Glue's Total Value Locked Philosophy: Prioritising Utility and Stability
Last updated
Last updated
Total Value Locked (TVL) is a core metric by which DeFi projects are often judged. While we acknowledge the logic behind this, as it provides a simple and quantifiable measure of a project's traction, TVL is too simplistic to be particularly useful on its own. Glue's approach focuses on two more meaningful and significant metrics: Useful TVL and Locked TVL.
Useful TVL refers to the value locked in the system that actively supports the size of trades and borrowing needed by the ecosystem. The initial goal is to ensure that trades up to $50,000 can be executed while keeping slippage below 0.5%. This threshold covers the vast majority of retail trades, ensuring that everyday users can trade efficiently without facing significant price impacts. This focus on practical usability over sheer volume means that our liquidity pools will be designed to handle typical transaction sizes effectively. For larger trades over $50,000, users can break them into smaller parts or use limit orders to achieve better prices. This approach not only makes the ecosystem more user-friendly but also ensures that liquidity is used more efficiently.
Rather than attracting vast amounts of liquidity that remain underutilised, Glue aims to ensure that the liquidity that is attracted is actively supporting the needs of users. This strategy optimises the use of resources and enhances the overall efficiency of the ecosystem.
Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. In automated market makers (AMMs) like Uniswap, slippage is influenced by the ratio of the trade size to the liquidity pool size. To support trades up to $50,000 with slippage below 0.5%, several factors need to be considered, including the size of the liquidity pool and the price impact of a trade. Slippage occurs when a trade is large enough to move the market price due to the relative size of the trade compared to the liquidity available.
For an AMM, the price impact can be approximated by:
To achieve slippage of less than 0.5% for a $50,000 trade, the following can be set up:
Converting from percentage to decimal:
Solving for the liquidity pool size:
Giving the final size of the liquidity pool to be:
To support $50,000 trades with slippage below 0.5%, the liquidity pool must have at least $5,000,000 in liquidity. This ensures that large trades can be executed with minimal impact on the market price, providing a stable and efficient trading experience for users.
Locked TVL refers to the value locked in the system that cannot be immediately withdrawn. In the crypto industry, it is common to see new protocols launched with significant incentives to attract initial TVL, often with the primary aim of driving speculative trading towards their own token and its price. However, this mercenary liquidity usually leaves as soon as the incentives stop, leading to instability and short-termism. Glue's goal is to build a long-term sustainable ecosystem. Priority is given to liquidity that is committed for certain periods over mercenary liquidity that can exit at any moment. By doing so, Glue’s locked TVL reflects a stable and reliable financial environment. Glu’s incentives have been designed to reward long-term commitments rather than short-term participation. This could involve offering higher rewards for liquidity providers who lock their funds for longer periods, thereby creating a more stable base of liquidity. By focusing on locked TVL, risk associated with sudden withdrawals which can lead to destabilisation of the ecosystem is minimised.
Glue will implement smart contracts that facilitate easy management of locked funds, including features like automatic renewal options for liquidity commitments, to streamline the process for users and providers. Additionally, engaging with the community to educate them about the benefits of long-term participation and the importance of useful TVL will be crucial. By having an educated community that understands and supports Glue's philosophy, a more resilient and cooperative ecosystem can be built.
