Are Aave, Maker, Compound TVL a good investment choice right now?
Total Value Locked (TVL) is a technical metric that has been used as a key metric in the performance of DeFi lending platforms. Put simply, it measures the cumulative amount of assets used for a given protocol. Traditional arguments suggest that the higher the value of a given DeFi platform, the better.
However, TVL alone cannot judge the bigger picture. Different protocols use each blocked token unit in different ways. With some protocols, each pair requires a separate ETH pool, while other networks can inherently provide liquidity for multiple tokens from the same ETH pool.
In simpler terms, 1 ETH on Layer 2 protocols covers the liquidity needs of 10 different ERC-20 tokens, while the former needs 10 ETH to service these 10 tokens. In fact, compared to the previous network, the Layer 2 network requires fewer asset locks to provide the same amount of liquidity.
In addition, other intrinsic details, such as debt level, are also excluded from the TVL equation. Therefore, TVL is generally a skewed metric that only projects a one-dimensional view.
So what should you watch out for?
When considering the location of each platform, it is important to consider a few other factors. Loan-to-Value (LTV) is such an important metric. It measures the ratio of the loan to the value of a property purchased. Finally, the risk is assessed based on the liquidity that is sufficient to cover the loan balance. The higher the LTV, the more risk a user / lender takes in providing liquidity to the protocol.
According to Dune Analytics’ LTV data, the above ratios for Aave, Compound and MakerDAO are 15%, 39% and 92%, respectively, at the time of going to press.
Source: Dune Analytics
Thus, the combination of Aave and Compound represents 90% of total DeFi sales, but it doesn’t show how much the logs actually earn (net worth). Only when the respective outstanding credits are deducted and the basic accounting regulations are adhered to, the user receives a clear picture.
However, it is important to note here that Maker collects all fees charged, while Compound and Aave only take 10% of the borrowed interest paid and a larger portion goes to suppliers. . If Maker begins digging for liquidity or Aave or Compound falls, the underlying TVL index will be fully flipped in favor of Maker.
Additionally, Aave and Compound’s outstanding loans increased 3-4 times compared to organic balances, largely due to stablecoin farming.
All in all, ranking DeFi logs based only on available liquidity is quite misleading.
One price indicator is that DeFi tokens haven’t done well lately. All three of the above coins have brought negative returns for investors, with AAVE -22.81%, COMP -28.51% and MKR -38.44% last month. The risk-adjusted returns of all 3 tokens have also been negative so far, which makes them an unfavorable investment choice at the moment.
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According to Ambcrypto