TVL, trading volume, open interest contracts — how to use DeFi data to find the next hot project?

Author: Patrick Scott | Dynamo DeFi

Compilation: Deep潮 TechFlow

In the past, crypto asset analysis mainly focused on charts, hype cycles, and narratives. However, as the industry matures, actual performance becomes more important than hollow promises. You need a filter to help you extract truly valuable signals from the overwhelming information.

Fortunately, such a filter already exists, called Onchain Fundamentals.

Onchain Fundamentals provide structural advantages for DeFi (Decentralized Finance) compared to traditional finance (TradFi). This is not only one of the reasons why “DeFi will prevail,” but also a core concept that anyone interested in investing in this industry must understand.

Over the past four years, I have been immersed in the study of DeFi data metrics, initially as a researcher, and later as part of the DefiLlama team. This article summarizes some of the most useful analytical frameworks I’ve learned during this time, hoping to help you start using these tools.

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Why are DeFi metrics important?

Onchain data is not just a breakthrough in evaluating crypto assets; it’s a revolution in the entire financial data field.

Imagine how traditional investors evaluate companies: they wait for quarterly earnings reports. Now, some even suggest changing the reporting frequency from quarterly to semi-annual.

In contrast, financial data for DeFi protocols is available in real-time. Websites like DefiLlama update relevant data daily, or even hourly. If you want to track revenue by the minute, you can directly query blockchain data (though overly granular data may have limited significance, the option is there).

This is undoubtedly a revolutionary breakthrough in transparency. When you buy stock in a listed company, you rely on financial data audited and released by management through accountants, often with a delay of weeks or months. When evaluating a DeFi protocol, you are directly reading transaction records on an immutable ledger in real-time.

Of course, not every crypto project has meaningful onchain fundamentals. For example, many “meme coins,” or “air projects” with only a whitepaper and a Telegram group, don’t benefit much from fundamental analysis (though other metrics like holder count may offer some insights).

But for protocols that generate fees, accumulate deposits, and distribute value to token holders, their operations leave data traces that can be tracked and analyzed, often before market narratives form.

For example, Polymarket’s liquidity has grown for years, a trend that was evident even before prediction markets became a hot topic.

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The explosive price growth of HYPE tokens last summer was driven by its sustained high revenue performance.

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These indicators have long hinted at future trends; you just need to know where to look.

Core Metric Analysis

Let’s start with the core metrics you need to understand when investing in DeFi.

TVL (Total Value Locked)

TVL measures the total value of assets deposited in a protocol’s smart contracts.

For lending platforms, TVL includes collateral and supplied assets.

For decentralized exchanges (DEXs), TVL refers to deposits in liquidity pools.

For blockchain networks, TVL is the total lock-in across all protocols deployed on that network.

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In traditional finance (TradFi), TVL is similar to Assets Under Management (AUM). Hedge funds report AUM to show the total funds entrusted to them. Similarly, TVL reflects the total amount of user funds deposited into protocols, indicating the level of trust users have in the protocol’s smart contracts.

However, over the years, TVL has also faced criticism, some of which is valid.

TVL does not measure activity volume. A protocol might hold tens of billions of dollars in deposits but generate almost no fees.

TVL is highly correlated with token prices. If ETH drops 30%, the TVL of all ETH-holding protocols will decrease proportionally, even if no actual withdrawals occur.

Since most DeFi deposits are in volatile tokens, TVL can be easily affected by price swings. Savvy observers combine USD inflows and TVL to distinguish between price changes and actual deposit activity. USD inflows are calculated by measuring the change in the balance of each asset over two consecutive days (multiplied by price) and summing these. For example, a protocol with 100% of its TVL in ETH will see its TVL drop 20% if ETH’s price falls 20%, but its USD inflow remains $0.

Nonetheless, when TVL is presented in both USD and token terms, and combined with activity or productivity metrics, it remains valuable. TVL continues to be an important tool for measuring protocol trust and overall DeFi scale. Just don’t treat it as a complete valuation metric.

