Investments, Algorand, Trading

Algorand’s latest research reveals that TVL is not a reliable indicator of future token performance.

Total value locked (TVL) has been the go-to stat in decentralized finance (DeFi) for years. Protocols promote it, dashboards rank by it and investors often rely on it as a shorthand for success. Seeing billions locked in a project is usually received as a signal that something good is happening.

But what if that’s not the case? What if this widely used metric reveals less than is commonly perceived about the real value or future performance of a crypto token?

That’s the question blockchain platform Algorand recently explored in a research study by Dr. Matt Brigida, chief economist at the Algorand Foundation. The findings challenge long-held assumptions in DeFi and suggest it may be time to rethink how value is measured in the space.

Is TVL a reliable metric for measuring value?

The study set out to test a simple but surprisingly overlooked idea: Does TVL actually predict returns?

To find out, the researcher analyzed over 300 tokens (leaving out Bitcoin (BTC) and stablecoins), creating weekly portfolios based on their TVL-to-market-cap ratios. The strategy was to buy the top 25% while shorting the bottom 25%. The goal was to see if these TVL-based portfolios could generate “alpha,” a finance term for returns that beat the market trend.

The researcher went the extra mile to keep data accurate, and applied the tests to both raw TVL and a data set that excludes double-counting — a common issue in DeFi. The tests were also repeated by accounting changes in TVL over time.

Finally, the researcher plugged all this data into classic finance models, the kind that economists use to analyze traditional markets but adapted for the crypto world. He was looking for any patterns and any significant returns that actually stood out.

However, all these tests came out with the same result, which indicates that making trades based on TVL doesn’t give traders any edge. Once the broader market trends were accounted for, any performance difference that might have seemed linked to TVL simply evaporated.

This means that while a protocol might have billions of dollars locked in it, that impressive number doesn’t automatically translate into its token outperforming the rest of the market. It doesn’t tell if the token is truly valuable, resilient or a smart investment.

A chart from the study indicates that TVL doesn’t correlate with returns. Source: Dr. Matt Brigida/Algorand

Implications for the industry

The findings have implications for nearly every corner of the crypto ecosystem.

It challenges the assumption that TVL is analogous to “assets under management (AUM)” in traditional finance. Unlike AUM, TVL can be inflated by practices such as counting the same funds multiple times as they move between lending, borrowing and staking protocols. This creates a misleading picture of how much real value is actually in use.

For analysts and builders, it calls for a broader rethink of what metrics actually matter. Crypto wallet activity, transaction flow, protocol-level revenue and user retention may offer more insight into the real dynamics of a decentralized platform.

And for the wider public, this serves as a reminder: not every headline figure in crypto tells a complete story. Big numbers can be impressive, but without context, they can be misleading.

The ecosystem moving beyond TVL

The industry already witnesses a shift underway across major analytics platforms that is in line with the research findings.

Some platforms, like Messari, Token Terminal and Artemis, started to treat TVL as a secondary metric. Meanwhile, Blockworks introduced real economic value (REV) that draws away from TVL to value created by user activity.

User-generated value has taken center stage in value measurement for Nansen and Flipside Crypto as well, along with other metrics like smart money movements and wallet behavior. The shift also sees the integration of community-driven tools, just like in the case of Dune and L2BEAT.

Algorand’s research shows that while TVL may still have its place, it shouldn’t be mistaken for the whole picture. Real value in DeFi isn’t about how much capital is parked; it’s about how that capital is used, who’s using it and whether it creates lasting utility. For investors, that means it’s time to look beyond the surface.

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