ViaBTC Capital | TVL Adjustment on Public Chains and Case Analysis
November 05 2021 - 02:41AM
NEWSBTC
As one of the major indicators for the valuation of public chains,
Total Value Locked (TVL) measures the level of prosperity and the
fundamentals of a public chain’s ecosystem, especially for public
chains with extensive applications on DeFi. During the short bull
market that has just ended, native public chain tokens differed
from one another in terms of their performance in the secondary
market. Even for public chains with moderate performance like BSC,
the TVL rebounded after the May 19 crash. However, their token
prices have been lower than those of other public chains (e.g.
Solana) because the way TVL is calculated does not correctly
reflect the actual TVL and capital flows. In fact, non-stablecoins
constitute a significant proportion of TVL, and the prices of many
non-stable assets are subject to market swings. This has led to a
flawed evaluation method of “price analysis based on token prices”,
and the right way to calculate the TVL trends should eliminate the
impact of token prices movement. In this article, three TVL
adjustment methods that exclude the impact of token prices are
introduced. Some interesting analysis using the adjusted TVL is
also provided. The data used by the research are the daily TVL
statistics of the top 10 public chains (as per DeFiLlama’s TVL
ranking) from February 3, 2021, to September 25, 2021, and the
closing price of the corresponding tokens. Normal TVL Trends In
terms of the TVL trend, the BSC public chain was clearly hit by the
May 19 crash. After around two months of horizontal price movement,
its TVL significantly rebounded. As for Solana, the TVL started
growing from the early days of July and soared since September.
Other public chains, such as Terra and Avalanche, also performed
pretty well. However, as mentioned earlier, due to the major
fluctuation of token prices and the flaw of normal TVL calculation,
the actual TVL concerning the ecosystem of the public chains may
not shown properly by the picture. Figure 1 (data source: ViaBTC
Capital, CoinEx, DeFiLlama) Introduction to Methods of TVL
Adjustment It is very difficult to measure TVL with one numerical
value because the tokens locked on a public chain come in a great
variety and are subject to rapid updates. The unified measurement
based on the USDT-margined value of all tokens is a comparatively
more feasible approach. However, since the USDT-margined value also
suffers from great volatility, the TVL determined through such an
approach may be distorted. One ideal method of adjustment (Method
1) is to establish a Baseline time point and record the price of
all the locked tokens at this time point. Whenever the TVL is
calculated, the current TVL will be determined by the number of the
various tokens in the present network and the Baseline token price,
which is expressed in the following formula: In the above
formula, is the adjusted TVL at the given time t, is
the number of tokens at time t, and is the Baseline token price.
Using this adjusted TVL, we can conduct reliable horizontal
comparisons between different public chains and reflect on the
status of a given public chain. This method has been adopted by
DAppRadar for the calculation of the project-specific TVL. This
method is relatively precise and is suited for calculating TVL of a
specific project. However, when considering TVL adjustment of an
entire public chain, the above method suffers from the
unavailability of data and the rapid updates of the locked tokens.
For example, the Baseline price records may not include the
newly-launched tokens with high TVL. Next, let’s move to another
method of TVL adjustment (Method 2). Although this method is less
accurate, it features easier data acquisition/processing and can be
adopted more extensively. Moreover, using method 2, we can also
reasonably adjust most public chains’ TVL. Method 2 also first
determines a Baseline time point; however, it only records the
price of the native token (e.g., BSC’s BNB). It then adjusts the
TVL based on the current price of the native token, the Baseline
token price, the TVL of stablecoins, and the regular TVL. In the
above formula, is the adjusted TVL at the given time t,
is the regular TVL at time t, is the Baseline token
price, is the price of the native token at time t, and is the
TVL of stablecoins at time T. This adjustment is based on the
following reasons: On a public chain, apart from stablecoins, most
of the locked assets are native public chain tokens. For example,
on PancakeSwap, most of the LPs exist in the form of XXX-BNB.
Tokens of a public chain’s native project are highly correlated
with native public chain tokens, which are often the most volatile
assets on public chains. Therefore, it makes sense to adjust the
token price fluctuations of the native projects with the volatility
of native public chain tokens. Mainstream tokens come with high
correlations, i.e. correlation between native public chain tokens
and other mainstream assets locked such as BTC and ETH. Such
statistics can be easily obtained and processed, which makes the
method more universal. Method 3, a further simplification of Method
2, is an alternative solution when the TVL value of stablecoins on
the public chains is unavailable. The method features the same
rationale as Method 2. The difference is that it cannot be applied
to public chains with a high TVL of stablecoins, such as Terra and
Celo. Case Analysis Through the TVL trends adjusted using
Method 3 as shown in Figure 2, we can tell that the BSC crash may
not be as steep as that shown by the regular TVL trend.
Furthermore, according to the adjusted values, the sharp and
sustained recovery from July to September as per the regular TVL
trend did not occur —— What happened was merely an interval
oscillation. In the case of Solana, the real TVL did not soar in
September. Rather, it had stagnated at the end of August, and the
rise of TVL that followed was likely to be caused by the impact of
the FOMO price. Figure 2 (data source: ViaBTC Capital, CoinEx,
DeFiLlama) This adjusted TVL also leads to some interesting
discoveries. We determined the cumulative volatility of the
adjusted TVL and the price of native public chain tokens in
relation to three well-established public chains (Ethereum, BSC,
and Polygon), i.e. and, with the given time 0 being February 3,
2021. From the results stated in Figure 3, it is clear that the
price growth of native public chain tokens and that of the adjusted
TVL seem to converge To further verify such a relationship, we can
divide the two values of cumulative volatility and see whether
there is a mean reversion at around 1. Figure 4 demonstrates that
this convergence holds, which means that the valuation method based
on the adjusted TVL multiplier (valuation/ the adjusted TVL) is
appropriate as Figure 4 shows that this multiplier keeps
fluctuating around a certain value. Figure 3 (data source: ViaBTC
Capital, CoinEx, DeFiLlama) Figure 4 (data source: ViaBTC Capital,
CoinEx, DeFiLlama) Another case relates to the observation of the
actual changes in the TVL of public chains. That is, when a new
public chain starts to boom, what is the source of its TVL growth?
Does it come from the circulation of existing on-chain capital or
new capital inflow? Here, we did some research on Solana. From
Figure 2, it is clear that the TVL of Solana’s ecosystem soared
approximately from August 12 to September 12. As such, we picked
the statistics during this period as the sample for the analysis of
correlation and TVL changes. Based on the values of correlation as
shown in the black frames of Figure 5, most of the TVL of Solana
may have been contributed by Polygon and Ethereum, the latter of
which may have provided a greater proportion. The overall TVL
(Figure 6) of the 5 public chains dropped from August 12 to
September 12, including ETH and BSC, which means that the TVL
growth of Solana was the result of capital circulation instead of
new capital inflow. Figure 5 (data source: ViaBTC Capital, CoinEx,
DeFiLlama) Figure 6 (data source: ViaBTC Capital, CoinEx,
DeFiLlama) In a nutshell, the adjusted TVL allows us to eliminate
the impact of certain token prices and get a clearer picture of the
asset turnover and the TVL dynamics on public chains. Additionally,
with such adjustments, we can develop an intuitive insight into the
ecosystem development of public chains, particularly those that
focus on DeFi application and invest in the native token and
infrastructure of a new public chain during the early stage of
asset turnover.
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