Glossary

Total Value Locked (TVL)

Easy

Тotal value locked represents the number of assets that are currently being staked in a specific protocol.

What Is TVL (Total Value Locked)?

Total Value Locked (TVL) is a critical metric in crypto that represents the total value of digital assets currently deposited or "locked" in a specific DeFi protocol, platform, or across an entire blockchain ecosystem. These assets are typically locked through staking, providing liquidity to trading pools, lending, or participating in yield farming activities. TVL is generally expressed in US dollars to enable straightforward comparisons across different platforms and protocols.

How Is TVL (Total Value Locked) Calculated?

TVL calculation involves adding up the total market value of all cryptoassets locked in a protocol's smart contracts at current market prices. For example, if a DeFi lending platform has 10,000 ETH (worth $2,000 each) and 5 million USDC locked in its contracts, its TVL would be $25 million ($20 million from ETH plus $5 million from USDC).

The formula is relatively simple: TVL = Sum of (Number of Tokens Locked × Current Price Per Token)

It's important to note that TVL fluctuates daily based on:

  • New deposits or withdrawals from users

  • Price changes in the underlying assets

  • Changes in rewards or incentive structures

Why Is TVL (Total Value Locked) Important in Crypto?

TVL has become one of the most watched metrics in DeFi for several reasons:

Indicator of trust and adoption

Higher TVL generally signals stronger user confidence in a protocol. When users commit significant capital to a platform, it suggests they trust its security, functionality, and potential returns.

Liquidity assessment

TVL directly correlates with a protocol's liquidity. Higher liquidity means users can execute larger trades with minimal price slippage and access capital more efficiently.

Project growth tracking

Rising TVL typically indicates a growing user base and increasing platform adoption. Investors often track TVL trends to identify promising projects with expanding market share.

Protocol comparison

TVL enables direct comparisons between different protocols and blockchains. Investors can use TVL to determine which platforms are capturing the most market share in specific DeFi categories.

Security consideration

Generally, protocols with higher TVL are considered more battle-tested and secure, as they've successfully protected larger pools of assets. However, this correlation isn't perfect, as even high-TVL protocols can contain vulnerabilities.

TVL vs Market Cap: What's the difference?

While both metrics are valuable for assessing crypto projects, they measure different aspects:

TVL represents the total value of assets locked within a protocol's smart contracts, indicating actual capital utilization and user engagement.

Market cap (Market capitalization) represents the total value of a project's token, calculated by multiplying its current price by the circulating supply. It reflects the market's valuation of the token itself.

A healthy project typically maintains a reasonable ratio between these metrics. If a token's market cap significantly exceeds its protocol's TVL, it might be overvalued. Conversely, if TVL vastly exceeds market cap, the token might be undervalued relative to the capital it's securing.

What Factors Influence TVL?

Several key factors drive changes in Total Value Locked:

Yield opportunities

Higher yields from staking, lending, or liquidity provision attract more assets, increasing TVL. Projects often boost rewards temporarily to attract liquidity.

Market conditions

Bull markets typically correlate with rising TVL as users commit more capital to DeFi. During market downturns, TVL often decreases as users seek safer alternatives.

Protocol features and innovation

New features, improved user experience, or innovative mechanisms can dramatically increase a protocol's TVL by attracting users from competing platforms.

Security reputation

Security incidents and exploits typically lead to immediate TVL drops as users withdraw funds. Conversely, protocols with strong security track records tend to accumulate TVL over time.

Token incentives

Many protocols distribute tokens to users who lock assets, creating additional incentives beyond base yields. Changes to these incentive structures directly impact TVL.

Limitations of TVL as a Metric

While TVL is valuable, it has several important limitations:

Price volatility impact

Because TVL is denominated in USD, significant price movements in underlying assets can dramatically change TVL figures without any actual change in user behavior or deposits.

Double-counting risk

Assets can be counted multiple times in TVL calculations. For example, a stablecoin might be counted once when deposited into a lending protocol and again when the lending receipt token is used in a yield farm.

Quality of locked assets

TVL doesn't differentiate between types of locked assets. A protocol with $1 billion in Bitcoin and Ethereum has fundamentally different risk characteristics than one with $1 billion in newly created tokens.

Incentivized vs organic TVL

TVL driven by unsustainable token incentives ("mercenary capital") differs from organic TVL backed by genuine utility. The metric itself doesn't distinguish between these types.

Protocol differences

Different protocol types naturally have different TVL potential. Comparing TVL across different categories (e.g., DEXs vs. lending platforms) without context can be misleading.

How to Analyze TVL Effectively

To get the most value from TVL metrics:

  1. Track trends over time rather than focusing on absolute numbers

  2. Compare similar protocols within the same category

  3. Consider TVL in context with other metrics like daily active users, trading volume, and revenue

  4. Look at TVL distribution across chains to understand where capital is flowing

  5. Analyze TVL:market cap ratios to identify potentially under or overvalued projects

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