Defining Total Value Secured (TVS) In Decentralized Oracle Networks
According to DefiLlama, the multi-chain Decentralized Finance (DeFi) ecosystem has experienced a 12x growth over the course of 2021, starting the year at approximately $21B to now surpassing $250B. This common economic metric widely used to measure DeFi’s growth and adoption is known as Total Value Locked (TVL) — the aggregate financial value of all blockchain-based tokens stored within a protocol or platform at a given moment in time.
Underpinning much of the DeFi ecosystem are hybrid smart contracts — decentralized applications that combine on-chain infrastructure with off-chain infrastructure to create enhanced utility for blockchain networks. Within the hybrid smart contract framework, TVL is currently regarded as one of the best ways to measure the total economic impact of the on-chain portion of the DeFi ecosystem, as it tracks the funds directly locked on-chain in a blockchain’s DeFi ecosystem.
For the off-chain portion of hybrid smart contracts, oracles have become the dominant layer of infrastructure. Oracles are used to fetch external data and perform off-chain computations on the behalf of decentralized applications in DeFi and beyond. However, because oracle networks for data and computation do not hold user funds, the “locked” portion of the “Total Value Locked” metric does not apply. This begs the question then, how do you track the value of oracle networks within the decentralized economy?
One answer is to use TVL as an input to generate a new metric referred to as Total Value Secured (TVS) — the aggregate amount of TVL within all protocols and platforms that depend on the proper operation of an oracle network to protect user funds. Although still a relatively new metric in the mindshare of the crypto community, TVS serves as a useful measuring stick of the economic impact and adoption of oracles.
When applying this metric to Chainlink, the most widely adopted decentralized oracle network across the blockchain ecosystem, the TVS totals over $82B+. Chainlink’s TVS covers hundreds of decentralized applications across the multi-chain ecosystem including Aave, Compound, Liquidity, Venus, Synthetix, Flexa, Benqi, Fei Protocol, Alchemix, dYdX, and many more. Ultimately, this makes Chainlink one of the fastest growing and highest potential value securing forms of decentralized consensus in the blockchain ecosystem.
In this article, we explore in more depth how decentralized oracle networks like Chainlink secure value, how TVL is commonly calculated today, and how TVL serves as an input to determine the TVS of oracle protocols.
How Oracles Secure Value Within Hybrid Smart Contracts
Total Value Secured as a metric of the economic impact of oracle networks is derived from the fact that the real-world data provided to smart contracts via oracles directly determines the outputs of such applications. The dynamic between oracles and smart contracts goes back to the infamous “garbage in, garbage out” problem of logic-based systems. If a smart application receives manipulated data, then any operations that depend on such data will not execute as expected. The end result is putting user funds at risk.
For example, in a decentralized money market protocol, users interact with on-chain logic that allows them to lend their assets and generate yield or deposit collateral and borrow assets as working capital. These activities are commonly facilitated through overcollateralized loans, where a borrower’s collateral is worth more than the assets being borrowed (e.g. $100 of ETH collateral to borrow $70 of USDT). To ensure the solvency of money markets, positions that fall below an acceptable collateralization ratio (e.g. 110%) are liquidated by automatically selling the user’s collateral to pay back their debt.
As part of money market operations, price oracles are required to determine the max loan issuance size when a new loan is created and to mark positions for liquidation when they become under-collateralized. Price oracles enable such operations to be performed by smart contracts by continuously publishing real-time price updates on the blockchain for every supported asset, which are then used on-chain to determine the collateralization ratio of loans.
If the integrated price oracles are operating as designed and the market risk parameters are adequately set, then the decentralized money market will operate smoothly. However, if the price oracles deliver manipulated or stale market data, then the protocol can become insolvent and lose user funds. For instance, if the price of a collateral asset is reported to be higher than it is in reality, then malicious actors can create toxic loans where the debt is worth more than their underlying collateral. Therefore, a significant portion of an on-chain money market’s TVL can be drained since the borrower has no incentive to pay back their loan positions. This ultimately leads to lenders on the market taking a loss.
Conversely, manipulated pricing data can also lead to borrowers being falsely liquidated and incurring a liquidation fee. Furthermore, if the price oracles delivering market data on-chain fail to deliver data on-chain in a timely manner, user funds can be at risk during market volatility as undercollateralized positions cannot be liquidated without a freshly updated source of data.
In order to protect the capital of both lenders and borrowers, money market protocols must use a highly reliable and tamper-resistant price oracle solution such as Chainlink Price Feeds. Aave and Compound are just two examples of widely used money market protocols with billions of dollars in TVL that use Chainlink Price Feeds to protect against data manipulation and downtime. Through Chainlink, such protocols are provided access to market data even during blockchain network congestion and market volatility.
