One of the most used metrics in DeFi is under fire as Coinbase’s Viktor Bunin and Solana’s Anatoly Yakovenko discuss its importance.
Posted October 3, 2024 at 6:11 PM EST.
In decentralized finance (DeFi), total value locked (TVL) is a widely used metric that measures the amount of capital held in DeFi protocols. But how useful is it? Is TVL really the best measure of success, or is it just another easily manipulated number?
A heated debate took place this week on .
TVL: Difficult to handle?
Bunin sparked the debate on Wednesday by defend TVL is a much harder metric to falsify than numbers like transaction counts or active addresses. “Too many people have been psychoped into thinking that TVL doesn’t matter,” Bunin tweeted. “When in reality, it’s the only metric that’s really expensive once transaction fees go down,” he added, explaining that if other metrics such as trading volume or wallets assets can be inflated cheaply by robots, artificially increasing TVL requires moving significant amounts. of capital.
For Bunin, TVL stands out because it requires real capital to be deposited into DeFi protocols. “TVL means it’s deployed in DeFi protocols for trading, lending, borrowing, pers, etc. That means it’s productive capital,” he said. explain.
Yakovenko, on the other hand, disputed this dependence on TVL. In his view, TVL is only useful if capital generates real economic value in the form of fees or income.
He argued that the focus should be on metrics such as profits, revenue or transaction volumes that reflect actual usage. “If it does not bring profit to someone, it is not economically relevant,” Yakovenko insisted.
Bunin countered by pointing out that revenues can also be manipulated, explaining that large deals could be structured to artificially inflate revenue figures. “You can have a whale deposit $10 million, pay 100% fees, and make it appear that the protocol is generating $10 million in revenue, and then simply pass the funds back to the whale through a back channel,” Bunin said. note. He says while revenue may appear to be a more dynamic measure, it remains subject to manipulation, while TVL requires a sustained capital commitment, making it a more reliable measure of success.
Thomas Mattimore, head of platform at Reserve, agreed with Bunin’s argument that TVL is harder to falsify than other metrics. “TVL, a clear demonstration of confidence”, Mattimore tweetedsupporting the idea that committing capital to DeFi protocols represents real commitment from users.
Mattimore believes that in a world where bot-generated transactions can inflate the number of active users or transaction volume, TVL stands out as a much more difficult metric to exploit at scale.
Kyle Samani, co-founder of Multicoin Capital and well-known Solana advocate, took Yakovenko’s side in the debate, arguing that TVL is more about supply than demand and does not fully account for the health of a protocol. “TVL is very playable and is fundamentally a measure of supply and not demand,” Samani tweetedimplying that real economic activity (transactions, fees, and profits) are more important indicators of DeFi growth. He emphasized that even protocols with relatively low TVL can generate significant business and value.
Learn more: SOL On Track To Topple ETH, Says Multicoin Capital’s Kyle Samani
The numbers behind the debate
Looking at the numbers, Ethereum’s dominance over TVL remains undisputed. Ethereum leads all protocols with $45 billion in TVL, followed by Tron with $7.6 billion and Solana with $5.15 billion. But even though Ethereum’s TVL represents a massive portion of the DeFi space, Yakovenko and Samani argue that this doesn’t necessarily mean Ethereum is more efficient or generates more value.
Bunin highlighted potential discrepancies between transaction counts and TVL, warning that when channels have high transaction volumes but low TVL, it could indicate manipulation is taking place. “Notice which channels are making numbers in users or TPS, but not in TVL. The bigger the gap, the more likely it is false,” Bunin warned.
However, Yakovenko has repeatedly argued that having too much TVL can also be a red flag if capital is not used. He believes that TVL should only reflect the amount needed to support volume. “All the TVL excesses are useless: it’s risk capital that does nothing,” he said. note in an interview last December on Unchained.
