TVL, Trading Volume, Open Interest: How to Use DeFi Data to Find the Next Hit Project?
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TVL, Trading Volume, Open Interest: How to Use DeFi Data to Find the Next Hit Project?
On-chain data is not just a breakthrough in evaluating crypto assets, but a revolution in the entire financial data field.
Navigating Web3 tides with focused insightsAuthor: Patrick Scott | Dynamo DeFi
Compiled by: TechFlow
In the past, analysis of crypto assets largely revolved around charts, hype cycles, and narratives. However, as the industry matures, actual performance matters more than empty promises. You need a filter to help distill truly valuable signals from the overwhelming noise.
Fortunately, this filter already exists. It's called Onchain Fundamentals.
Onchain fundamentals provide DeFi (Decentralized Finance) with a structural advantage over traditional finance (TradFi). This is not only one of the many reasons "DeFi will win," but also a core concept that everyone wanting to invest in this industry must understand.
For the past four years, I have been immersed in DeFi metrics, first as a researcher and later working with the DefiLlama team. This article summarizes some of the most useful analytical frameworks I've learned during this time, hoping to help you get started with these tools.
Source: https://defillama.com/?stablecoinsMcap=true&dexsVolume=true
Why are DeFi Metrics Important?
Onchain data is not just a breakthrough for evaluating crypto assets; it's a revolution in the entire field of financial data.
Consider how traditional investors evaluate companies: they have to wait for quarterly earnings reports. Now, there are even proposals to change the frequency of earnings reports from quarterly to semi-annually.
In contrast, the financial data of DeFi protocols is available in real-time. Websites like DefiLlama update relevant data daily or even hourly. If you want to track revenue by the minute, you can even query the blockchain data directly (although overly granular data might not be meaningful, you do have that option).
This is undoubtedly a revolutionary breakthrough in transparency. When you buy stock in a publicly traded company, you rely on financial data released by management after being audited by accountants, which often has delays of weeks or even months. When you evaluate a DeFi protocol, you directly read transaction records happening in real-time on an immutable ledger.
Of course, not every crypto project has fundamental data worth tracking. For example, many "Memecoins" and "vaporware" projects with only a whitepaper and a Telegram group—in these cases, fundamental analysis isn't very helpful (although other metrics like holder count might provide some reference).
But for protocols that generate fees, accumulate deposits, and distribute value to token holders, their operations leave a data trail that can be tracked and analyzed, often ahead of market narratives.
For instance, Polymarket's liquidity has been growing for years, a trend that began long before prediction markets became a hot topic.
Source: https://defillama.com/protocol/polymarket
The explosive price growth of the HYPE token last summer stemmed from its consistently high revenue performance.
Source: https://defillama.com/protocol/hyperliquid?tvl=false&revenue=true&fees=false&groupBy=monthly
These metrics had already hinted at the future direction; you just needed to know where to look.
Core Metrics Explained
Let's start with the core metrics you need to understand for DeFi investing.
TVL (Total Value Locked)
TVL measures the total value of assets deposited into a protocol's smart contracts.
- For lending platforms, TVL includes collateral and supplied assets.
- For decentralized exchanges (DEXs), TVL refers to deposits in liquidity pools.
- For blockchain networks, TVL is the total value locked across all protocols deployed on that network.
Source: https://defillama.com/
In traditional finance (TradFi), TVL is similar to Assets Under Management (AUM). Hedge funds report AUM to show the total amount of money clients have entrusted to them. TVL serves a similar purpose, reflecting the total amount of funds users have deposited into a protocol, indicating user trust in the protocol's smart contracts.
However, the TVL metric has faced considerable criticism over the years, some of it justified.
- TVL does not measure activity. A protocol might have billions in deposits but generate almost no fees.
- TVL is highly correlated with token price. If the ETH price drops 30%, the TVL of all protocols holding ETH will drop proportionally, even if no actual withdrawals occur.
Since most DeFi deposits are volatile tokens, TVL is susceptible to price fluctuations. Therefore, savvy observers combine USD Inflows with TVL to distinguish between price changes and actual deposit activity. USD Inflows are calculated by determining the balance change (multiplied by price) for each asset between two consecutive days and summing them. For example, a protocol with 100% locked in ETH would see its TVL drop 20% if ETH price falls 20%, but its USD Inflows would be $0.
