DeFi market fall showcases how rising TVL doesn't tell the full story

The decentralized finance market seems to be deflating after the DeFi summer craze when tokenized versions of Bitcoin and protocols, such as Uniswap and SushiSwap, outperformed the rest of the market.

Earlier in October, the two main DeFi indices, Binance's DeFi Composite Index and TokenSet's DeFi Pulse Index Set lost more than 60% and 50% of their value, respectively.

DeFi Composite Index was launched by Binance Futures in late August, and it tracks the DeFi market performance using a basket of DeFi protocol tokens listed on Binance.

It remains questionable whether TVL accurately measures the interest in the DeFi market.

"Most of the BTC protocols being utilized for farming to get additional exposure to DeFi projects without losing exposure to BTC, which seems the most logical risk-taking activity for Bitcoin investors. The TVL increase can't be the real indicator of the DeFi token valuation, which was clearly ahead of the product development phase."

With most of the prominent DeFi tokens losing value in the double digits in October, the cumulative market capitalization for all DeFi assets also shrunk by 25% on Oct. 8 alone; the major losers were SushiSwap, Uni Coin and Yearn.

Although this drop in metrics throughout the DeFi market might seem alarming to most investors, according to Klumov, it could also be viewed as a healthy correction where DeFi assets will now find their true value, adding that TVL should not be the go-to metric: "Since the market is maturing, more complicated metrics have to be established to properly identify winners and losers."

Klumov outlined how the DeFi community, at large, has benefited from higher fees, while also lauding the Ethereum blockchain for coping well: "It raised the minimum ticket per transaction, which can compensate for the higher gas fees. That's why other blockchains followed with their DeFi offerings, but most haven't managed to generate enough traction." He further added: "This is primarily because of the convenience and security Ethereum offers at the settlement level."

The complexities in DeFi are often of a similar nature where both the investors and the experts do not entirely understand how the DeFi markets function.

"Many people who participate in DeFi recognize that what they are doing is risky, but are enticed to take those risks by high rates of return on their locked assets. Another difference is the much faster speed at which the DeFi ecosystem is developing."