Total Value Locked: What TVL Means In DeFi

Total locked value (TVL) has become an important metric for assessing decentralized finance (DeFi) protocols. Many of today’s traders use this simple measure to understand a system’s strength and potential. This article will explain what TVL is, how it relates to the DeFi ecosystem, and how it’s calculated. Once you understand what this essential metric says about a protocol, you’ll be able to make it a key factor in your most important crypto decisions.

What Is Total Value Locked (TVL)?

TVL is the value of all the assets contained within a DeFi protocol. It has become a key metric for appraising DeFi projects because it provides a useful measure of a protocol’s general health.

By counting all the coins currently staked within a protocol, TVL reveals the total supply underlying the system. This supply corresponds to the capital locked within the system, and it directly reflects the potential proceeds available for investors from involvement in the protocol.

You can also use the TVL to determine another key factor about a protocol, the TVL ratio. This can show you whether an asset is currently being undervalued, a vital piece of information for any crypto investor.

What’s the Meaning of TVL in the DeFi Space?

You can’t thoroughly explain TVL without understanding how the term specifically relates to the world of DeFi. After all, the concept developed primarily as a way to assess decentralized protocols and the DeFi system as a whole. TVL is already giving traders a new way to understand decentralized markets and make important investment decisions.

TVL is generally used to measure the health and potential of particular DeFi protocols. By analyzing the value associated with assets staked in a protocol, you can gauge the interest that people have in that particular sector of the DeFi ecosystem. 

The TVL reveals the total value of all coins invested in the protocol at the present moment without regarding potential future annualized percentage yields. This focus on the present makes the metric a tangible, sturdy data point for analyzing a protocol in real-time.

TVL can also serve as a gauge of the entire DeFi ecosystem. You simply treat the entire world of DeFi as a single giant protocol, and then measure the total value of present assets.

Calculation of TVL Ratios

In order to really grasp the meaning of TVL, you need to understand how the metric is calculated. By learning about the specific factors that determine the total value and TVL ratio of a protocol, you’ll better understand what the metric is actually measuring and what the numbers say about the service in question.

Calculating the TVL of DeFi protocols requires measuring the metric across different product categories. Each protocol or DeFi service operates according to its own particular structures, and these differences in turn alter how TVL can be calculated. 

Lending-based services, for example, focus on deposited assets, while tokenization protocols involve minted assets. Many protocols combine these features in unique ways, requiring more in-depth analysis to arrive at the TVL. In any case, the calculation of total value locked and TVL ratio comes down to the consideration of these central DeFi components.

Decentralized Exchanges

In a DEX, experts can measure the TVL by adding up all the assets deposited in the exchange. Many of the world’s largest DEXs, like Curve and Uniswap, have remarkably high TVLs. This indicates the breadth and depth of the liquidity that these types of services have been attracting.

Lending

Throughout the DeFi ecosystem, lending is the most common financial activity. Just as with traditional lending institutions, some holders deposit their funds into a protocol to make a profit. Other users who need currency in the short term then borrow from the pool of funds, while posting their own locked assets as collateral. This system increases the fluidity within crypto markets and creates new opportunities for everyone involved.

TVL crypto is an important measure in the world of DeFi lending. It’s calculated according to the value of the assets that both lenders and borrowers deposit into the system. MakerDAO, a DeFi protocol with significant cultural and financial clout, leads all other DeFi protocols with over $1.8 billion locked in through lending practices. This high figure demonstrates MakerDAO’s strength and probable longevity.

Derivatives

As the DeFi ecosystem grows and matures, derivatives have become an increasingly common phenomenon. These complicated products give experienced traders a way to manage synthetic assets, produce futures contracts, and boost overall yields from their complex investment portfolios. While still foreign to most beginning traders, derivatives have already become an important component of the general DeFi system.

When it comes to derivatives, TVL is measured according to the value of the assets that investors put into associated smart contracts. Synthetix, a popular DeFi protocol that’s heavily involved in derivatives, has a TVL of $529 million. The fact that so much value is locked into the protocol suggests it has the liquidity necessary to serve their investors’ needs.

