Home / Crypto / Learn / What is TVL in Crypto?
Learn 8 min read

What is TVL in Crypto?

Coins being locked into a vault

Key Takeaways

  • Total value locked (TVL) is a critical metric in DeFi, representing the total value of assets locked into a protocol’s smart contracts for staking, lending, or liquidity provision.
  • TVL measures the value of assets locked in a protocol, while market cap reflects the total value of a protocol’s circulating token supply.
  • A higher TVL suggests greater liquidity, trust, and user adoption, which are key metrics for future growth.
  • Price volatility and short-term fluctuations can influence TVL, and it doesn’t fully compare protocols with different functions.

Decentralized finance may have evolved over the years but the space remains largely unregulated. Anyone can launch a DeFi protocol, a decentralized application (dApp), or even a new blockchain. This freedom creates both opportunities and risks for users making it hard to assess the reliability of protocols.

One crucial metric that investors use to evaluate the popularity and safety of a DeFi protocol is Total Value Locked (TVL). This metric shows the amount of value locked into a protocol or on different blockchains. It offers insights into its adoption and security.

In this article, we’ll take a quick look at TVL, its use cases, and where you can find more information about it.

What Is Total Value Locked (TVL)?

Total value locked is a metric that describes the total value of assets (cryptocurrencies) locked into a DeFi protocol or blockchain. It represents the sum of all funds deposited into the smart contracts for purposes such as staking, lending, or providing liquidity. 

Essentially, TVL shows how much confidence users have in the protocol: the higher the amount, the more users are committing their capital. For this reason, many investors see TVL as an indicator of the platform’s health. Higher TVL usually means that the protocol has built trust within its community. 

This metric is particularly important for protocols in decentralized finance because they rely on liquidity to function effectively. Without a sufficient amount of locked value, the protocol may experience liquidity shortages. As a result, this could lead to inefficiencies or increased risk for the users.

Why Is TVL Used in DeFi?

Decentralized finance functions without any intermediaries and the user base is what drives the protocol’s growth. TVL is an important metric in DeFi for a few major reasons:

  • Liquidity measurement: TVL shows the amount of liquidity within a protocol, which is critical for the functioning of decentralized exchanges (DEXs), automated market makers, and lending platforms.
  • Investor confidence: A higher TVL generally reflects greater user confidence in the protocol. When large sums of assets are locked, it can signal the stability and trustworthiness of the protocol.
  • Protocol growth: TVL is a growth metric for DeFi projects. As a protocol attracts more users and capital, the TVL will increase. In return, this may positively affect its native token’s price.

TVL has become a widely accepted benchmark for understanding the size and strength of DeFi protocols. It provides a way for investors to evaluate the level of risk when engaging with new or existing platforms.

How TVL Is Calculated

TVL is calculated by summing the value of all the assets locked into a DeFi protocol. These assets can include different cryptocurrencies like Ethereum (ETH), stablecoins, or other altcoins that users have deposited into the platform’s smart contracts. The formula for calculating TVL is as follows:

  • TVL=(Number of Tokens Locked)×(Price Per Token)

For example, if a protocol has 10,000 ETH locked, and each ETH is priced at $2,000, the protocol’s TVL in ETH alone would be $20 million. Most platforms offer multi-token support, so the TVL will sum up all assets across different blockchains and tokens.

Where To Find TVL Data

Since TVL is so important for DeFi, numerous platforms are providing vital TVL data. Some of the most widely used platforms are:

  • DeFi Llama: One of the most popular resources for tracking TVL across various blockchains and DeFi protocols. It also provides historical data and comparisons.
  • DappRadar: Focuses on dApp data but also tracks TVL for specific DeFi applications.
  • Dune: A leading platform for tracking TVL on various chains. Users can create their own boards with different metrics.

TVL vs Market Cap – What’s the Difference?

