The hype surrounding decentralized finance is sometimes credited for triggering a broader market increase in July, as new protocols begin to issue symbols that immediately yield profits over their original value. Despite the undeniable price increase, it is not immediately clear whether the sector as a whole has grown, as it is extremely difficult to obtain reliable calculations to measure the underlying performance of DeFi protocols.
Projects are subject to rather strict analysis methods, as they often have well-defined income and expenses. But the increase in liquidity recovery or return has in a way broken the standards. The protocols reward their users with their own control characters, which is a great incentive to use the platform. The hectic move to increase revenue from these symbols has skewed DeFis prevailing success metrics, Total Locked Value or TVL.
A good example of this is the composite protocol, where the value of Dai presented to it exceeds the total supply of symbols almost three times – $ 1.1 billion against $ 380 million at the time of writing. This is due to the fact that Compound users open up exploited positions on Dai – which is usually not the case with stack coins. While this led society to debate the benefits of TVL, several other similar dimensions were also skewed.
DeFi Lending Project assessment
The ranking scale will vary slightly depending on the project type. With regard to lending protocols such as Compound and Aave, TVL represents the liquidity of the offer on the project side or the total amount of deposits that are currently retained. It is noteworthy that TVL only takes into account the series’ inventory. According to DeFi Pulse, there are only around 220 million closed files in the complex, not 1.1 billion.
However, lending institutions are usually valued based on book value or borrowed amount. Since this is what generates income, it is considered a more direct measure of the minutes’ financial results.
However, due to the distribution of the network currency, COMP, all symbols other than Tether (USDT) and 0x (ZRX) have a negative effective interest rate when borrowed, according to the Compound dashboard, which means that users get paid for it. The composite protocol currently offsets the costs for buyers and COMP holders through mitigation.
While it may be difficult to filter out liquidity available just to speculate on a company’s profitability, it is unnecessary. The purpose of evaluating a bank’s income or lending protocol is to measure how much of the value can be achieved with inventory or a symbol, but since the token is used to support the cost of borrowing, the value is actually obtained from the holders. This can be seen in the price of the COMP token. Since its release, it has continued to decline in value due to dilution and sales pressure on newly acquired symbols.
Due to this phenomenon, compound pricing strategies can easily ignore or even subtract the part of the book value that retrieves the value from symbol holders. Even in the first case, the book value of Compound will only be $ 25 million out of the declared $ 1 billion – the total amount for borrowers from USDT and ZRX.
While it is clear that not all assets exist only for return, the Cointelegraph previously reported that only $ 30 million was borrowed from Dai before it became the first coin to extract liquidity. André Cronier, founder of the Yarn Protocol, told Cointelegraph that the market did not take these nuances into account: Current, not fully diluted – 100 million dollars. Although he thought it was completely insane to ignore income, he continued his intellectual exercises:
So if CTR is equal to TVL, what is the best way to increase it? Increase TVL. How do you increase TVL? Reward with symbols. The value of the token increases due to TVL’s assumptions and is returned. “