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What Is Total Value Locked (TVL)?

Total Value Locked or TVL is a key metric in the cryptocurrency and decentralized finance (DeFi) sectors. It measures the total U.S. dollar value of digital assets locked, or staked, on a particular blockchain network via DeFi platforms or decentralized applications (dApps). A higher TVL is often perceived as an indicator of a project’s security and value. 

After looking at what is the TVL ratio, let’s look at its history.

History and Development of TVL

  • Bitcoin’s Introduction (2009): Bitcoin was created as a peer-to-peer currency using digital ledger technology, operating outside centralized control.
  • Ethereum and Smart Contracts (2015): Ethereum introduced smart contracts, allowing developers to build permanent dApps on its network.
  • DeFi Boom (2020-2022): This period saw a surge in dApps offering digital financial services without traditional intermediaries. Users could stake digital assets to access services like loans, creating the concept of TVL.

How Is TVL Calculated?

TVL is calculated by summing the total value of digital assets locked on a specific DeFi platform or dApp. These assets, often cryptocurrencies or stablecoins, are used as collateral for loans or to provide liquidity. For example, if a platform has $1 billion worth of Ether, $1 billion worth of Bitcoin, and $500 million worth of Tether locked, its TVL would be $2.5 billion. Major cryptocurrencies like Bitcoin, Ether, and Tether account for most of the TVL.

Importance of TVL for Investors

TVL is crucial as it offers a snapshot of the importance of an application or network based on the value of staked assets. A high TVL implies a secure and trusted platform. This metric became vital during the DeFi boom, as platforms offered high APR yields for staking and lending. However, TVL alone isn’t sufficient to determine a project’s security or potential; deeper analysis is necessary.

Drawbacks of TVL

  • Limited Insight: TVL doesn’t show user activity levels, which can be misleading if a small number of investors account for most of the TVL.
  • Accuracy of Data: Investors should verify data from third-party platforms to ensure it’s up-to-date.
  • Security Concerns: The DeFi sector is not immune to collapses, as seen with the Terra (LUNA) protocol in 2022.
  • Artificial Inflation: TVL can be manipulated by bad actors to attract attention.

What is the Difference Between Market Cap and TVL?

Market Cap represents the total value of a cryptocurrency, calculated by multiplying its current price by the circulating supply. It is a measure of a cryptocurrency’s overall valuation and popularity, used to rank and compare different cryptocurrencies. A higher market cap typically indicates a larger, more widely adopted, and potentially more stable cryptocurrency, guiding investors on the perceived stability and growth potential of the asset.

On the other hand, total Value Locked measures the total value of assets staked or locked in a DeFi platform, expressed in USD. TVL serves as an indicator of the platform’s activity, liquidity, and trustworthiness. A higher TVL suggests greater usage and confidence in the platform, reflecting its health and potential for generating yield. While market cap focuses on the valuation of individual cryptocurrencies, TVL assesses the engagement and robustness of DeFi ecosystems.

Final Words on Total Value Locked of Crypto

TVL is a useful metric for assessing the quality of a DeFi project or application but should be used alongside other metrics and due diligence in areas such as the founders’ experience, governance model, tokenomics, and community size.