Decentralized Finance, commonly known as DeFi, refers to financial systems built on blockchain technology, such as Ethereum. The primary goal of DeFi is to eliminate traditional intermediaries like banks and financial institutions, offering broader and more decentralized access to various financial services.
Within the DeFi ecosystem, Total Value Locked (TVL) is a key metric used to assess the total value of crypto assets locked or utilized in smart contracts on a DeFi protocol. TVL reflects the level of liquidity and activity within the DeFi space.
What Is Total Value Locked (TVL) in Crypto?
Total Value Locked (TVL) is a metric used in the crypto world to determine the total U.S. dollar value of digital assets locked or staked on a specific blockchain network through DeFi platforms or decentralized applications (dApps). A higher TVL generally indicates that a project is perceived as safer and more valuable.
How Does TVL Work?
Crypto assets emerged in 2009 with the creation of Bitcoin, designed as a peer-to-peer asset using digital ledger technology operating outside centralized control. Early projects focused on creating alternative currencies to traditional financial systems until the arrival of Ethereum in 2015, which introduced smart contract functionality. This allowed developers to build permanent decentralized applications (dApps) on its network.
This innovation triggered the DeFi boom between 2020 and 2022, with numerous dApps offering digital financial services such as lending without relying on traditional financial intermediaries like brokers, exchanges, or banks.
To access loans, users must deposit digital assets or tokens with an application, similar to how mortgage borrowers place a down payment with a lender. In the crypto world, these deposited funds are "locked" in the network—meaning they remain in circulation but cannot be used while deposited.
This led to the creation of the term "total value locked," which provides users with a quick overview of an application or network's significance based on the value of assets locked within its chain.
How to Calculate TVL and the Formula
After understanding what TVL is and how it works, it's important to learn how to calculate it.
For example, suppose 1,000 XYZ tokens are staked in a DeFi protocol, and the current price of XYZ is $10. The Total Value Locked (TVL) for XYZ tokens would be calculated as follows:
TVL = 1,000 XYZ Tokens × $10 = $10,000
Thus, the TVL for XYZ tokens in this DeFi protocol is $10,000.
However, many DeFi protocols allow users to stake multiple types of tokens. In such cases, the TVL for each token type must be calculated separately and then summed to determine the total TVL of the protocol.
For instance, if users also stake 500 ABC tokens at $20 per token in the same protocol, the TVL for ABC tokens would be:
TVL = 500 ABC Tokens × $20 = $10,000
The total TVL for the DeFi protocol would then be:
Total TVL = TVL of XYZ Tokens + TVL of ABC Tokens = $10,000 + $10,000 = $20,000
Why Is TVL an Important Metric for Investors?
TVL is a crucial metric in the crypto asset world because it provides investors with a tool to help define the risk and potential benefits of investing in a specific DeFi platform. If a platform has a large amount of assets locked in its network, it gives the impression that it is a secure platform trusted by crypto investors.
This is similar to traditional banks, where investors analyze the level of deposits held by an institution. If a bank attracts deposits, it can generate money by issuing loans or investing those funds. Conversely, if deposits decline, the bank cannot issue as many loans, resulting in lower revenue.
The DeFi boom from 2020 to 2022 occurred because financial platforms leveraged their decentralized nature to offer high annual percentage rates (APR) for staking and lending. This happened at a time when global central banks pursued collective monetary policies relying on near-zero interest rates to spur growth.
At its peak in December 2021, decentralized applications had a TVL of over $179 billion. Over the following months, the tech stock peak reduced investors' appetite for risk, and speculative capital was withdrawn from the crypto sector. Central banks also aggressively tightened interest rates to combat inflation, leading investors to shift toward government deposit security. By October 24, 2023, the TVL for the crypto sector stood at around $40 billion.
What Are the Limitations of TVL?
It's important to note that TVL only provides a snapshot of the total value of assets locked in a platform and does not highlight the level of activity. If a platform has a high TVL but low user activity, it may indicate that a small number of investors are contributing to the platform's TVL. Generally, this is a red flag and warrants further investigation.
Investors should also verify data practices from third-party analytics platforms to ensure all TVL figures are current. The DeFi industry is not immune to the collapse of trusted institutions, as seen with the $60 billion downfall of the Terra (LUNA) lending protocol in 2022. This highlighted another issue with TVL: the assets involved in the calculation may not be as secure as believed.
This can make it more difficult for users to accurately assess the true value of a project, though it should not be an issue when evaluating DeFi projects or dApps with strong reputations. TVL is a useful metric for assessing the quality of a project or decentralized financial application, but it should not be the sole measure used for investment decisions.
Investors should conduct careful analysis in other areas, such as the founders' experience, the platform's governance model, tokenomics, or the size of the platform's community.
Examples of DeFi Platforms with High TVL
Virtually all DeFi platforms have a Total Value Locked (TVL). However, the size of the TVL depends on popularity among crypto investors and the number of tokens locked within the platform. Here are five examples of DeFi platforms with the highest TVL:
Lido Finance
Lido Finance is a DeFi platform focused on Liquid Staking Derivatives (LSD). As of March 2023, Lido Finance had a TVL of $10.46 billion. The platform allows users to stake ETH tokens and receive stETH tokens as proof of staking. Owners of stETH can access various DeFi services and features within this protocol.
