The TVL illusion in the Bitcoin ecosystem: Lessons learned from the 1800BTC incident

The recent 1800BTC incident in the Bitcoin ecosystem is not just a simple fund transfer issue. What this incident reveals is a more fundamental question: the reliability of the widely used TVL data in the industry. Concerns raised by industry insiders like Happy Teacher—such as the phenomenon of the same UTXO being double-counted across multiple projects—expose structural problems that we have been ignoring.

UTXO, Multi-Approval, and the Technical Truth Behind TVL Inflation

From a technical perspective, examining this issue reveals an interesting contradiction. Due to the nature of the UTXO (Unspent Transaction Output) model, the same UTXO cannot be approved multiple times or allocated to multiple projects simultaneously. Even with Hash Time Lock applied, each UTXO can only be locked for one purpose at a time. Therefore, technically, the same asset should not be counted toward multiple projects’ TVL at once.

However, reality tells a different story. By tracking capital flows on the chain, one can identify collateral addresses that projects have not disclosed. Investors verify whether projects have actual control over specific addresses. TVL data mainly focuses on these addresses. The problem lies in the practice of project teams inflating the size of these addresses by funneling funds from large investors.

MPC Wallets, ‘Dead Funds,’ and the Operational Structure of Merlin

A clear example of this phenomenon is the Merlin project. Merlin implements multi-signature via MPC (Multi-Party Computation) wallets. When large users transfer assets to Merlin’s MPC wallet addresses, the large user base and the project jointly manage these assets.

MPC wallets achieve multi-party management by distributing private key shares across multiple parties. No single party can unilaterally use the assets. To outsiders, these addresses appear to be owned by the project, but in reality, the project does not have absolute control over the assets. This is the root of Merlin-style “fake TVL.”

So, what exactly is fake TVL? Importantly, this does not mean data manipulation. Fake TVL refers to assets marked as bonds that are actually dead funds, which do not participate in real value-creating activities. The role of such funds is merely to attract retail investors’ participation and generate project momentum.

Actual Liquidity vs. False TVL: A New Standard for Project Valuation

TVL can be categorized into two types based on its nature. Real TVL is active liquidity used within the ecosystem, such as in lending or swap projects, contributing directly to protocol operations. In contrast, false TVL is stagnant funds that do not play any role in the protocol’s functioning. Staking projects are a typical example.

The TVL of staking projects fundamentally differs from other DeFi projects. Since they do not contribute to the core operation of the product, evaluating them solely based on TVL is inappropriate. Staked assets can be entirely “inflated” numbers and are unrelated to the protocol’s true functionality.

The Industry’s Overlooked Criteria for Value Judgment

Until now, our industry has regarded TVL as the top metric for evaluation. However, not all TVL is meaningful. It is now time for ordinary users and investors to shift their focus to the intrinsic value of projects. What characteristics should truly good projects have?

First, they must solve real user problems. Second, their business logic must be sound. Third, they should generate positive cash flow. Only projects that possess these three elements can deliver genuine value to users and the industry.

The 1800BTC incident is not merely a scandal. It is a mirror reflecting how addicted our industry is to numbers games. TVL does not tell the whole story. We must develop the discernment to distinguish projects that create real value.