Fees, Revenue, and Holders’ Income

In DeFi, these terms differ from traditional accounting and can be confusing.

Fees: From the user’s perspective, fees are the costs paid when using a protocol. For example, trading on a DEX incurs transaction fees. These fees may go entirely to liquidity providers or partly to the protocol. Fees represent the total amount paid by users, regardless of where they ultimately go. In traditional finance, this is similar to Gross Revenue.

Revenue: Revenue refers to the protocol’s share of the earnings. That is, how much of the total fees paid by users does the protocol actually retain? These revenues may flow into the protocol’s treasury, team, or token holders. Revenue does not include fees distributed to liquidity providers; it can be viewed as Gross Income.

Holders’ Revenue: This narrower definition tracks only the portion of income distributed directly to token holders via buybacks, burns, or staking dividends. In traditional finance, this is akin to a combination of dividends and share buybacks.

These distinctions are crucial for valuation. Some protocols may generate large fees but distribute almost all of them to liquidity providers, resulting in minimal actual income.

DefiLlama currently publishes comprehensive income reports for many protocols. These reports are automatically updated based on onchain data, breaking down income into different components, and redefining these metrics in standard accounting language.

Source: protocol/aave

These income reports also include visualizations of fund flows, showing how funds move from user deposits into protocols and then are allocated to various stakeholders. If you want to understand a project’s economic model in depth, these are very valuable.

Source: protocol/aave

Trading Volume

Trading volume tracks the scale of trading activity.

DEX Trading Volume: Total volume of all trading pairs on decentralized exchanges.

Perpetual Contract Volume (Perp Volume): Total trading volume across all perpetual contract platforms.

Source: pro/97i44ip1zko4f8h

Trading volume is a key indicator of overall crypto market participation. When people actively use digital assets, they trade. Surges in trading volume often correlate with shifts in market interest, whether in bullish euphoria or panic selling.

Compared to previous cycles, perpetual contract trading volume has grown significantly. In 2021, perpetual exchanges were still relatively niche. Today, platforms like Hyperliquid, Aster, and Lighter see daily volumes in the billions. Due to this rapid growth, comparing current data with past cycles has limited value. For example, comparing current perpetual trading volume with 2021 data only shows expansion, not deeper insights.

In any category, the trend in market share is more important than absolute trading volume. For instance, if a perpetual DEX’s market share increases from 5% to 15%, even if its absolute volume declines, its market position is improving. Many dashboards in the DefiLlama custom dashboard library provide market share charts worth exploring.

Open Interest (OI)

Open interest refers to the total value of open or non-liquidated derivatives contracts. For perpetual DEXs, it represents all open or unsettled positions.

Source: open-interest

Open interest is an important indicator of derivatives platform liquidity. It reflects the total capital deployed in active perpetual positions.

During market volatility, this metric can collapse rapidly. A large wave of forced liquidations can wipe out open interest within hours. Tracking the recovery after such events can reveal whether a platform can regain liquidity or if funds have permanently migrated elsewhere.

Stablecoin Market Cap

For blockchain networks, stablecoin market cap is the total value of all stablecoins deployed on that network.

Source: stablecoins/chains

Stablecoin market cap is an important indicator of capital inflow. Unlike TVL, which is affected by token price swings, stablecoin market cap represents the actual USD (or equivalent) injected into the chain via cross-chain bridges. For example, if a chain’s stablecoin market cap increases from $3 billion to $8 billion, it indicates a real capital inflow of $5 billion into that ecosystem.

Since October 2023, approximately $180 billion has flowed into the crypto market in stablecoins. Some of this inevitably entered DeFi, boosting TVL, trading volume, and fee generation. The flow of stablecoins is akin to capital inflows in a country’s economy; increasing supply signals new funds entering, while decreasing supply indicates capital outflows.

