The total value locked in a DeFi can easily be manipulated, says Jain.
There are other indicators that provide more reliable information, he explains.
Decentralized finance protocols are based on networks whose transactions are not only immutable but also transparent. Therefore, all information is public and there are all kinds of metrics about users’ movements. However, one of these key figures can be manipulated and should not be taken into account, says an entrepreneur in the industry.
Specifically, the opinion corresponds to Tushar Jain, CEO and founder of the investment company Multicoin Capital, which focuses on companies that use blockchain technology in their operations. In an episode of the Lightspeed podcast: yesin manifested that the DeFi Total Value Locked (TVL) can be easily manipulated and that “it should not be considered by serious investors.”
For the entrepreneur, this key figure is invalid because it can be doubled or tripled at will, thus giving “a false sense of precision”. «When you deposit cryptocurrency into a smart contract, you receive a token. “If you deposit this token into another contract and do it one at a time, you can create a snowball that artificially inflates the statistics,” he said.
So, What metric can be used to measure the value and adoption of a DeFi protocol by users and investors? “It depends on developing new things and how many users interact with them,” says Jain. “Everything else is a derivative of that activity,” he adds.
The advantage of TVL, he explains, is that it is easy to measure. “Investors love looking at metrics. They want to see data so they can feel like they’re making decisions based on data,” he says. “But they should focus on the metrics that matter, not the ones that are easiest to achieve.”
“Focusing on TVL means putting the cart before the horse. “I’m on a crusade to get people to stop.”
Tushar Jain, CEO and Founder of Multicoin Capital.
What is TVL and why is it important?
The TVL or “Total Value Locked” (total value locked, in Spanish), is a metric used in the context of DeFi protocols to measure the total amount of financial assets locked or deposited in a specific protocol. These assets may include cryptocurrencies, tokens and stablecoins that users deposit into smart contracts within the protocol to obtain loans, trade or invest, or provide liquidity to generate interest.
TVL is an important metric because it reflects the size and popularity of a DeFi protocol, as well as the amount of capital that users have entrusted to that protocol. The higher the TVL, the more robust and reliable the protocol is generally considered to be., as this means more users using its services and depositing assets into it. Beyond Jain’s opinion, TVL has so far been an important metric for measuring the popularity of DeFi protocols, as discussed several times in CriptoNoticias.
However, it is also important to note that a high TVL is not a guarantee of the security or quality of a protocol. Therefore, it is important to conduct due diligence before depositing funds to a DeFi platform. Additionally, as the founder of Multicoin Capital pointed out, some statistics actually include tokens issued by a protocol and reinvested into it as part of its TVL. Platforms like Defillama They make it possible to distinguish between these tokens and ignore them in the analysis.