Trust as a driver in the DeFi market: Leveraging TVL/MCAP bands as confidence indicators to anticipate price movements

Mar Grande and Javier Borondo

Finance Research Letters, 2025, vol. 75, issue C

Abstract: The modern digital world is increasingly embracing DeFi, which offers secure financial services on public blockchains. However, this emerging market still lacks widely accepted valuation models. In this paper, we introduce the TVL/MCAP bands as a market valuation indicator that captures investors’ trust in the market and is robust to price fluctuations. We show how crossovers on these bands alert about future price variations of DeFi tokens. Surpassing the upper band signals increased investor confidence, which translates into greater capital inflows and drives upward price momentum. In light of our results, this is reflected in the anticipated price variation for the following month being 15% higher than when no such crossing occurs. By the same token, when the ratio breaks the lower band, the price is expected to decline, and logarithmic returns tend to become more negative. Hence, we conclude that investors’ confidence is a major driver of the DeFi market and that the proposed TVL/MCAP bands represent an effective tool to anticipate the trend of this market.

Keywords: Econophysics; DeFi; Total value locked; Natural experiment; Cryptocurrency; Causality (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612324017343

DOI: 10.1016/j.frl.2024.106705

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