A new metric, called “adjusted TVL” published by DappRadar, wants to paint a more reliable picture of how the decentralized finance (DeFi) ecosystem is growing.
It has been reported that the metric attempts to clean total value locked readings from any external influence, primarily price increases.
However, total value locked is often considered a measure of the popularity of a DeFi protocol and the sector as a whole. By measuring it in US dollars means that any token price increase will also drive TVL up, even though no new assets were committed to the protocol.
Researchers noted that while this may inflate the metric in bull markets, it would also underestimate it unfairly during bear cycles.
The report said that the DeFi statistics website DeFi Pulse allows viewing the amount of Ether (ETH), Bitcoin (BTC) and Dai locked in a protocol, but this fails to take into account any other asset that may contribute to the metric.
It has been analyzed that DappRadar’s adjusted TVL fixes all assets in a protocol at their price from 90 days before. Any growth or loss in this adjusted value in a 90 day period can thus only come from net flows of assets and not their price change.
Adjusted TVL paints a slightly less optimistic picture than a face-value reading would suggest. Out of the $7.3 billion in nominal TVL, it only accounts for $3.9 billion. This suggests that the remaining $3.4 billion simply came from price rallies of existing assets in the last three months.
Moreover, on a project-by-project view, the protocol with the least discrepancy between adjusted and nominal TVL is Curve, a stablecoin-focused exchange. A discrepancy of 15% still exists, likely explained by another category of Curve pools: swaps between different wrapped versions of Bitcoin and Ether.
As per the report, Maker and Aave have a discrepancy of about 30% each due to their reliance on Ether and other tokens. By far, the highest discrepancies can be seen on Synthetix and mStable.
Synthetix counts $108 million in adjusted TVL compared with a nominal figure of $931 million. mStable’s proportion is $900,000 to $50 million.
According to the report, some argued that the prevalence of the TVL metric helps drive prices up as well, based on the misconception that it signifies growing popularity. Examples such as Synthetix and mStable suggest that the price growth of their native tokens drove the vast majority of their TVL increase, which could be the result of a positive feedback loop.
But even discounting price growth does not necessarily mean that adjusted TVL paints a completely fair picture of protocol popularity and fundamentals.
Ilya Abugov, the Project Manager at DappRadar, said that “one metric is insufficient to describe what is happening in the industry.”
Also, the website features a unique active wallets category, which paints a fuller picture of how many wallets, and most likely people, are using a protocol at a specific point in time.
Thus, Abugov concluded:
“We will continue to expand our suite [so] that the community may have a more complete picture of the state of events in the sector.”