Inflated TVL Figures Could Pop a $30B Bitcoin DeFi Ecosystem

Inflated TVL Figures Could Pop a $30B Bitcoin DeFi Ecosystem

Two startups are collaborating to introduce a groundbreaking solution to verify total value locked (TVL) claims by Bitcoin decentralized finance (DeFi) projects, addressing a critical issue threatening the sector.

Why Bitcoin DeFi Needs Proof-of-TVL

With more than $30 billion in TVL, Bitcoin DeFi is rapidly emerging as a lucrative trend. However, inflated TVL figures from questionable projects risk undermining the entire ecosystem.

TVL serves as a key metric in DeFi, signaling a token’s liquidity and providing investors with a sense of a project’s popularity and reliability. Unlike Ethereum, Bitcoin’s unspent transaction output (UTXO) model complicates accurate TVL measurement. While Ethereum tracks total balances in accounts, Bitcoin’s UTXO model allows projects to manipulate TVL figures, raising concerns about transparency and trust.

“You can make as many claims on the UTXO model as you want,” Professor Yu Feng of UCSB explained. “But at the end of the day, we only calculate the transactions that happen on the Bitcoin blockchain because those are verifiable.”

Bitcoin DeFi projects often advertise TVL based on funds promised by liquidity providers (LPs) without ensuring those funds are genuinely accessible. As Feng points out, only funds demonstrably controlled by the project should count towards TVL.

ZK-Proofs to the Rescue

To address these challenges, Feng and his collaborator, former UCSB assistant professor Shumo Chu, have developed a tool leveraging zk-proofs and BitVM, a Bitcoin-based smart contract framework. Zk-proofs enable cryptographic validation of data without revealing the data itself, ensuring accurate TVL calculations.

“The beauty of zk is that it’s programmable,” Chu explained. “We can implement these protocols relatively easily so that people cannot cheat.”

Chu’s proof-of-TVL solution mirrors proof-of-reserves systems adopted by exchanges like Binance post-FTX collapse, but tailored to Bitcoin’s UTXO model. Proof-of-TVL prevents scenarios where investors discover over-minted tokens without sufficient Bitcoin backing. Additionally, it verifies slashable funds committed to proof-of-stake platforms for lending and DeFi activities.

As detailed in the proof-of-TVL GitHub repository, “The BTC that is not under the staking protocol nor slashable cannot be counted in the TVL.”

Looking Ahead

Chu and Feng’s proof-of-TVL system is currently in testing and will soon debut in Nubit’s upcoming product, Goldinals. This Bitcoin fungible token standard, akin to Ethereum’s ERC-20 model, is slated for launch next week.

“We’re building the first Bitcoin-native access protocol called Goldinals on top of BitVM,” Feng shared. “Our mission is to bring the world computer back to Bitcoin.”

This innovative approach could redefine trust and transparency in the Bitcoin DeFi space, setting a new standard for TVL verification and ecosystem stability.