Why It’s Time to Rethink Total Value Locked (TVL) in DeFi

Without a doubt, TVL has long been DeFi’s favorite headline metric. However, recent research suggests its efficiency may be lacking in comparison with our expectations, especially when it comes to predicting real investment performance.

Billions locked in a protocol might be a token of strength. According to the latest study from Algorand’s Dr. Matt Brigida, relying on this indicator as a signal for future returns may be a way to no return. Let’s reveal what this research found and what may be a better alternative to TVL. Mind the gap!

Does TVL Actually Predict Token Performance?

TVL was commonly considered a crypto’s version of assets under management. Algorand’s deep dive aimed at revealing the truth behind this concept. Here are the key elements of the study:

a closer look at over 300 tokens, excluding stablecoins and Bitcoin;
forming weekly portfolios based on TVL-to-market-cap ratios;
buying the top 25% and shortening the bottom 25%;
removing double-counted assets and adjusting the calculations for data accuracy and TVL volatility;
sticking to traditional financial models adapted for crypto assets to run the study’s results.

The key objective was to see whether the alpha delivery was possible with TVL-based strategies in mind. In reality, returns didn’t beat the market. None of the portfolios showcased consistent outperformance. A deeper analysis of the data proved that TVL-based edges were lacking.

What This Means for DeFi Investors

A high TVL has always been a noticeable attraction. In practice, however, it doesn’t tell investors much about the genuine value of the target token and whether this deal will pay off. The right understanding of this indicator matters:

TVL isn’t linked to token strength. Even if you have billions locked, it doesn’t automatically imply user demand and long-term utility of the asset.
It’s not on par with AUM in traditional finance, which reflects client capital under management. What’s more, TVL might distort the big picture, introducing recycles and leveraged value of the token to the playground.
Don’t overlook the risk of TVL inflation. Funds reused across staking protocols, borrowing, and lending may be considered a few times.

For investors of any caliber, it’s essential to stay cautious and refrain from becoming heavily dependent on fancy TVL charts.

Better Metrics to Consider Instead

Don’t get it wrong — TVL isn’t garbage for investment analysis. Still, it would be wrong to assign the key role to it in your decision-making strategy. Here are a few tools and metrics to streamline your portfolio management:

transaction flow and gas usage;
protocol revenue and fee generation;
wallet activity;
user retention;
governance engagement;
community participation;
smart money tracking with top wallets behind capital moving.

DeFi is evolving, and so should your analytical tools and metrics. Although TVL has been the star so far, it’s time for a long-awaited shift in the paradigm. Measuring real usage and utility is now easier with instruments like L2BEAT, Dune, and REEV from Blockworks. For long-term progress, focus on how capital flows and the users behind them to see whether it’s generating meaningful value.

Final Thoughts

Big numbers in DeFi and beyond are extremely tempting. However, it’s easy to make a wrong move relying on the surface-level data without in-depth contextual details. Algorand’s research has emphasized the need to upgrade the current ecosystem to keep up with its dynamic shifts and evolution. Instead of chasing locked values, it’s better to see the real data behind dazzling numbers of TVL.