DeFi’s “Total Value Locked” Metric Is a Crooked Mirror

As of early June, the total value of DeFi (decentralized finance) was only $1 billion. However, by September 2, this figure had increased by 860% to $9.6 billion.

Of course, these numbers have not escaped the scrutiny they deserve. Through data analysis from DEFI Pulse, people in the industry have been questioning whether the total value locked (TVL) is being double-counted, double-counted, triple-counted, or even quadrupled.

TVL doesn’t always mean the same thing in DeFi

DeFi Pulse defines “total value locked” as follows: “DeFi Pulse monitors the smart contracts of every protocol on the Ethereum blockchain. Every hour, the chart is refreshed by extracting the total balances of Ethereum (ETH) and ERC-20 tokens held by these smart contracts. TVL (USD) is calculated by multiplying these balances by the price.”

Short-termism could bring the system down

Regardless of how big it gets, DeFi’s growth appears to be driven by more capable, sophisticated users.

Igor Lilic, chief technology officer at ConsenSys, said: “Broadly speaking, DeFi users are not large institutions, but individuals or small groups. We call them ‘retail decentralized finance users’. ‘Small’ is relative, and some of these projects manage billions of dollars in assets.”

For Ilya Abugov, the DeFi ecosystem is dominated by “whale liquidity miners.” He noted: “Currently, a lot of activity is focused on short-term gains rather than the actual functionality/utility of the projects.”

But due to the interconnectedness of the entire ecosystem, and the way users can withdraw tokens from one platform and deposit them in another, such short-term profit taking can be dangerous, potentially causing shocks from a single system to the entire system.

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