Why our new research should make us rethink what “value” really means in DeFi.
Let’s Start With the Basics
What did we do?
Dr. Matt Brigida, Associate Professor of Finance at SUNY Polytechnic Institute and our Chief Economist at the Algorand Foundation, wanted to answer a surprisingly overlooked question: Does total value locked (TVL) actually predict whether a crypto token will perform well?
So we ran a straightforward experiment:
- Each week sorted over 300 tokens (excluding Bitcoin and stablecoins) by TVL/MarketCap.
- Formed portfolios: Bought the top 25% of tokens ranked on TVL/MarketCap and shorted the bottom 25%.
- Looked for “alpha”: Did these portfolios earn returns that couldn’t be explained by broader market movement?
We tested this using both raw TVL and a cleaner version (excluding double-counting, etc.). We also repeated the procedure using the change in TVL / MarketCap. Then using classic finance models, think of them as crypto versions of Fama-French factor regressions, we checked if any of the returns stood out as truly unusual.
What did we find?
“TVL-based portfolios don’t generate meaningful excess returns.”
Once market movement was accounted for, any performance difference vanished. Even the so-called “clean” TVL data didn’t give investors an edge.
So, what does this mean?
TVL might reflect how many assets are sitting in a protocol, but it doesn’t tell you whether the token is going to outperform the market. There could be billions “locked” in a dApp, but that doesn’t mean the token behind it is valuable, resilient, or smart to invest in.
That’s a pretty big deal.
What this means for different players
For TradFi experts:
TVL has become DeFi’s equivalent of AUM (Assets Under Management). But imagine if hedge funds were inflating AUM by counting the same dollar multiple times through leverage loops, you’d call that a red flag. That’s what can happen with TVL.
For blockchain analysts:
This paper challenges what many dashboards still display as a core metric. If TVL doesn’t drive returns and can be gamed, maybe it’s time we demote it from “key stat” to a “secondary stat.”
Could wallet activity, transaction flow, or capital retention provide a more honest picture?
You can tell priorities seem to be shifting by watching where some of the major analytics platforms are putting their attention lately. Messari, Artemis, and Token Terminal, now consider Total Value Locked (TVL) as a supplemental metric with Blockworks introducing Real Economic Value (REV). This trend is mirrored by community-driven analytics tools like Dune and L2BEAT, which are either decentralizing TVL interpretation or adopting broader metrics such as Total Value Secured (TVS). Nansen aligns with this by analyzing TVL alongside wallet activity and smart money movements for a deeper understanding of protocol dynamics and capital flow. Similarly, Flipside Crypto prioritizes user-generated value over TVL, treating it as a secondary indicator.
For Web3 builders:
DeFi isn’t just about liquidity, it’s about people using it. This research backs the shift we’re already seeing: from TVL to other metrics, from quantity of capital to quality of users.
For curious readers and the public:
Crypto is full of big numbers. But not every big number means something real.
TVL sounds important, so much value is locked! But this research reminds us to dig deeper.
Who’s locking that value? Why? Is it real usage, or just capital bouncing around?
A call to action and reflection
This paper doesn’t say TVL is useless. It says it’s incomplete. TVL might show where funds are parked,
but not how they move, not who moves them, and certainly not how they create value or help users in meaningful ways.
In Web3, we need metrics that reflect real participation, sustained engagement, and economic utility. So maybe we ask ourselves:
-
-
- What makes a protocol truly valuable. Is it deposits or participation?
- What if we stopped measuring DeFi like traditional finance and started asking what actually drives trust and traction?
- And in a market full of hype, what do we really mean by “value”?
-
Final thoughts
With this research, Algorand Foundation reinforces its contribution to advancing the evolution of the crypto market, merging academic rigor with real-time blockchain intelligence to shape the future of data-driven innovation and analytics in Web3.
“TVL might once have been our compass, but maybe now it's just another metric.”
Maybe it’s time to unlock our thinking, just like we unlocked our funds.