Liquidity Pools

Liquidity pools are the crypto funds that have been locked into a DeFi protocol through smart contracts. They’re created through deposits, giving investors within a protocol the leeway to draw from a pool of accessible funds. Since they involve the direct and immediate locking of assets within a protocol, they’re relatively easy to measure within the parameters of crypto TVL.

Investors will often deposit crypto assets into a protocol in exchange for a return on those assets. Whenever they make these deposits, they’re increasing the value of the total assets held within the protocol. The deposits, therefore, produce an increase in the protocol’s TVL. The size of a protocol's liquidity largely determines its TVL, meaning you can often use the metric as a measure of the liquidity available to traders.

Staking

In order to partake in DeFi protocols, traders must stake a certain amount of their own crypto assets. Once these assets are staked, investors can earn profits through returns on them. This process, called yield farming, lies at the center of the DeFi universe.

Since crypto TVL is meant to measure the entire value of a protocol’s locked assets, staking has an obvious, immediate effect on the metric. Each time an investor stakes more currency in the system, the TVL will rise accordingly. A higher TVL suggests that many investors have been staking currency in the protocol, which in turn suggests that the system is in a healthy place.

Using TVL to Your Advantage

Once you understand the meaning of crypto TVL, you can start using the metric to inform your decisions. While TVL is far from the only data point to consider when trading in DeFi protocols, it’s certainly worth considering.

Not all DeFi protocols are alike, and some are in much stronger positions than others. A quick glance at the TVL will help you decide where to place your hard-earned crypto assets. The TVL ratio, or the current value measured against the protocol’s market cap, is also a useful metric. You can find it for most DeFi protocols by using DefiLlama, a DeFi dashboard that countless traders have found helpful.

Cryptos with the Highest TVLs

When examining DeFi protocols by using the TVL metric, it can help to start by looking at the projects that have the most value. These six protocols use different mechanisms and pursue different goals, but they all boast impressive TVL figures. Their apparent strength makes them worthy of consideration the next time you’re looking to invest in a DeFi protocol.

Curve

Curve is one of the top DEXs. The protocol’s high TVL boosts its stature. At the time of writing, Curve’s TVL is $8.54 billion. While this figure represents a considerable drop from a high of $24 billion, it still places the protocol among the top performers in the DeFi ecosystem.

Lido

Lido, a DeFi protocol designed to provide liquidity for staked assets, has a current TVL of $7.42 billion. This total value, which reflects the assets that traders have staked in the system, has decreased as a result of general market fluctuations, but the protocol’s outlook is still considered positive.

Maker

Maker was an early pioneer in the world of DeFi, and it continues to attract assets from forward-thinking investors. As a decentralized autonomous organization (DAO), the protocol allows traders to contribute directly to the decision-making process. With a current TVL of $9.24 billion, the project remains one of the highest-valued DeFi protocols available to investors.

Aave

Aave is a DeFi protocol that focuses on lending. Its TVL of $8.24 billion shows that a considerable number of investors have deposited funds into the protocol. As long as this number remains high, investors and lenders alike can expect the system to remain strong.

Uniswap

Uniswap joins Curve as a DEX with an impressively high TVL. The current figure of $5.5 billion suggests that the protocol will continue to be an attractive option for crypto traders.

Compound

A lending platform on the Ethereum chain, Compound boasts an impressive TVL of $3.97 billion. While recent drops in total value have been somewhat dramatic, the remaining liquidity keeps the protocol’s TVL higher than that of most of its competitors.

The Bottom Line

TVL — the total value of the crypto assets in a DeFi protocol — is an important measure of a system’s health and vitality. Whether you want to assess the total assets in a system or examine the TVL ratio to determine whether a protocol’s tokens are undervalued, the metric can prove useful on a daily basis. Now that you understand how crypto TVL works, you'll be better informed as you plan your next maneuvers in the world of DeFi.