Opinion: The Adjusted TVL metric better reflects the state of the DeFi sector

The Adjusted TVL metric gives greater weight to movements in address balances, and less to the asset’s price. According to the metric’s developer Ilya Abugov from DappRadar, this approach allows to see a more realistic picture in the DeFi sector.

The analyst argues that TVL, calculated as the product of the number of tokens locked in a protocol and their price [TVL = A * P], on a bull market overstates asset growth, while in a bear market it understates it. The reason lies in the influence of the price component.

The researcher suggests a situation where TVL grows solely due to token price increases while the number of locked coins in the protocol remains unchanged.

On 27 August, he constructed a chart of Adjusted TVL based on the product of the number of locked tokens and a fixed Ethereum price from 90 days prior. The slope of this curve proved not as steep as that of the original TVL.

According to the researcher, 45% of the TVL growth during the examined period can be explained by the rise in token prices.

Chart of TVL, Adjusted TVL, UAW as of August 27. Data: DappRadar.

Abugov found that as of August 27 among DeFi leaders (Aave, MakerDAO, Curve, Synthetix, Compound) the smallest gap between TVL and Adjusted TVL at 15% was observed for the third-placed non-custodial exchange Curve. By comparison, on the decentralized derivatives platform Synthetix this gap amounted to 80%.

Leaders in DeFi by Adjusted TVL as of August 27. Data: DappRadar.

The analyst suggests supplementing this analysis with the UAW (Unique Active Wallets) metric, which broadens understanding of trends in the DeFi sector. In the graph above, one can see that UAW has plateaued since mid-August amid continuing TVL growth.

Abugov argues that understanding how price movements affect a project’s assets is crucial for risk analysis. This is especially important for protocols like Uniswap, whose TVL consists of assets in liquidity pools. During price surges, the metric can rapidly rise and distort expectations of asset inflows and available liquidity.

The DappRadar analyst contends that focusing on TVL can create a distorted view of actual user demand. At the same time, this does not negate the growth of the sector, which is reflected by the dynamics of Adjusted TVL, added Abugov.

At the time of writing, according to DappRadar, Adjusted TVL was nearly aligned with TVL amid a decline in UAW.

Chart of TVL, Adjusted TVL, UAW. Data: DappRadar.

Adjusted TVL of Uniswap, the leading non-custodial DeFi exchange, was 69.5% higher than its TVL. For its competitor Curve, this gap was negative at 6.25%.

Leaders in DeFi by Adjusted TVL. Data: DappRadar.

On 17 September, Uniswap released the UNI governance token, which became a catalyst for returning liquidity to this DEX.

Many users recently have drawn parallels between the current DeFi boom and the ICO bubble of 2017. Such views are shared by Tone Vays and OKEx CEO Jay Hao.

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