Meet With BNB Chain Experts #4: The Importance of TVL in Web3

Hey there BNB Fam!

Welcome to another episode of ‘Meet with BNB Chain Experts’. This is a podcast series where we invite experts to explore topics that are important to decentralized applications.

This time we were focusing on DeFi, and specifically on demystifying Total Value Locked (or TVL), a key metric used in the industry which refers to the value of deposited funds deposited in a decentralized protocol. We invited Alex Lee from Wombat, a multi-chain stableswap native on BNB Chain, together with Marvan and Kevin to deep dive into it.

Participants:

Marvan, Partner Growth Manager, BNB Chain

Alex Lee, Founder, Wombat

Kevin, Partner Growth Manager, BNB Chain

Summary of the 4th Episode

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1) How should we interpret TVL to newcomers?

TVL stands for total value locked. It's the total amount of crypto funds that are being locked up or used in different protocols as opposed to, for example, if you just have tokens in your wallet or if you have your tokens in an exchange. And essentially it's one measure of the health and activity of different ecosystems.

2) Why is TVL so important?

These funds were there not just being locked for no reason. This was the really important part. For example, those who are providing liquidity on DEX are actually providing liquidity for traders so that they can have liquidity trade in and out of positions. It's actually providing a service where lenders provide capital to people who want to borrow or want to spend without having to sell their crypto for whatever the reason. There are also liquid staking providers who are actually helping to secure the network.Things are happening as opposed to just a number.

3) How has the industry’s perception of it evolved over time?

It's the most obvious way to measure the size of a DeFi ecosystem. People start to use it as a way to determine the project tokens valuation. It reflects how swap rates would be. Projects want to compete for the most TVL to be more capital efficient.The winner of the capital efficiency will generate the most trading revenue. And high TVL is tied to improvements in usability, liquidity and popularity, especially for lending protocols. The larger the TVL, the better and larger borrowing positions and better slippage.

Trust is another important perspective. People put so much money in a protocol because it’s trustworthy. If the TVL is low, there would be a perception that the protocol is not competitive， which is true for most protocols out there. However, I think this is going to change as protocols like Wombat arise. They’re more capital efficient that low TVL also does not mean poor slippage or poor capital efficiency. I think this is starting to change with more and more capital efficient protocols coming into the space and you can think of this as a real evolution to the structure of the DeFi space.

4) The myths and truths about TVL

People have to realize that the TVL growth sometimes does not mean there is real growth. Take Curve on Ethereum for example: the TVL will increase as ETH price goes up. However, If you take a closer look at it, sETH-ETH actually makes a large part of the TVL of Curve. So on top of that you know that TVL might be affected by synthetics being created and double counted to some extent.

As DeFi grows, people need to understand what is really locked value of stable versus broad volatile assets and what will be a big driver going forward. For stable swaps like Wombat, TVL is a really important part of measuring the success for a dex.

5) Other industries focus on revenue and other metrics. How do you expect the market’s evaluation of DeFi protocols to change over time?

Sustainable TVL relies on sustainable rewards. There has to be a way for a sustainable source of revenue for the protocol to provide these rewards. Companies such as Amazon or Tesla were trading at hundreds of billions of dollars in market cap before they were profitable and there has to be either net profits today, or the expectation of profits in the future. I think we're starting to see that already in DeFi with the notion of real yield.

I think at the end of the day, we're seeing this merge between Web2 and Web 3. In a sense that everything has to be about the user, the product and having a product that the user is willing to pay for. So two questions: first is this protocol or blockchain generating revenue or have users and second is that revenue being passed on to accrue to the token holder in some way: whether it's through buyback and burn, or buyback and give the token to token holders or something else.

This gets me to my last point, it is about building a good product. People are looking at not only the revenues and fees being generated but also looking at metrics such as net revenue, which essentially means taking the revenues or fees generated and then subtracting out the incentives that were given out. I think that's the next sort of metric that people are starting to look at and that's going to be very similar to net profits in traditional companies.

6) What is your advice for new protocols to build a strong TVL?

For new protocols built on TVL you need to simplify all of this kind of stuff. If you present Curve or Ellipsis to any person, it will look very crypto native. It looks really complicated and convoluted. But for something that is so important, it shouldn't be. My advice for any DeFi that wants to build a strong TVL, build something of value instead of just for projects. Try to solve issues.That’s how Web 2 projects become so successful. There's an issue. You solve it and basically you build a strong community and all these valuable partnerships, like Wombat has with Helio and Stader and all these other projects. I think Crypto is not a zero sum game and the ability to create a powerful project and a common multiplier effect will only improve your TVL and attract further liquidity into your system. That's my take on it.

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