Money markets are just one example of how oracles directly secure the applications that consume its data. However, this logic applies to a wide range of hybrid smart contract use cases within the DeFi ecosystem such as decentralized stablecoins, synthetic assets, futures contracts, prediction markets, and more. A simple generalization of this dynamic is:
If a faulty oracle network can cause an application to lose user deposited funds, then a properly operated oracle network is securing that application’s TVL by protecting it against data manipulation and downtime.
Before diving deeper into TVS, let’s first look at how TVL is calculated and its utility, given that TVL is used as an input to determine an oracle protocol’s TVS.
Diving Into Total Value Locked (TVL)
TVL is a useful metric because it’s a hard-to-fake measure of the total economic activity taking place within a protocol or platform. A growth in TVL is generally perceived as a sign of success for a smart contract application because it not only shows the magnitude of economic activity occurring but also the willingness and trust of users to deposit their money into the application. While not the only way to measure economic activity, TVL is one of the more useful measuring sticks as TVL can only increase if there is real capital being deposited.
The “locked” portion of TVL can be considered a bit of a misnomer as the assets aren’t usually locked in the sense that the assets cannot be withdrawn. Rather, they are “held” by the smart contract for any user-defined period of time. While it may seem counterintuitive that a “non-custodial” smart contract “holds” user deposits, it is framed as such because there is typically no centralized custodian or intermediary involved compared to the traditional financial economy. When held, the tokens are “managed” by on-chain programmatic code that defines the conditions under which deposited assets can be used and when assets can be withdrawn.
Though TVL isn’t a fully standardized metric and has many nuances to consider in its usage, there are some common approaches taken when determining the TVL of many use cases within DeFi.
- Decentralized money markets: the total value of all tokens held in the protocol’s smart contracts. Effectively tracks total value of deposits minus the total value of borrows. Some trackers show just the total value of deposits, which arguably is a different metric than TVL.
- Decentralized exchanges: the total value of all deposited tokens across all liquidity pools in an automated market maker (AMM) or on-chain order book based exchanges.
- Decentralized stablecoins: the total value of tokens deposited as collateral to back minted stablecoins, but not the market value of the minted stablecoins. The minted tokens are counted as TVL within the other applications they are deposited into.
- Synthetic asset platforms: the total value of tokens deposited as collateral to back synthetic tokens, but not the market value of minted tokens. The synthetic tokens are counted as TVL within the other applications they are deposited into.
- Rebase tokens: the total value of tokens deposited as collateral to back rebase tokens, but not the market value of the rebase tokens. The rebase tokens are counted as TVL within the other applications they are deposited into.
- Privacy Mixers: the total value of tokens deposited into the mixer’s smart contract.
- Futures/Perpetuals: the total value of tokens deposited as collateral to back existing futures positions or available as liquidity, but not the value of leveraged positions themselves.
- Options: the total value of tokens deposited as collateral or available as liquidity to back calls and puts, and not the value of the options positions themselves.
- Payment channels/networks: the total value of tokens deposited in the payment network’s smart contracts as liquidity.
- Yield aggregators: the total value of deposited tokens into the protocol plus yield generated. Effectively tracking the value of tokens users are able to withdraw from the protocol.
- Insurance: the total value of tokens deposited as collateral into the protocol or available as liquidity to back insurance agreements, but not the value of all outstanding coverage policies.
- Cross-chain token bridges: the total value of tokens locked in custody on all host blockchains, which back the wrapped token representations minted on other receiving chains. Wrapped tokens created by a bridge can be counted as TVL within the other applications they are deposited into.
- Staking Pools: the total value of all tokens/coins deposited in the protocol plus earned yield from Proof of Stake blockchains. Any minted derivative claim token can be counted as TVL within other applications it’s deposited into.
Given the composability of the smart contract ecosystem, many protocols route user deposits into other on-chain protocols. When determining the aggregate TVL of the DeFi ecosystem or DeFi ecosystems on specific blockchains, many TVL dashboards take this into account by filtering double counting. However, this needs to be managed on a protocol by protocol basis and standardization across the ecosystem has not been fully achieved. Accurately tracking aggregate TVL will likely become more complex as the DeFi ecosystem evolves in a layered manner and different interpretations emerge.
Additionally, it’s important to note that certain types of capital are often excluded from TVL metrics including:
- Staking of an application’s native governance token. Such staking is typically used for governance and exposure to revenue cash flows, but not commonly used within the actual on-chain financial product offered to users. However, there is not a strong consensus on this and TVL trackers often include toggles to include/exclude this portion.
- Assets within a protocol’s “pool2,” an automated market maker liquidity pool where one of the tokens is the protocol’s native token. Pool2’s are designed to increase native token liquidity but are most often separate from a protocol’s financial product and are commonly built on existing AMMs. The TVL in a pool2 is taken into account in the AMM protocol in which liquidity is deployed. TVL trackers often include toggles to include/exclude pool2 in the native token protocol’s TVL.
