The DeFi Health Check: What Matters Beyond TVL?

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MELD

6 min readMar 1, 2023

DeFi’s explosion in popularity over the past few years has since brought the total value locked in DeFi protocols to new highs. While total value locked (TVL) is a commonly used metric to gauge the health of the DeFi project, it is important to recognize that TVL is not the only metric that matters. In this article, we will explore some other metrics that can be used to evaluate the health of the DeFi project.

What is Total Value Locked?

Total value locked (TVL) is a metric that measures the total amount of assets that are currently locked up in a particular DeFi protocol. The TVL metric is calculated by taking the sum of all the assets that have been deposited into the protocol and multiplying it by the current market value of those assets.

Why is TVL so important?

The TVL metric is often used as a proxy for the overall health and growth of a DeFi project, as it gives a snapshot of how much capital is being actively used at any given time.

While it is a useful metric, it is important to remember that it is not the only metric that matters when evaluating the health of a DeFi ecosystem. Here are some other metrics that can provide added valuable insights.

Trading Volume

Trading volume is an important metric to consider when evaluating the health of any DeFi project because it represents the total amount of assets that are bought and sold on a particular DeFi protocol over a specific time period, usually 24 hours.

Trading volume indicates market activity and liquidity within a protocol. High trading volumes can indicate that there is a lot of market activity and that there is a healthy level of liquidity within the protocol, while low trading volumes can indicate that there is not much market activity and that there may be liquidity issues within the protocol.

In addition to providing insight into the overall health and liquidity of a particular DeFi protocol, trading volume can also show market sentiment. If the trading volume is high, it may be an indication that investors are bullish on the underlying assets of the protocol. Conversely, if trading volume is low, it may be an indication that investors are bearish on the underlying assets of the protocol.

Active Addresses

Active addresses are another important metric to consider when evaluating the health of any DeFi project. It is a measure of the total number of unique addresses that have interacted with a particular protocol over a specific time period, usually 24 hours.

This can indicate the overall user adoption and engagement within a particular DeFi protocol. High levels of active addresses can indicate that there is a strong user base and that the protocol is seeing widespread adoption. Conversely, low levels of active addresses can indicate that the protocol is struggling to gain traction and that there may be issues with user adoption.

In addition to showing the overall user adoption and engagement within a particular DeFi protocol, active addresses can also be an indicator of network effects. Suppose a DeFi protocol has a large number of active addresses, in that case, it may be an indication that the protocol is benefiting from network effects, where the value of the protocol increases as more users adopt it.

Average Transaction Size

Average transaction size is another important metric to consider as it measures the average size of a transaction that occurs on a particular DeFi protocol over a specific time period, usually 24 hours.

Average transaction size can be an indicator of the overall health and activity within a particular DeFi protocol. High average transaction sizes can indicate that there is a lot of capital being moved around within the protocol and that there is a healthy level of liquidity. On the other hand, low average transaction sizes can indicate that there may be liquidity issues within the protocol and that there may not be much capital being moved around.

Alongside providing insights into the overall health and activity within a particular DeFi protocol, average transaction size can also be an indicator of the type of users that are using the protocol. If the average transaction size is high, it may be an indication that large investors or institutions are using the protocol. Conversely, if the average transaction size is low, it may be an indication that smaller retail investors are using the protocol.

Governance Participation

Governance participation is another important metric to consider as it measures the percentage of total tokens that are actively participating in the governance process of any particular DeFi protocol.

Governance participation can indicate the overall engagement and participation within a particular DeFi protocol. High governance participation can indicate that there is a strong level of engagement and participation from token holders within the protocol. On the other hand, low governance participation can indicate that token holders may not be actively participating in the governance process or that there may be issues with the governance mechanism itself.

Governance participation can also indicate the level of decentralization within the protocol. If governance participation is high and there is a wide distribution of tokens, it may be an indication that the protocol is more decentralized. Conversely, if governance participation is low and there is a concentration of tokens in a small number of hands, it may be an indication that the protocol is leaning away from being truly decentralized.

Security and Auditing

Security and auditing is perhaps one of the most important metrics to consider when evaluating the health of the DeFi project or project. It is important to take into consideration the level of auditing that has been performed on a particular DeFi protocol as it ensures that the protocol is secure and that user funds are protected. If a DeFi protocol has yet to undergo thorough security audits or if there have been security breaches in the past, it may be an indication that the protocol is not safe for users to use.

In addition to providing insights into the overall safety of a particular DeFi protocol, auditing activities can also be an indicator of the level of professionalism and maturity within the DeFi project. If DeFi protocols are undergoing regular audits, it can be an indication to investors that the project is maturing and becoming more professional.

Conclusion

As the DeFi project continues to grow and evolve, it is important for investors and users to take a holistic approach to evaluate the health of the project. By considering a range of different metrics, they can gain a better understanding of the overall health and potential of the DeFi project.

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