This report is part of a weekly series where we explore and evaluate the fundamentals of Open Finance. You can view prior reports here.
If you’ve been following crypto over the past year, you’ve likely seen this chart measuring the amount of value locked in DeFi. Since most applications require capital to be deposited, often in the form of loan collateral or liquidity in a trading pool, it has been used as the de facto metric to show the growth of decentralized finance. Recently, the total value locked surpassed the $1 billion mark, a milestone that was as celebrated as the $10k mark for the price of bitcoin.
While the growth in TVL is a positive sign for the burgeoning world of DeFi, it needs to be taken with a grain of salt and interpreted correctly. To state the obvious, this figure is highly reliant on the price of ETH. As its price has doubled since the beginning of the year, so too has the value locked in DeFi despite any there being any other meaningful contributors to its growth.
Another slightly less obvious flaw is that it is also heavily influenced by the price of SNX. Currently, there is $125m of SNX locked and towards the end of last year, it accounted for over one-fourth the total amount in DeFi. Not only did the price increase ~3,000% in 2019 but the figure is also somewhat misleading as its an inaccurate measure of the true value of that amount staked. For one, there is 80% of the total supply staked so if one were to sell that it would be worth orders of magnitude less. And to make matters worse, SNX is relatively illiquid trading less than $1m per day,