- Native tokens held idly by a protocol’s DAO treasury. Such capital is usually not used directly within the protocol and often consists of minted but not yet issued tokens.
- Off-chain collateral that backs on-chain tokens. For example, the fiat currency backing centralized stablecoins is collateral that inherently exists off-chain. Growth in centralized stablecoins is a different metric usually tracked by market capitalization (which should be 1:1 to off-chain collateral).
Taken as a whole, TVL is an increasingly popular metric used to measure the economic success of specific DeFi applications and blockchain networks as a whole. While there are many nuances to calculating TVL, many of which are outside of the scope of this article, it provides users a powerful tool to gauge the growth of the decentralized economy and sets up the framework to determine the TVS of oracles.
Diving Into Total Value Secured (TVS)
TVS is a powerful metric in measuring the adoption of oracle networks because it shows exactly how much value is being directly secured by the inputs provided by oracles. Similar to the TVL metric, TVS is a hard-to-fake metric that highlights both an oracle network’s market adoption by applications with economic activity and the level of trust users have for a specific oracle protocol. While there are other important metrics to track in the realm of oracles — e.g., number of integrations, user fees, data points put on-chain, number of oracle feeds, number of nodes/data sources, data accuracy, uptime percentage, etc. — TVS is a single unifying metric that helps sum up the total economic impact and adoption of an oracle network.
The “secured” portion of “Total Value Secured” specifically refers to the protection an oracle solution provides against data manipulation and delivery corruption that could lead to the loss of user funds. It’s important to consider that a hybrid smart contract needs to be secured end-to-end, which goes beyond just using a secure oracle solution. This means leveraging heavily audited on-chain code, as well as providing protection against economic attack vectors and other forms of risk management such as proper loan-to-value ratios and enough distributed liquidity for supported assets. Simply put, both the on-chain logic and data inputs from oracles are responsible for securing user funds, so both need to be correct and tamper-proof.
In most situations, the entire TVL of a protocol or platform relies upon the proper operation of its integrated oracles to secure user funds, so the entire TVL is included in an oracle’s aggregate TVS. However, there are edge cases that need to be taken into consideration when calculating TVS. For example, some DeFi protocols offer a range of different financial services where some use oracles and others do not. Only the services within a DeFi application that depend on oracles for the security of user funds should be counted under that oracle network’s TVS.
Additionally, there are situations where only a portion of a smart contract’s TVL is secured by a particular oracle protocol. For example, isolated money markets that allow end-users to define which oracle is used by specific markets may result in one oracle protocol being used in some markets and other oracles in another. Similar situations may arise on multi-chain applications where they may use different oracles on different chains. In these situations, only the TVL that is directly being secured by a specific oracle network should be included within its TVL.
Furthermore, there are also cases where a hybrid smart contract uses multiple oracle solutions in tandem, such as by mixing data from across different oracle protocols. While mixing data from multiple different oracle protocols is dangerous for data quality, since the lower quality oracle solution simply dilutes the quality of the higher quality oracle solution, some protocols do use this approach and require consideration. The most realistic approach is that there would be an overlap, with the different oracle protocols sharing the same TVL under their respective TVS metric.
For situations where a DeFi protocol itself doesn’t use oracles, but applications built on top do, only the TVL of the higher-level application would be included under TVS. There are also instances where oracles are not only used by DeFi applications but also CeFi applications as well. In any case where oracles are directly securing value by preventing data manipulation that results in a loss of user funds, then the TVL of such a platform or protocol would be included under TVS.
Beyond Data Delivery
While the TVS metric of oracle networks today mostly applies to protocols using oracles to access real-world data, oracle protocols such as Chainlink go far beyond data delivery and also provide services based on off-chain computation and cross-chain interoperability. In these cases, the previously explored definition of TVS can apply to these categories of services as well.
In particular, the Cross-Chain Interoperability Protocol (CCIP) is an inter-chain messaging solution being built on the Chainlink Network that will enable the creation of programmable token bridges. As a result, funds within these bridges will be directly secured by a collection of Chainlink nodes that is kept in check by another independent oracle-powered anti-fraud network. This means the TVS metric of Chainlink can be expanded to include both the TVL of DeFi applications powered by Chainlink services and the tokens used within CCIP.
While TVS is a relatively new metric, we believe it is one of the most robust metrics for determining how much value an oracle protocol generates within the multi-chain hybrid smart contract economy. We hope to foster more discussion around TVS moving forward given the deeper role oracles like Chainlink continue to play in blockchain applications built using hybrid smart contracts, going beyond data delivery and into various off-chain computations.
Follow us on Twitter @SmartContent777 to get up to date on the latest articles, as well as follow our individual accounts @Crypto___Oracle and @ChainLinkGod for a constant stream of information about the Chainlink, DeFi, and the blockchain space.