Total Value Locked (TVL)

What is Total Value Locked?

Total Value Locked (TVL) is a metric used to measure the total value of digital assets that are locked or staked in a particular decentralized finance (DeFi) platform or decentralized application (dApp).

The higher the TVL, the more trustworthy the platform or dApp is perceived to be.

How Is TVL Calculated?

The process generally involves adding up the digital assets currently locked in a specific DeFi protocol or smart contract. These assets could include cryptocurrencies, stablecoins, or other tokens that are being used as collateral for loans or provide the platform with liquidity.

For example, if a DeFi platform is calculating its own total value locked and has $10 million worth of ETH, $5 million worth of USDT, and $2 million worth of other ERC-20 tokens locked in its smart contract, then its TVL would be $17 million.

Usually, however, investors rely on TVLs that have been calculated by third-party DeFi analytics platforms. These platforms use application programming interfaces (APIs) and a process called web scraping to gather the data they need for the calculation.

Here are some examples of TVLs posted by the analyst platform DeFiLlama on 28 August 2023.

• Lido: $13.9bn
• MakerDAO: $5.13bn
• Aave: $4.53bn
• JustLend: $3.36bn
• Uniswap: $3.33bn

The values are likely to be different on another day because crypto assets in the DeFi ecosystem can be highly volatile.

Importance of TVL

TVL is an important metric because it provides users with data they can use to assess the risks and potential benefits of investing in a particular DeFi ecosystem.

The problem is that there isn’t a standard for quantifying TVL, and different analytics platforms use different methods to calculate the metric. This makes it difficult for users to compare TVL values across different platforms.

Here are three examples of how different analyst platforms calculate total value locked:

• DeFi Pulse: TVL is the total value of all assets deposited in a DeFi protocol that are generating economic activity.
• DeFiLlama: Total value locked represents the number of assets that are being staked in a specific protocol at the moment.
• CoinGecko: TVL represents the total quantity of underlying amount of funds that a DeFi protocol has secured or the number of assets that are currently staked in a protocol.

Limitations of the Metric

Total value locked can be a useful metric for assessing the popularity and usage of a particular DeFi platform or project, but it’s important for investors to understand its limitations, including the following:

• TVL only measures the total value of assets that are locked or staked in a platform, but it doesn’t take into account things like the actual activity levels of users. If a platform has a high TVL but low levels of user activity, this should be a red flag for investors.
• A platform with a high TVL may not necessarily be a high-quality or secure platform. It’s important for users to evaluate a platform’s reputation and security policies before investing.
• Fluctuations in TVL may not accurately reflect the health or long-term potential of a particular project. TVLs can be easily influenced by external factors such as market conditions, changes in media coverage, changes in investor sentiment or the introduction of new protocols or DApps.
• When using a third-party analytics platform to research TVLs, the investor should research how often the platform updates its TVL data to ensure the metric is always up-to-date.
• In some cases, the total value locked can be artificially inflated by malicious actors who want to attract more attention to a particular platform or project. This can make it difficult for investors to accurately assess the true popularity and usage of a platform based on TVL alone.

TVL should not be the sole metric used to make an investment decision.

Due diligence should also include research into the platform’s governance model, its token economics, the strength and engagement of the platform’s community, the depth of the platform’s liquidity pool, its policies regarding yield farming, and its security protocols and procedures.