How Can a Protocol’s Total Value Locked (TVL) Be Used as a Proxy for Financial Performance?

TVL, the total amount of assets deposited in a protocol, is a common proxy for usage and market share, especially in Decentralized Finance (DeFi). While not a direct measure of revenue or profit, a higher TVL often correlates with higher protocol fees generated, which are the basis for DCF models.

Investors can use the Price-to-TVL ratio as a comparative metric. However, TVL can be inflated by temporary liquidity mining incentives, so it must be analyzed alongside real usage metrics.