Nevertheless, TVL still holds value when presented in both USD and token terms and combined with activity or productivity metrics. TVL remains an important tool for measuring protocol trust and the overall scale of DeFi. Just don't mistake it for a complete evaluation standard.
Fees, Revenue & Holders Revenue
In DeFi, the definitions of these terms differ from traditional accounting and can be confusing.
- Fees: From the user's perspective, fees refer to the cost you pay to use the protocol. For example, when you trade on a DEX, you pay a trading fee. This fee might go entirely to liquidity providers or partially to the protocol. Fees represent the total amount paid by users, regardless of the final destination. In traditional finance, this is equivalent to Gross Revenue.
- Revenue: Revenue refers to the protocol's share of earnings. That is, out of all fees paid by users, how much does the protocol actually retain? This revenue might flow to the protocol's treasury, team, or token holders. Revenue excludes fees distributed to liquidity providers; think of it as the protocol's Gross Income.
- Holders Revenue: This is a narrower definition, tracking only the portion of revenue distributed to token holders through buybacks, fee burns, or direct staking rewards. In traditional finance, this is akin to a combination of dividends and stock buybacks.
These distinctions are crucial for valuation. Some protocols may generate substantial fees but end up with minimal revenue because almost all fees are distributed to liquidity providers.
DefiLlama has now released full income statements for many protocols. These statements, updated automatically based on on-chain data, break down revenue into different items and redefine these metrics in standard accounting language.
Source: https://defillama.com/protocol/aave
These income statements also come with fund flow visualizations, showing the journey of funds from users into the protocol and then to various stakeholders. This information is worth exploring if you want to delve deeper into a specific project's economic model.
Source: https://defillama.com/protocol/aave
Volume
Volume tracks the scale of trading activity.
- DEX Volume: Counts all token swaps on decentralized exchanges (DEXs).
- Perp Volume (Perpetual Volume): Counts the total trading volume on all perpetual trading platforms.
Source: https://defillama.com/pro/97i44ip1zko4f8h
Volume is a key metric for measuring overall crypto market participation. When people actively use digital assets, they trade. Spikes in volume are often associated with shifts in market interest, whether it's frenzied buying or panic selling.
Compared to previous cycles, perpetual volume has grown significantly. In 2021, perpetual exchanges had a very limited presence. Today, platforms like Hyperliquid, Aster, and Lighter handle billions in daily volume. Due to the rapid growth in this sector, comparing with historical data from the past has limited meaning. For instance, comparing current perpetual volume to 2021 data only tells you the sector has expanded, not much else.
Within a category, trends in market share changes are more important than absolute volume. For example, a perpetual DEX increasing its market share from 5% to 15% indicates a real improvement in its market position, even if its absolute volume decreases. DefiLlama's custom dashboard library offers many market share charts worth checking out.
Open Interest
Open Interest refers to the total value of derivative contracts that are not closed or liquidated. For perpetual DEXs, Open Interest represents all positions that are not yet closed or liquidated.
Source: https://defillama.com/open-interest
Open Interest is an important metric for measuring the liquidity of derivative platforms. It reflects the total capital deployed in currently active perpetual positions.
During market volatility, this metric can collapse quickly. A large wave of liquidations can wipe out Open Interest within hours. Tracking recovery after such events can show whether a platform can re-attract liquidity or if capital has permanently migrated elsewhere.
Stablecoin Market Cap
For blockchain networks, Stablecoin Market Cap refers to the total value of all stablecoins deployed on that network.
Source: https://defillama.com/stablecoins/chains
Stablecoin Market Cap is a key metric for measuring capital inflows. Unlike TVL, which is affected by token price volatility, stablecoins represent real dollars (or dollar equivalents) that users have bridged onto the chain. For example, when the stablecoin market cap on a chain grows from $3 billion to $8 billion, it means $5 billion in real capital has flowed into that ecosystem.
Since October 2023, approximately $180 billion has flowed into the crypto market in the form of stablecoins. Some of this inevitably enters DeFi, driving TVL growth, increased volume, and fee generation. Stablecoin flows are akin to capital inflows in a national economy. An increase in stablecoin supply means new money is entering, while a decrease indicates capital outflow.