Application Revenue & Application Fees

Application revenue and fees are chain-level metrics that count all revenue and fees generated by applications deployed on the chain, excluding stablecoins, liquidity staking protocols, and Gas fees.

I view these as the “GDP” of the blockchain, representing the scale of actual economic activity within the ecosystem.

Revenue metrics are among the hardest data to fake because they require users to spend real funds. This makes them high-signal indicators for assessing DeFi ecosystem activity.

Note that you should not base valuation solely on application revenue, as valuing assets based on unrelated income is meaningless. These metrics are better suited for diagnosing whether a chain is growing rather than for valuation purposes.

How to interpret these metrics effectively?

Understanding individual metrics is the first step, but to use them effectively, you need an analytical framework. I recommend a three-step approach:

Prioritize sustained, stable growth.

Track both stock and flow metrics simultaneously.

Consider the impact of token unlocks and incentive mechanisms.

1. Prioritize sustained, stable growth

Protocols that show short-term spikes in revenue followed by rapid crashes do not demonstrate sustainable value creation. I’ve seen countless protocols set revenue records in one week but disappear within a month.

What truly matters is steady growth over a longer period. For example, a protocol’s monthly revenue growing from $500,000 to $2 million over six months indicates sustainable expansion. Conversely, if a protocol’s revenue suddenly jumps to $5 million in one week but then plummets to $300,000, it’s likely a transient anomaly.

In crypto, time moves much faster than in traditional markets. A month of continuous growth roughly equals a quarter in traditional markets. If a protocol’s revenue continues to grow over six months, it can be considered akin to a company with six consecutive quarters of revenue growth. Such performance is noteworthy.

2. Track both stock and flow metrics

Stock Metrics: e.g., TVL, open interest, stablecoin market cap, treasury size—show how much capital is deposited.

Flow Metrics: e.g., fees, revenue, trading volume—show actual activity levels.

Both are equally important.

Activity volume is easier to manipulate. For example, a protocol can artificially inflate trading volume through incentives or wash trading, which is common. Liquidity, however, is harder to fake. To attract genuine deposits and retain users long-term, protocols need real utility or attractive yields.

When evaluating any protocol, analyze at least one stock and one flow metric. For example:

• For perpetual DEXs: open interest and trading volume.

• For lending protocols: TVL and fees.

• For blockchains: stablecoin market cap and application revenue.

If both types of metrics grow, the protocol is genuinely expanding. If only activity volume increases while liquidity stagnates, further analysis is needed—there may be manipulation. If only liquidity grows but activity remains flat, it could indicate that deposits are mainly from a few “whales.”

3. Consider token unlocks and incentives

Token unlocks create selling pressure. Each week, a portion of vested tokens is released, and some are sold. Without other demand sources to offset this selling, token prices tend to decline.

Before investing, check the token unlock schedule. A protocol with 90% circulating supply has minimal future dilution risk. Conversely, a protocol with only 20% circulating supply and large unlocks in three months faces higher risk.

Similarly, a high-revenue protocol that distributes more tokens as incentives than it earns from users’ activity may have less impressive revenue figures. DefiLlama tracks this with the “Earnings” metric, which deducts incentive costs from revenue. For example, a protocol might generate $10 million annually but distribute $15 million in token rewards.

While incentives are an effective early growth strategy and often necessary in the initial phases, they do create sell pressure that must be offset by other demand.

Deepening Your Knowledge

This article covers the most common DeFi metrics, but it’s just the tip of the iceberg. There’s much more to explore.

I’ve published a comprehensive DefiLlama tutorial on YouTube, explaining how to use the platform: identifying undervalued protocols, evaluating blockchains, discovering emerging projects, and avoiding common analytical pitfalls. Click here to watch.

If you want ongoing insights into DeFi analysis, portfolio building, and onchain research, I regularly publish content on my Substack. Visit newsletter.dynamodefi.com.

The data is all there; the key is whether you will make good use of it.