The Surprising Irrelevance of Total-Value-Locked on Cryptocurrency Returns

TL;DR

This paper challenges the assumption that total-value-locked (TVL) directly influences cryptocurrency returns by showing that TVL-based portfolios' returns are explained by overall crypto market factors, making TVL strategies redundant.

Contribution

It demonstrates that TVL does not provide unique predictive power for crypto returns beyond standard market factors, using empirical analysis of TVL-sorted portfolios.

Findings

TVL portfolios' returns are linear functions of market returns

TVL strategies can be replicated with market portfolios

Results hold for both total and adjusted TVL measures

Abstract

A common assumption in cryptocurrency markets is a positive relationship between total-value-locked (TVL) and cryptocurrency returns. To test this hypothesis we examine whether the returns of TVL-sorted portfolios can be explained by common cryptocurrency factors. We find evidence that portfolios formed on TVL exhibit returns that are linear functions of aggregate crypto market returns, that is they can be replicated with appropriate weights on the crypto market portfolio. Thus, strategies based on TVL can be priced with standard asset pricing tools. This result holds true both for total TVL and a simple TVL measure that removes a number of ways TVL may be overstated.