App Revenue & App Fees
App Revenue and App Fees are chain-level metrics that count the revenue and fees generated by all applications deployed on that chain, excluding stablecoins, liquid staking protocols, and Gas fees.
I view them as the blockchain's "GDP," showcasing the scale of actual economic activity happening within that ecosystem.
Revenue metrics are among the hardest data to fake because they require users to actually spend money. This makes them a high-signal indicator for judging the activity level of a DeFi ecosystem.
It's important to note that you cannot base valuation on App Revenue, as it makes no sense to value something based on revenue not directly tied to the asset. App Revenue and App Fees are better suited for diagnosing whether a chain is growing, not for valuing it.
How to Effectively Interpret These Metrics?
Understanding individual metrics is the first step, but to use them effectively, you need an analytical framework. I tend to use the following three-step analysis method:
- Prioritize consistent, stable growth.
- Track both stock and flow metrics simultaneously.
- Consider the impact of token unlocks and incentive mechanisms.
1. Prioritize Consistent, Stable Growth
Protocols whose revenue charts show a brief spike followed by a rapid crash do not reflect sustainable value creation. I've seen countless protocols set a weekly revenue record only to disappear a month later.
What truly matters is stable growth over a longer timeframe. For example, a protocol's monthly revenue gradually increasing from $500k to $2 million over six months indicates sustainable growth. A protocol whose weekly revenue suddenly spikes to $5 million but then quickly drops to $300k is likely just a fleeting anomaly.
In the crypto industry, time passes much faster than in traditional markets. Here, one month of sustained growth roughly equates to a quarter in traditional markets. If a protocol's revenue grows consistently for six months, you can think of it as a company with six consecutive quarters of earnings growth. That kind of performance is worth attention.
2. Track Both Stock and Flow Metrics Simultaneously
- Stock Metrics: Such as TVL, Open Interest, Stablecoin Market Cap, Treasury, etc., tell you how much capital is deposited in the protocol.
- Flow Metrics: Such as Fees, Revenue, Volume, etc., tell you the actual activity level within the protocol.
Both are equally important.
Activity is easier to fake. For example, a protocol can artificially inflate volume through incentives or wash trading, and such temporary spikes are not uncommon. Liquidity, however, is harder to manufacture. Getting users to actually deposit funds and keep them there long-term requires the protocol to have real utility or offer attractive yields.
When evaluating any protocol, analyze at least one stock metric and one flow metric. For example:
- For a perpetual DEX, choose Open Interest and Volume.
- For a lending protocol, choose TVL and Fees.
- For a blockchain, choose Stablecoin Market Cap and App Revenue.
If both categories show growth, the protocol is genuinely expanding. If only activity metrics are growing while liquidity stagnates, dig deeper; there might be manipulation. If only liquidity is growing while activity stagnates, it might indicate deposits are primarily from a few "whales."
3. Consider Token Unlocks and Incentives
Token unlocks create sell pressure. Among the vested tokens released by a protocol each week, a portion will always be sold. If there is no other source of demand to offset this selling, the token price will fall.
Before investing, check the token's unlock schedule. A protocol with 90% of its tokens already in circulation has little future dilution pressure. A protocol with only 20% in circulation and a massive unlock scheduled in three months presents a completely different investment risk.
Similarly, high-revenue protocols that distribute more in token incentives than they earn from users make their high revenue data less impressive. DefiLlama tracks this through the "Earnings" metric, which deducts incentive costs from revenue. For example, a protocol might generate $10 million in annual revenue but distribute $15 million in token rewards.
While incentives are an effective strategy for early protocol growth and are often necessary in the initial stages of a protocol's lifecycle, they do generate sell pressure that needs to be offset by other demand.
Learn More
This article outlines the most common DeFi metrics you'll encounter, but this is just the tip of the iceberg; there's much more to explore with deeper study.
I've published a complete DefiLlama tutorial on YouTube, detailing how to use the platform: screening undervalued protocols, evaluating blockchains, discovering emerging projects, and avoiding common analytical mistakes. You can watch it here.
If you want ongoing guidance on DeFi analysis, portfolio construction, and on-chain research, I regularly publish content on my Substack. Feel free to visit newsletter.dynamodefi.com.
The data is right in front of you. The key is whether you will put it to good use.
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