What Is TVL? Definition of TVL in DeFi

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TVL stands as a primary benchmark influencing our perception of DeFi protocol achievements, but what exactly does it signify?

What Does Total Value Locked (TVL) Mean?

TVL, which stands for “Total Value Locked,” is a way to measure how much money is currently being used in a particular type of online financial system called DeFi, which stands for “Decentralized Finance.” It’s like checking how much money people have put into a special digital vault to use for things like loans, trading, and earning interest. total value locked helps us understand how popular and valuable this digital system is at the moment. If the TVL is higher, it means more people are using it, and if it’s lower, fewer people are using it.

TVL represents the cumulative value of assets held within a DeFi protocol
Total value locked represents the cumulative value of assets held within a DeFi protocol

How Important Is TVL in DeFi?

TVL holds significance due to its provision of user-accessible data for evaluating the risks and potential gains associated with investing in a particular DeFi ecosystem.

However, a challenge arises from the lack of a standardized approach to quantify TVL; distinct analytics platforms employ diverse methodologies to compute this metric. Consequently, comparing total value locked figures across various platforms becomes complex.

Outlined below are three instances illustrating distinct methods used by various analytics platforms to compute total value locked:

  • DeFi Pulse: Total value locked encompasses the cumulative value of all assets deposited within a DeFi protocol, contributing to ongoing economic activity.
  • DeFiLama: Total value locked denotes the count of assets presently staked within a specific protocol.
  • CoinGecko: total value locked signifies either the overall amount of funds secured by a DeFi protocol or the number of assets currently staked within it.
TVL holds significance due to its provision of user-accessible data
Total value locked holds significance due to its provision of user-accessible data

How to Calculate TVL?

Explanation of the Formula used to Calculate TVL

The TVL formula is simple: Price of the crypto assets in USD x the total number of staked, locked, and tokens in the liquidity pool of the protocol. This is different from a token’s market capitalization: the token’s price in USD x circulating supply of the token.

Factors and Components Considered in the Calculation

  1. Token Quantities:
    • The amount or quantity of each token locked in the protocol is a fundamental factor. This is usually determined by user activities such as providing liquidity, staking, or participating in other DeFi functions.
  2. Market Prices:
    • The current market price of each locked asset is a crucial component. Prices are often sourced from decentralized exchanges or price oracles to ensure accuracy.
  3. Variety of Locked Assets:
    • TVL accounts for the diverse range of assets locked within the protocol. This includes various tokens, cryptocurrencies, or assets supported by the DeFi platform.
  4. Smart Contract Data:
    • TVL is derived from data recorded on the smart contracts of the DeFi protocol. Smart contracts automate the locking and unlocking of assets, and their data is used to calculate TVL accurately.
  5. Collateralization Ratios (if applicable):
    • In protocols involving lending and borrowing, collateralization ratios may be considered. This reflects the ratio of the value of locked assets to the value of borrowed assets.
  6. Locked Liquidity:
    • TVL often includes liquidity provided to decentralized exchanges or liquidity pools. This liquidity is a significant component, especially in platforms that facilitate decentralized trading.
  7. Staking and Yield Farming Rewards (if applicable):
    • In some cases, TVL calculations may also consider rewards earned through staking or yield farming activities. This adds another layer to the overall value locked within the protocol.

Usually, people use TVLs that are calculated by special websites that understand DeFi stuff. These websites use clever tools to get the numbers they need. Here are some total value locked examples from Token Terminal on April 6, 2023. Remember, these numbers can change a lot because digital money can move a ton in the DeFi world.

  • Uniswap: $3.92b
  • Aave: $5.64b
  • Synthetix: $443.80m
  • Lido Finance: $11.43b

Is TVL Accurate?

Although TVL offers valuable insights, it’s crucial to acknowledge that it might not always be entirely accurate. Moreover, exercising diligence by conducting your research before committing to any project is of utmost importance. By investigating and analyzing projects through diverse tools, you can cultivate a deeper comprehension of the protocols garnering popularity and significant engagement. While total value locked holds significance, it’s pivotal to recognize that it’s just one among several metrics to factor in when making investment decisions concerning a token.

TVL is not always entirely accurate
TVL is not always entirely accurate

Highest TVL Cryptos

The cryptocurrencies with the highest Total Value Locked are the ones that have the most digital assets locked up in DeFi platforms. These are usually popular and trusted cryptocurrencies that people use for various purposes in the decentralized finance world. The higher the TVL, the more valuable and actively used the cryptocurrency is within these platforms. However, it’s important to remember that total value locked can change frequently due to the volatility of the crypto market and how much people are using these assets in DeFi at any given time.

Total Value Locked All Chains (Sources: Defillama - Access on August 25th, 2023)
Total Value Locked All Chains (Sources: Defillama – Access on August 25th, 2023)

Conclusion

In the dynamic landscape of decentralized finance, Total Value Locked emerges as a pivotal metric that encapsulates the essence of a protocol’s vitality and appeal. Serving as a tangible reflection of the assets staked, locked, and actively engaged within a DeFi ecosystem, TVL offers a window into the platform’s health, user trust, and growth potential. It symbolizes not just a financial sum, but also the culmination of user participation, developer innovation, and market demand. As the DeFi space continues to evolve, total value locked stands as a lodestar, guiding us toward understanding the ecosystem’s pulse and its trajectory toward greater adoption and utility.

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Chi Do
Chi Do
Chi Do is a content writer at CoinMinutes, responsible for creating most of the content on the website, including news related to Bitcoin (BTC), Ethereum (ETH), Blockchain, Decentralized Finance (DeFi), and more. With a keen interest in cryptocurrencies since the 2020s, Chi has acquired extensive experience and knowledge in this field. Chi holds a Bachelor's degree in communication from Academy of Journalism and Communication in Vietnam.

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