Assessing a DeFi Project’s TVL Alone Is Like Judging a Book by Its Cover

During the booming crypto market of 2021, investors flocked to any crypto project they could find. However, when the wild growth petered out and crypto winter cooled that speculative buzz, they became more cautious and started to look for more reliable projects. This caution has led to a shift in investor strategies, with more focus now being placed on evaluating the fundamentals of each project before investing.

As part of my interview with Mike Ermolaev recently, I discussed some considerations investors should take into account when evaluating crypto projects. Here's a deeper look at crypto metrics.

In spite of the fact that Total Value Locked (TVL) is a popular DeFi metric that tracks the amount of crypto funds locked into all of a platform's smart contracts, it is not the only way to measure its success, and it can even be misleading in some cases.

In general, TVL increases as the value of assets in a liquidity pool grows, so it can be skewed by market movements. It also misses out on transaction count and volumes, the number of liquidity providers, and other key data.

Thus, while TVL is a useful metric to keep in mind, it should not be treated as the sole determinant of a platform's success.

Furthermore, project teams should develop new metrics that capture the true value of their projects rather than simply boast about their TVLs.

According to CoinMarketCap data, there were 9097 active cryptocurrencies by the end of March 2023. Nevertheless, not all cryptocurrencies are valuable and some are nearing their end. The question is, how do you tell if a coin is doomed to die?

How to tell when a coin is doomed to die

To start with, keeping track of a coin's trading volume is an effective way to measure its health. Additionally, its use cases can give investors an idea of how useful the coin is and how much value it can bring in the long term. It may have little value if it has limited utility, making it less attractive as an investment.

Moreover, the network's level of adoption is also a significant factor to consider when evaluating a project’s viability. However, the number of new addresses does not reflect the real adoption situation.

It is theoretically possible for unethical teams to create as many addresses as needed to artificially inflate their projects’ value.

In fact, analyzing the number of unique active addresses is a better indicator of user engagement on the project, as it provides a more accurate picture of the actual activity taking place on the network.

For example, Ethereum's network had 11.88 million active addresses in February 2023, down from 12.78 million in January 2023. Meanwhile, 2.03 million new ETH addresses were registered in February, an increase from 1.97 million in January.

In other words, user activity dropped, but superficially it appeared that adoption was increasing as more people joined the network. This illustrates the importance of looking beyond surface metrics.

Yet, if we dig even deeper, we need to make sure the transactions are actually meaningful, not just present. Social networking messages, for instance, can be counted as transactions even if they have no value. So, there is a growing need to create metrics that reflect the intrinsic worth of the transaction.

Ecosystems are already coming up with innovative ways to reward projects that add value based on OKR & KPI results and not just empty promises. It is certain that this will create a more meaningful and rewarding environment for all participants.

The KAVA ecosystem, for example, created a community funding pool worth 1 million KAVA tokens (around $820K as of this writing), which they distribute between projects within the ecosystem based on their TVL. Although it is still about TVL, the approach is different, promoting growth while delivering value.

Also, the HBAR Foundation behind the Hedera ecosystem tracks specific KPIs of its projects that include TPS, accounts created, the value created on the network, TVL, and more, as well as provides users with the ability to track these metrics through its DLT platform. This level of transparency is essential for bolstering consumer confidence and helping crypto gain mainstream acceptance.

Meanwhile, crypto developers and entrepreneurs should strive to create products based on real utility and value, not just speculation and fantasy. This focus will guarantee that projects will gain traction and grow in the long term. Creating a token and hoping it will moon doesn't work anymore. Unless you plan to launch a literal rocket to the moon with your crypto!