New research challenges conventional wisdom about what truly drives value in decentralized finance (DeFi).
Key Findings: TVL’s Limited Predictive Power
The Experiment
Dr. Matt Brigida and the Algorand Foundation conducted a groundbreaking study to test whether Total Value Locked (TVL)—a staple metric in DeFi—correlates with token performance. Here’s how:
- Weekly Analysis: Sorted 300+ tokens (excluding Bitcoin/stablecoins) by TVL-to-Market Cap ratio.
Portfolio Construction:
- Long Position: Top 25% tokens by TVL/MarketCap.
- Short Position: Bottom 25% tokens.
- Alpha Detection: Used crypto-adapted Fama-French models to isolate excess returns.
The Results
- No Excess Returns: TVL-based portfolios showed no statistically significant outperformance after accounting for market trends.
- Clean vs. Raw TVL: Even adjusted TVL data (removing double-counting) failed to predict returns.
Conclusion: TVL indicates capital parked in protocols but does not signal token value or market-beating potential.
Implications for Stakeholders
For Traditional Finance (TradFi) Professionals
TVL has been DeFi’s parallel to Assets Under Management (AUM). However, inflated TVL—via leverage loops or double-counting—mirrors AUM manipulation risks in hedge funds.
For Blockchain Analysts
- Shift in Metrics: Leading platforms (Messari, Token Terminal) now prioritize Real Economic Value (REV) and Total Value Secured (TVS) over TVL.
Better Alternatives:
- Wallet activity
- Transaction flow patterns
- Capital retention rates
👉 Discover how analytics tools like Nansen and Dune are redefining DeFi metrics
For Web3 Builders
DeFi’s next phase focuses on user quality, not just liquidity quantity. Metrics should reflect:
- Real-world usage
- Sustainable engagement
- Economic utility
For Investors and the Public
Big numbers ≠ Real value. Ask:
- Who’s locking funds?
- Is it organic usage or strategic capital rotation?
Rethinking "Value" in DeFi
Critical Questions
- Protocol Value: Should we prioritize deposits or active participation?
- Trust Drivers: How do we measure traction beyond capital inflows?
- Market Hype: What defines true value in a speculative ecosystem?
Call to Action
TVL is incomplete, not useless. It tracks where funds sit but ignores:
- Capital movement
- User behavior
- Value creation mechanisms
Future Metrics: Adopt indicators aligned with real-world utility and user-centric growth.
FAQ
1. Why doesn’t TVL predict crypto returns?
TVL measures capital parked in protocols but lacks context on how funds are used or who controls them, diluting its predictive power.
2. What metrics replace TVL?
- Real Economic Value (REV)
- Wallet activity
- Transaction velocity
- Capital retention rates
3. How can investors spot meaningful DeFi projects?
Look for:
- High user engagement
- Transparent governance
- Sustainable tokenomics
👉 Explore Web3’s next-gen analytics frameworks
Final Thoughts
The Algorand Foundation’s research underscores the need for data-driven innovation in Web3. As DeFi matures, metrics must evolve to reflect true economic activity—not just locked capital.
“TVL was a compass; now it’s one star in a broader constellation.”