1) I'll say it once and I'll say it again:
TVL is a poor metric for derivatives exchanges
The beauty of leverage is to have $10 of buying power for $1 of margin. High TVL:Volume implies your capital is not efficient and is antithetical to the goals of a perps exchange 🧵
TVL is a poor metric for derivatives exchanges
The beauty of leverage is to have $10 of buying power for $1 of margin. High TVL:Volume implies your capital is not efficient and is antithetical to the goals of a perps exchange 🧵
2) Why does anyone care about TVL at all?
In the context of e.g. PoS it could make sense to judge the economic security of a network like Ethereum or Solana is based on the amount of capital that's staked. More dollars staked in eth == harder to attack the network.
In the context of e.g. PoS it could make sense to judge the economic security of a network like Ethereum or Solana is based on the amount of capital that's staked. More dollars staked in eth == harder to attack the network.
3) But when it comes to trading, what do we care about? Putting your $$ to work
This is precisely why lending markets and margin trading are powerful. I can lock up some small amount of collateral/margin and cover the rest with a loan, so purchasing power >> cash on hand.
This is precisely why lending markets and margin trading are powerful. I can lock up some small amount of collateral/margin and cover the rest with a loan, so purchasing power >> cash on hand.
4) Even though nobody has fully figured out how to solve the holy grail of under-collateralised loans in DeFi (due to the counterparty rug risk), it's what propels the traditional finance and CeFi markets.
Why do you think MMs love their "line of credit"?
Why do you think MMs love their "line of credit"?
5) Derivatives, especially perps offer a fantastic way to achieve similar trading leverage.
As a result they've become the defacto instrument for crypto traders with over 68% of *all* crypto volume coming from derivatives (mostly perps, crypto options are miniscule still).
As a result they've become the defacto instrument for crypto traders with over 68% of *all* crypto volume coming from derivatives (mostly perps, crypto options are miniscule still).
6) So then it'll come as no surprise that the success metrics for derivs exchanges revolve around volume (capital turnover of trades) and open interest (the sum of open position values).
Anyone shilling TVL either doesn't know what they are talking about, or is misleading you.
Anyone shilling TVL either doesn't know what they are talking about, or is misleading you.
7) Furthermore, this is why DEX designs (spot and perps) have shifted towards orderbooks and concentrated liquidity on AMMs. You want your LP capital to be traded against, not sitting idly in the wings of an xyk curve.
Study @PhoenixTrade and @Lifinity_io volume:tvl efficiency
Study @PhoenixTrade and @Lifinity_io volume:tvl efficiency
8) So think to yourself, do I want my perp exchange to get me the most trading out of my limited capital? Do I want my LP positions generating loads of fees for every dollar I deposit?
Or do I want it to sit there like a glorified vault with all its vanity TVL.
Or do I want it to sit there like a glorified vault with all its vanity TVL.
9) P.S. I'm an engineer and retardio at finance but I feel like this is pretty intuitive and self-evident. Don't really understand why DeFi is still stuck with this TVL obsession years on. How can we fix this.
https://x.com/rleshner/status/1374459064940294144
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