Total Value Locked On Top Five DeFi Protocols Exceeds $2 Billion, But Skeptics Still Question The Metric

It now takes $2 billion total value locked (TVL) to break into the top five DeFi protocols, however skeptics are still wary of using TVL as a true metric of which protocol is in the lead.

TVL was coined by DeFi data analytics platform DeFi Pulse and is used to judge the popularity of various DeFi protocols. The value reports how much crypto is committed to smart contracts. TVL has risen drastically over the course of the summer as DeFi protocols have become increasingly popular. In mid-May TVL first broke past $1 billion and today that figure stands at $20.92 billion. Currently the top five DeFi protocols all have more than $2 billion TVL. Maker, Aave, Uniswap, Compound and Synthetix hold the top five spots with $3.83 billion, $2.68 billion, $2.54 billion, $2.41 billion and $2.32 billion, respectively.

While TVL has become an indicator used to rank DeFi protocols, it has also become a point of controversy in the crypto community as people have begun to question its legitimacy. The first thing to note is that TVL is highly dependent on the price of ETH, as the price of Ether rises so too does the value of TVL. At the time of writing ETH is nearing its all-time-high price of $1,149 and is up 4.12% which will impact TVL reported on DeFi Pulse. To get around this shortcoming, it makes more sense to look at TVL in terms of ETH rather than dollars. This graph shows a similar story to the dollar graph, in mid-May there was 2.65 ETH locked in DeFi and today there is 6.7 million ETH locked in.

Another weakness of TVL is that it can rise when assets move around within DeFi protocols, as opposed to only rising when new assets are invested. Additionally, if a protocol lets a user deposit ETH and also borrow ETH on deposited ETH collateral, the TVL on the platform would be misreported by DeFi Pulse.

Founder of Encode Club Damir Bandalo tweeted about the weaknesses of TVL back in August writing that the same assets get counted multiple times on DeFi Pulse. He used his own calculations to estimate that at the time there was $3.5 billion locked in the top 15 DeFi protocols compared to the $6.7 billion DeFi Pulse reported.

“As we know DeFi is all about composability but that makes it hard to accurately count how much money is truly locked in the system,” Bandalo wrote. “It gets very easy to count the same $ multiple times.”

Through his calculations Bandalo discovered that in August only 3.85% of ETH and 0.18% of BTC locked in DeFi, leaving lots of room for futher investment. He added that stablecoins made up 33% of value locked, ETH made up 50% and BTC is 10%.

By Emily Mason