DeFi Total Value Locked (TVL) Higher Means More Successful? NO, we need a new ranking criterion

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

• Babbitt Information (ID: bitcoin8btc)

• , by Ashwath Balakrishnan, translated by Kyle, published with permission.

• Important points:

• Total Value Locked (TVL) is an important metric for measuring collateral in smart contracts.

Compound has higher supply and lending sources than Aave, yet Aave has a better TVL ranking.

One possible solution is to compare protocol revenues, since this approach can be applied generally to any cryptographic protocol.

Total Value Locked (TVL) is the most popular metric tracking DeFi and its corresponding growth. But here's the catch: it doesn't work with all protocols.

This is why cryptocurrencies need to find alternatives.

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One metric does not fit all DeFi requirements

In the DeFi ecosystem, there are multiple sub-segments such as DEXs, money markets, asset aggregators, and synthetic asset issuance. The variety makes it difficult to try to apply a cookie-cutter metric to quickly evaluate projects.

Let's look at another example.

If Aave is ahead of Compound in terms of total value locked, does that mean it is growing faster than Compound?

Compound currently provides $1.64 billion in capital, of which $913 million is borrowed. This implies a capital utilization rate of 55.5%, with approximately $730 million of supply available to future borrowers.

Source: Compound

However, Aave has a supply of $1.3 billion, active borrowing of $154 million, and a balance of $1.15 billion available to borrowers.

Aave's capital utilization is just 11.76%

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Source: AaveWatch

Compound’s growth stemmed from liquidity mining, while Aave succeeded without any meaningful token incentives. Whether or not the growth is driven by yield mining, Compound’s data shows that its market is larger and more utilized than Aave.

Essentially, if Compound has a supply of $100 billion and borrowers get $99 billion, but Aave has a supply of $10 billion and borrowers take advantage of $1 billion, then TVL still ranks Aave's revenue at On Compound.

The TVL metric penalizes Compound for having more lending sources (the platform’s main use case). This is akin to saying one bank is better than another because it issues fewer loans and therefore has more liquidity to cater to future borrowers.

For Synthetix, TVL is the market price of SNX products and SNX pledged in the agreement.

If activity on Synthetix stagnates, but the price of SNX increases by 30%, TVL will also increase by 30%, assuming SNX’s collateralization remains the same. Likewise, if the percentage of SNX staked decreases, the TVL will decrease by a similar amount.

The growth of the Synthetix protocol does not depend primarily on how much collateral is in the ecosystem, but on the amount of synthetic assets being minted and the volume of transactions on exchanges.

While collateral locking is essential as it inherently increases the amount of synthetic assets that can be issued, TVL is certainly the wrong metric for tracking the growth and usage of this protocol.

TokenTerminal shows Uniswap’s annualized revenue (based on the last 30 days) at $111 million, while Balancer’s is at $30.8 million. Even though Balancer has a 33% higher TVL than Uniswap.

Additionally, liquidity aggregators such as Kyber Network, which is connected to a large number of DeFi dApps, source liquidity from these sources, so liquidity is not locked into the protocol.

However, Kyber can generally increase transaction volume and generate more revenue compared to Bancor, which has 3x the TVL of Kyber.

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Source: DeFi Pulse

Asset aggregators like yEarn Finance are a good example. YFI holders receive a fee from yVault investors when they exit, so the project's revenue stream and TVL are directly related. Despite this, only a few DeFi protocols can capture value from TVL.

Synthetix token holders will be rewarded with fee income when the protocol’s transaction volume increases, and Aave stakeholders will also be rewarded with fees earned by the protocol.

So it probably doesn't matter how high or low the TVL is, unless it's really indicative of growth and value capture.

Potential Alternatives to TVL

Using a more prevalent financial metric, such as revenue, provides greater clarity than TVL.

All protocols generate income for token holders, validators or other participants. The total revenue generated by the protocol is a direct indication of how much value the protocol creates for people.

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