TVL measures the total value of assets locked into a protocol while market capitalization (market cap) reflects the total value of a protocol’s token in circulation. Market cap is calculated by multiplying the supply of a protocol’s native token by its current price:

Market Cap= Supply of Tokens×Token Price

When it comes to market cap, there are two types: current market cap and fully diluted market cap (FDMC). The current market cap is calculated by taking the currently circulating supply of tokens. In contrast, the fully diluted market cap takes into account the total supply of tokens that will ever be in circulation.

For example, Bitcoin’s current market cap is $1.23 trillion while the fully diluted one is $1.31 trillion. In some cases, the current market cap is equal to the FDMC because all tokens are already in circulation.

Going back to the comparison between TVL and market cap, the key difference is that TVL measures the value locked within a platform. At the same time, market cap doesn’t take that into account, only the market value of the platform’s token. 

TVL helps assess how much liquidity or assets are locked in the protocol, while the market cap is used to evaluate the token’s value on the open market. A protocol may have a high TVL but a relatively low market cap if its token is undervalued, or vice versa. 

Comparing the two metrics can help investors determine whether a token has a fair price or if a protocol’s popularity justifies the value of its token.

What Can TVL Tell Investors?

TVL provides critical insights for DeFi investors. Some of the key takeaways include:

  • Trust in the protocol: A higher TVL suggests that a larger number of investors trust the protocol with their assets.
  • Liquidity: High TVL means there’s ample liquidity, which is crucial for decentralized exchanges and lending platforms to operate efficiently.
  • Protocol adoption: Rapidly increasing TVL can signal growing user adoption, which might suggest future growth potential.

Limitations of TVL

While TVL is a valuable metric, it has some limitations:

  • Price volatility: TVL depends heavily on the price of the locked assets. If the value of ETH or other locked tokens decreases, the TVL may drop even if the number of tokens remains the same.
  • Short-term indicators: TVL can fluctuate daily, meaning a sudden increase or drop in TVL doesn’t necessarily reflect long-term protocol performance.
  • Comparing protocols: TVL doesn’t provide a full comparison between protocols that serve different functions (lending vs. trading platforms).

What Other Data Should DeFi Users Look For?

Aside from TVL, investors should consider additional metrics when assessing DeFi protocols. Other relevant data includes:

  • Daily Active Users (DAU)
  • Transaction Volume
  • Smart Contract Audits
  • Protocol Age
  • Governance Token Distribution

Daily Active Users (DAU)

This metric shows how many unique users interact with a protocol daily. Consequently, a higher number of active users often indicates a healthy protocol with strong adoption and regular usage. Platforms like DappRadar track DAU data.

Transaction Volume

Transaction volume shows the total value of assets transacted through the protocol over a given period. As a result, it also indicates how often users engage with the platform and how frequently they use the protocol. You can find this type of data on sites like CoinGecko or DeFi Llama.

Smart Contract Audits

A smart contract audit reviews the code of a DeFi protocol to identify potential vulnerabilities or flaws. Furthermore, a protocol with audited smart contracts provides more security and reduces the risk of hacks. Look for audit reports on the protocol’s official website or third-party audit firms like CertiK or Hacken.

Protocol Age

The longer a protocol has been operational without major incidents, the more trust it tends to garner from the community. Older protocols are generally more secure, as they’ve had more time in the field. You can find protocol age on blockchain explorers such as Etherscan by looking at the protocol’s token launch date.

Governance Token Distribution

Understanding the distribution of governance tokens can provide insight into how decentralized a protocol is. If a small group holds the majority of the tokens, they may have too much influence over key decisions. This data is typically available on token analytics platforms like Token Terminal or Bubblemaps.

Closing Thoughts

Total value locked is one of the most important metrics in DeFi. It offers key insights into the liquidity, trust, and health of a protocol. Despite that, investors should not rely on TVL alone as this can be misleading. Instead, users should consider TVL along with other vital metrics such as DAU, volume, audits, protocol age, and distribution.

Was this Article helpful? Yes No
Thank you for your feedback. 0% 0%