How Does the Concept of “Capital Efficiency” Relate to Both TVL and the MV=PQ Model?

Capital efficiency measures how effectively a protocol utilizes its deposited capital (TVL) to generate revenue or facilitate economic activity (PQ). A protocol with high capital efficiency generates a large PQ from a small TVL, suggesting strong utility and low velocity.

In the MV=PQ model, high capital efficiency implies that a smaller market cap (M P) is required to support the same level of economic output (PQ), assuming velocity is managed. Low efficiency suggests capital is dormant, which is a negative for valuation.