Is it time to drop TVL as a DeFi metric?

DeFi text with meaning inside a smartphone and TVL word above it.

Investors love to dig into data, constantly on the hunt for new metrics that might offer some special insight to assist in determining 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 it’s actually a terrible way to gauge the success of a blockchain or its apps, according to Tushar Jain.

Speaking to Blockworks on the Lightspeed podcast (Spotify/Apple), the Multicoin Capital managing partner asserts that not only is TVL a useless metric, it’s “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, in a lot of places, is double, triple, quadruple-counted.”

“You deposit into some smart contract, you get this receipt token. You deposit that into the next contract and so on and so forth,” he explains. “You can daisy-chain these things together,” resulting in an ever-growing snowball of artificially inflated statistics.

Jain argues that TVL in DeFi doesn’t take the liquidity of assets into account, allowing for the creation of “some very low-float, high market cap thing” that touts “high TVL” as a key selling attribute.

“It gives people a sense of false precision,” he says.

“Please stop looking at TVL as a useful metric if you’re at all a serious investor,” he insists. “You are just lying to yourself about it being a metric.”

But it’s so easy in DeFi

Jain admits TVL holds one key advantage. It’s “the easiest thing to measure.”

“It’s trivial, right?” he says. “You just run a query and like, here’s your number.”

“Investors love looking at metrics,” he says. “They want to look at data. They want to feel like they’re data-oriented.” But if investors are going to look at data, they probably should use “a metric that matters,” he says, “not just the one that’s easiest.”

Jain argues that the only metric that really matters is “people building net-new stuff and the number of users interacting with that stuff.” Everything else is a derivative of that activity, he says.

“If your chain has people getting assets on that chain,” he says, “if they’re doing things — whether they’re mapping for HiveMapper or providing your GPU for render or using USDC payments or so on and so forth — DeFi will become a thing there,” he says, “not because you have a high TVL, but because it’s the cheapest, most convenient thing to do.”

“Focusing on TVL is putting the cart before the horse,” he says.

“I’m on a crusade to get people to stop using it.”