- organizations benefit from having a single metric that guides growth (i.e. the North Star metric);
- for a yield aggregator, TVL has too many shortcomings to be that main growth metric;
- by heavily calibrating TVL with performance, a strong candidate for NSM is born.
There is something powerful about having a single metric that measures the health of a product. The genius behind DeFi Pulse’s push for total value locked (TVL) was that market cap had become an imperfect measure of growth for the likes of Compound, Maker, and Uniswap, even post-token. TVL became the new North Star metric (NSM) of these DeFi protocols.
At Pickle, we face a similar albeit more nuanced dilemma. As a yield aggregator, there are quirks to our business model that make some refinement of the TVL metric necessary. For Pickle, TVL is money deposited in jars. Since we operate on a performance fee basis (for now), not all TVL is created equal, as jars perform differently. We need a way to tell apart this good and bad TVL in order to turn it into an NSM.
Let us first evaluate the properties of a good NSM:
- the growth of this metric is a proxy for the growth in users who derive the most value from the protocol. Ideally, certain “power users” who for whom Pickle has significant “must-have-ness” are driving the NSM. Regular TVL isn’t discerning here.
- should be a metric with no “upper bound”. We should be able to chart the metric and see it go upwards across time. TVL works like this. A modified TVL should retain this too.
- it is a proxy for revenue. Unlike revenue, however, a good NSM should be a leading rather than a lagging indicator. All else equal, a focus on growing the NSM is more sustainable than focusing on growing revenue.
Given the above-mentioned properties, the NSM becomes a good focus for the core team, the community, and the mission of Pickle.
The NSM: monetizable TVL (mTVL)
Rather than focusing on the sheer value of the deposits made on the protocol, Pickle should focus on how those deposits are performing, which in turn is the source for the growth of each depositor’s position as well as the best way for the Treasury to grow. If Pickle does this at scale, then our protocol is truly making the most of those locked deposits.
Thus, we modify TVL by a factor that represents how it is performing, to arrive at the new TVL.
mTVL = TVL * performanceFactor
performanceFactoris a multiplier that let us know what TVL is “good” and what TVL is “better” (the only “bad” TVL is 0) based on a target investment performance.
- When investment performance is on target,
performanceFactor = 1, meaning that TVL is weighed at face value.
- When investment performance is below-target, that TVL is penalized (
performanceFactor < 1), and when it is above-target, that TVL is rewarded
performanceFactor > 1.
This can work with any target. I propose, however, that the target puts Pickle an order of magnitude above not using Pickle. That is, as Pickle’s main advantage is to auto-compound, when using Pickle to get an
apy that is at least 10x the underlying
apr, the requirement for “must-have-ness” is satisfied. We can then derive that:
performanceFactor = (apy/apr) / 10
apy = (1+(apr/365))^365 - 1
Then, we can see that for a
performanceFactor of 1, we would need an
apr of 365%, approximately. Pretty degen.
mTVL in action
Let us take a snapshot of current jars and use mTVL to analyse them.
While we can see that, the sum of mTVL and TVL appear similar, the picture looks quite different jar-to-jar.
- In fact, the mTVL of
mic/usdtis around 10x larger than that of 2nd place
bac/dai, and on average 100x of other jars. Because of its very high APR, this jar’s underlying strategy makes using Pickle an extremely attractive proposition (must-have, indeed) and performance fees more than worth the benefit of robo-farming.
- down to the revenue numbers,
mic/usdtbrings $12,000/day to our Treasury, and
bac/daisome $10,000/day, whereas the other 3 large jars of
renBtcbring $450/day, $115/day, and $21/day respectively.
- since the mTVL of
mic/usdtis 10x that of
bac/dai, it appears as if this difference isn’t justified on the numbers. However, it is important to keep in mind that as these jars compound, they grow at very different speeds and so does our revenue growth. For example, in 30 days,
mic/usdtwould be contributing $18,000/day to the Treasury (vs. $13,000/day for
bac/dai); in 90 days the
mic/usdtwould be contributing $45,000/day (vs. $20,000/day for
bac/dai). All else equal, a jar like
mic/usdtis more sustainably profitable and has higher built-in growth, so its value on the present should be much higher.
- since the mTVL of
- mTVL more clearly shows the futility of pursuing low-yield strategies. Under the current monetization model (performance fees only), jars that provide a little yield must have massive volume, in order to make decent contributions to the Treasury. Considering development and operational costs, we would be better served looking for high-yield opportunities. Should the monetization model change, the modifiers to TVL would change as well(e.g. , the
performanceFactorcould be tweaked — with a lower target — or another factor could be added to better calibrate TVL coming from large-caps seeking decent yield).
deliver massive value to users
=> get sustainable (high) revenue & growth
=> consistent and significant positive price-pressure
=> (cont.) deliver massive value to new & retained users
An NSM like mTVL is measuring the long-term health and sustainability of the protocol as a whole. Together with well-designed value-capture mechanisms like the Smart Treasury and
DILL tokenomics (vote-locking, boosted rewards, and staking rewards), a growth in the NSM means a growth in the fundamentals that drive the price of