Investors love to dig into data and are constantly looking for new metrics that can provide special insight to help determine their next financial move.
And in the world of DeFi, Total Value Locked, or TVL, has become the go-to method for measuring the viability of an ecosystem.
But according to Tushar Jain, it’s actually a terrible way to measure the success of a blockchain or its apps.
Speaking to Blockworks on the Lightspeed podcast (Spotify/Apple), Multicoin Capital’s managing partner claims that TVL is not only a useless metric, but also “actively harmful” to focus on.
“It gives you a false sense of precision on a metric that can be trivially gamed,” he says, adding, “TVL is double, triple, quadruple counted in many places.”
“You deposit into a smart contract and you get this receipt. You pay that into the next contract, and so on,” he explains. “You can link these things together,” resulting in an ever-growing snowball of artificially inflated statistics.
Jain argues that TVL does not take into account the liquidity of assets, which could create “a very low float, high market cap thing” in which “high TVL” is touted as a key sales feature.
“It gives people a sense of false precision,” he says.
“If you are a serious investor at all, you should no longer view TVL as a useful benchmark,” he emphasizes. “You’re just lying to yourself that it’s a benchmark.”
But it’s so easy
Jain admits that TVL has one important advantage. It is “the easiest thing to measure.”
“It’s trivial, right?” he says. “You just do a search and say, here’s your number.”
“Investors like to look at statistics,” he says. “They want to look at data. They want to feel like they are people just building new things and the number of users interacting with them.” Everything else is a derivative of that activity, he says.
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“If there are people in your chain that are getting assets into that chain,” he says, “if they’re doing things – whether they’re creating maps for HiveMapper or making your GPU available for rendering or using USDC payments and so on – DeFi will do that . become a thing there,” he says, “not because you have a high TVL, but because it is the cheapest and most convenient thing to do.”
“By focusing on TVL we are putting the cart before the horse,” he says.
“I’m on a crusade to convince people to stop using it.”