In a few days, the team from the Algorand Foundation, which deals with tokenomics, will publish a new study that questions the hypothesis that TVL (Total Value Locked) is a significant indicator for the price performance of cryptocurrencies.
Generally, the TVL DeFi is widely used as an indicator of the legitimacy of the various chains, but the research by Algorand instead finds that it is not correlated to financial returns.
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Algorand: TVL and crypto prices
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The TVL measures the dollar equivalent of all assets locked in all smart contracts on a blockchain.
It is generally used to measure the importance of a chain within the DeFi system, but also to make assessments regarding the value of the native cryptocurrencies of those chains.
In reality, the TVL does not have a specific role in the tokenomic, so what the research by Algorand reveals is that there is no connection between the price trend of a native crypto and the trend of the TVL on its blockchain.
The researchers at Algorand attempted to answer the question of whether TVL could predict the performance of a crypto, and after analyzing over 300 cryptocurrencies during the period 2023-2024, and simulating weekly long/short strategies (top 25% for TVL vs. bottom 25%), they did not find any outperformance, regardless of how the data was adjusted for known issues such as double counting.
In other terms, they discovered that the TVL does not provide any significant information once the general market movements are considered.
The fact is that in the USA the majority of crypto investors, as reported by Pew last year, continue to use TVL as a synonym for credibility, and this only reinforces the background noise, reducing investors’ confidence in cryptocurrencies.
It is necessary, however, to add that this reasoning concerns altcoins in particular, and only to a minimal extent Bitcoin.
The study of the Fondazione Algorand
The study by the Algorand Foundation will be published on June 10.
The main result of that study was precisely the detection of the fact that TVL can be easily gamified, thus resulting in an inadequate metric for creating crypto portfolios and for making investment decisions.
This contrasts with the importance that TVL is taking on in dashboards, headlines, and materials for investors, given that it has no influence on the financial performance of a crypto.
In fact, previous research has found that TVL is often inflated, also because many protocols count the same funds multiple times, distorting the perceived usage and overestimating the legitimacy of the metric.
The study by Algorand concerned more than 300 altcoins, excluding Bitcoin and stablecoins, and was conducted by Dr. Matthew Brigida, Associate Professor of Finance at the SUNY Polytechnic Institute and Chief Economist at the Algorand Foundation.
The research team constructed weekly portfolios that ranked the tokens based on TVL, holding the top 25% and short selling the bottom 25%, to verify if the high-low TVL portfolios generated alpha, discovering that they did not.
The results
So in the end, it was discovered that cryptos with high TVL did not show any price outperformance.
It is instead the market factors that explain the returns, so much so that once the broader performance of the crypto market is considered, the TVL does not offer further insights on the returns.
However, the study also invites analysts and developers to develop better metrics and alternative measures for trust in DeFi platforms, possibly based on user-centered indicators, such as wallet activity or unique participants.
In reality, the TVL continues to be used by all crypto media, but the study by Algorand warns that this practice can be misleading, both for investors and analysts. In fact, platforms like Messari, Artemis, and Token Terminal now treat TVL as a secondary or contextual indicator, and Blockworks has introduced the REV (Real Economic Value).
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Brigida says:
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“TVL is often used to project credibility or potential bull runs, but our results show that it is not a reliable investment signal. Even after correcting known issues like double counting, portfolios based on TVL have not produced abnormal returns.”
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Algorand
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The Algorand blockchain was launched in 2019 along with the native cryptocurrency ALGO.
Algorand has a TVL of about 42 million dollars, which is very low compared to, for example, Ethereum (62 billion) or Solana (8.8 billion).
Furthermore, it has dropped significantly in recent months after the all-time high reached last year at nearly 320 million dollars.
The fact is that it is not a blockchain widely used in the DeFi field, if compared to the main DeFi blockchains.
Furthermore, the current price of ALGO is only slightly higher than that of October 2024, which is before Trump’s electoral victory, and it is even at -94% from the highs of 2019.
In reality, however, it would make more sense to ignore the highs of 2019, but even compared to the highs of 2021, the loss is over 93%.
The Algorand Foundation supports the Algorand ecosystem, providing a development environment that supports key infrastructure by defining technical standards, offering comprehensive support to developers and entrepreneurs, and providing the framework for decentralized governance.
