Total value locked (TVL) has emerged as one of the most important metrics for evaluating DeFi protocols and broader crypto ecosystem health. But what exactly does it mean and why does it matter? This in-depth guide covers everything you need to know about TVL in crypto.
What is Total Value Locked (TVL)?
Total value locked refers to the overall value of crypto assets deposited in a DeFi protocol. Assets locked in a protocol can include funds placed in lending pools, liquidity pools, stakes in validation and consensus, and more. The value of the deposited assets fluctuates based on crypto‘s volatile market prices.
In simpler terms, TVL represents the sum of all assets actively working to facilitate transactions, lending, borrowing, and generation of yields across a DeFi network.
Why TVL Matters
TVL signals the adoption and usage of crypto protocols. The more value locked, the more users a platform has attracted to deposit assets for lending, liquidity provision, and other DeFi activities.
It offers a more accurate metric than market capitalization for measuring real economic activity rather than speculative investments. High TVL also means more revenue opportunities for the network from fees charged on transactions.
In essence, higher TVL = greater utility, security, and confidence in the network. Analyzing TVL can inform investment decisions on crypto projects and blockchain protocols focused on decentralization.
TVL vs. Market Capitalization
Market capitalization shows the total market value of a crypto asset based on circulating supply multiplied by price. It vaguely encapsulates investor demand – both from active and passive participants.
Meanwhile, TVL precisely tracks the value deposited by active users actually utilizing the network‘s services like yield farming. This better gauges real traction and liquidity for a protocol versus high market cap coins held for speculation.
Explosive Growth of Crypto TVL
The total USD value locked across all crypto hit an all-time high of $170 billion in April 2021 before declining to $84 billion over the crypto winter of 2022. Upward momentum has returned with the new year as prices stabilize, currently sitting at $92 billion at the start of 2023.
Two years ago in February 2021, total crypto TVL was only $39 billion meaning it has more than doubled over that short timeframe even despite the 2022 cooldown. The vast majority sits on Ethereum-based protocols making up 60%+ of TVL.
Leading DeFi apps driving TVL growth include decentralized exchanges like Uniswap and lending/yield protocols like Aave and Compound. Although Ethereum has dominated, additional blockchains like Solana, BNB Chain, Polygon and Terra are capturing TVL share with technical and economic innovations.
How to Calculate Protocol TVL
Calculating the total value locked for a specific protocol involves:
-
Identifying all assets/tokens deposited and staked within platform functions like liquidity pools and lending markets.
-
Recording the quantities of each unique token locked.
-
Multiplying token amounts by respective market-determined USD valuations.
-
Summing the USD-denominated quantities of every unique token locked.
For example…
Platform XYZ has:
- 100 ETH placed in its liquidity pool @ $1500/ETH = $150,000
- 500 XYZ tokens staked in validation @ $2/token = $1000
Total Value Locked = $150,000 + $1000 = $151,000
As crypto prices fluctuate, the TVL adjusts accordingly even if the token deposit quantities remain equal.
Limitations of TVL Metrics
While TVL marks adoption and traction, solely evaluating projects on this metric has shortcomings. A few issues to note:
Concentrated Whales – A handful of major depositors can skew TVL higher. Their exit could drastically reduce TVL and platform operations.
Double Counting – Coins deposited on protocol A that direct liquidity to protocol B may count towards both TVLs inaccurately.
User Intent – Large TVL could originate more from short-term speculators over long-term utility. Investors should couple TVL with gauges of user loyalty.
Staking Skews – Protocols allowing staking can have TVL less indicative of money flow, trading volume, or fees generating activity.
Incorporating TVL Analysis
While flawed as a standalone indicator, TVL does provide a valuable data point, especially when incorporated as one input into overall project evaluation.
Other key metrics to analyze alongside TVL:
- Network Activity – Transactions, fees, trades, operations
- Revenue and Profitability – Usage generating income
- Staking and Holders – Loyal users and decentralization
- Risks and Technical Stats – Assessing vulnerabilities
Taking a 360-degree view allows investors to separate speculative hype from real-world value as the crypto space matures.
Conclusion
As crypto protocols vie for the most value locked as an indicator of adoption, TVL will continue holding weight among investors seeking networks with meaningful traction. However, expectations have cooled from the unsustainable highs clubs like Bitcoin and Ethereum briefly reached. Sustainable TVL growth driven by long-tail utility not short-term speculation will dictate protocol winners going forward.
%20in%20Crypto){kind=link}