Title: Piercing the Veil of TVL: DeFi Reappraised

Abstract: Total value locked (TVL) is widely used to measure the size and popularity of protocols and the broader ecosystem in decentralized finance (DeFi). However, the prevalent TVL calculation framework suffers from a "double counting" issue that results in an inflated metric. We find existing methodologies addressing double counting either inconsistent or flawed. To mitigate the double counting issue, we formalize the TVL framework and propose a new framework, total value redeemable (TVR), designed to accurately assess the true value within individual DeFi protocol and DeFi systems. The formalization of TVL indicates that decentralized financial contagion propagates through derivative tokens across the complex network of DeFi protocols and escalates liquidations and stablecoin depegging during market turmoil. By mirroring the concept of money multiplier in traditional finance (TradFi), we construct the DeFi multiplier to quantify the double counting in TVL. Our empirical analysis demonstrates a notable enhancement in the performance of TVR relative to TVL. Specifically, during the peak of DeFi activity on December 2, 2021, the discrepancy between TVL and TVR widened to \$139.87 billion, resulting in a TVL-to-TVR ratio of approximately 2. We further show that TVR is a more stable metric than TVL, especially during market turmoil. For instance, a 25% decrease in the price of Ether (ETH) results in an overestimation of the DeFi market value by more than \$1 billion when measuring using TVL as opposed to TVR. Overall, our findings suggest that TVR provides a more reliable and stable metric compared to the traditional TVL calculation.