Maker DAO
Maker DAO is a Decentralized Autonomous Organization (DAO) that designs the DAI stablecoin and develops decentralized lending services on the Ethereum blockchain. As of March 2023, the TVL value in this protocol reached $7.71 billion.
Aave
Aave is a DeFi platform with a TVL of $5.6 billion as of March 2023. The platform facilitates crypto asset loans and allows users to earn yields. Initially known as a decentralized lending platform, Aave is built on Ethereum and is renowned for its flash loan services.
Curve Finance
Curve Finance is a decentralized exchange (DEX) with an Automated Market Maker (AMM). As of March 2023, the TVL of this protocol reached $4.6 billion. Curve Finance offers efficient services for crypto token exchanges with low fees and slippage.
Uniswap
Uniswap, the first DEX protocol on the Ethereum network, is known as a pioneer among DEX platforms. As of March 2023, Uniswap had a TVL of $3.7 billion.
Top 5 Crypto Assets by Total Value Locked
As of September 12, 2023, the following are the five crypto assets with the highest Total Value Locked (TVL):
- Lido (LDO)
Chain: Ethereum, Solana, Moonbeam, Moonriver, Terra Classic
Category: Liquid Staking - MakerDAO (MKR)
Chain: Ethereum
Category: Collateralized Debt Position (CDP) - AAVE (AAVE)
Chain: Ethereum, Polygon, Avalanche, Arbitrum, Optimism, Base, Metis, Fantom, Harmony
Category: Lending - JustLend (JST)
Chain: Tron
Category: Lending - Uniswap (UNI)
Chain: Ethereum, Arbitrum, Polygon, Optimism, Celo, Base, BSC, Avalanche
Category: Dexes
Lido
Lido is a DeFi protocol designed to address staking issues in Ethereum that could limit economic activity and hinder users from seeking additional profits. Lido offers an alternative to Ethereum staking, which is typically managed by centralized exchanges and is custodial. With a market share of 74.1%, Lido is one of the largest liquid staking platforms on Ethereum.
MakerDAO
MakerDAO is a crypto asset lending platform operating on the Ethereum network. Maker offers loans in the form of the DAI stablecoin, with crypto assets serving as collateral locked in smart contracts.
Aave
Aave is a protocol that allows users to deposit crypto assets to earn interest while also borrowing crypto assets for investment or other needs.
JustLend
JustLend is a specialized lending protocol on the Tron network. The protocol has two functions: lenders and borrowers, who can interact directly with the protocol to receive interest determined by an algorithm.
Uniswap
Uniswap is a DEX application that facilitates exchange transactions between ETH and ERC-20 tokens on the Ethereum blockchain.
Is There a Relationship Between TVL and Liquidity?
It's often misunderstood, but it's important to note that Total Value Locked (TVL) is not the same as liquidity. TVL only reflects how many assets are locked in a protocol, not how many assets can be traded (bought or sold).
What Is the Difference and Relationship Between TVL and Market Cap?
The difference between TVL and market capitalization is that the former calculates the value of digital assets locked in an application, while the latter is the market value of the project developing and operating the DeFi platform or dApp.
Many people are also confused about the difference between TVL and market capitalization. As we know, market capitalization is the total market value of all crypto tokens issued by a platform or blockchain protocol. In this regard, TVL value more indicates how much asset value is locked in the protocol, while market capitalization measures how much asset is circulating in the market as a whole.
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Frequently Asked Questions
What does TVL mean in crypto?
TVL, or Total Value Locked, is a metric that represents the total value of assets deposited in a DeFi protocol. It is usually denominated in U.S. dollars and helps investors gauge the popularity and security of a platform.
How often does TVL change?
TVL is highly dynamic and can change frequently due to market volatility, user activity, and shifts in asset prices. Platforms often update TVL data in real-time or on a daily basis.
Can TVL be manipulated?
While TVL is a useful indicator, it can sometimes be influenced by a few large investors or specific market conditions. It's essential to combine TVL analysis with other metrics like user activity, transaction volume, and project credibility.
Why is TVL important for DeFi projects?
A high TVL often indicates trust and adoption within the DeFi community. It can also influence token prices, protocol upgrades, and overall market sentiment toward a project.
Does high TVL always mean a project is safe?
Not necessarily. While a high TVL can indicate trust, it does not guarantee security or sustainability. Investors should also evaluate the project's smart contract audits, team reputation, and community engagement.
How can I track TVL for various protocols?
Several analytics platforms provide updated TVL data for DeFi protocols. These platforms aggregate information from multiple blockchains and offer insights into trends, comparisons, and historical data.
Understanding TVL is essential for anyone involved in the DeFi ecosystem. It provides valuable insights into the health and adoption of protocols, helping investors make informed decisions.