What is total value locked?
Total Value Locked (TVL) is understood as the total amount of assets locked in DeFi smart contracts. This number corresponds to the amount of assets currently withheld in a given protocol.
Total value Locked (TVL) uses three main units: USD, ETH, and BTC. In addition, DAI is also used as a unit of measurement for TVL, but this unit is not used frequently.
How to calculate total value locked:
Total Value Locked (TVL) = Total Amount of Tokens Locked x Token Market Value Locked
DeFi protocols use TVL
Lending
In lending, the TVL index is measured by the value of assets deposited into smart contracts by both the lender and the borrower. Borrowers are then provided with a “line of credit” containing up to 60% of their locked value.
MakerDAO is the leading project in this field.
Decentralized exchange (DEX)
In DEX, TVL is measured by the value of assets deposited into the smart contracts of exchanges, including order-book type exchanges such as Loopring and DeversiFi. Liquidity pool exchanges such as Uniswap, Curve and Balancer have the highest TVL.
Currently, Curve Finace is the DEX with the highest total TVL among Defi protocols with a total locked value of up to $10.3 billion USD.
Derivatives (Derivatives transactions)
TVL in derivatives protocols is measured by the value of assets deposited into smart contracts, supporting synthetic assets and financial contracts. In options trading apps, users can deposit USDC to earn interest, as traders buy spreads to keep positions open.
DxDy leads the Derivative category with a total value locked of $1 billion.
Payment Protocol
TVL is measured by the value of assets deposited into smart contracts that are transferred to the sidechain or plasma implementation of the payment protocol.
With over $683 million in assets locked, Flexa is currently the leader in the payments category. The Flexa-powered payment protocol allows depositors to leverage their crypto assets with major brands like Starbucks, Dunkin Donuts, and GameStop.
Assets (asset)
The TVL in the asset is measured by the amount of tokenized coins. These crypto assets represent a 1:1 buyback of the underlying asset.
Convex Finace has the highest TVL in the asset.
Meaning of TVL
TVL displays the amount of funds locked in DeFi protocols and thus helps to get a clear view of the overall state of the DeFi market. TVL is also an effective metric to compare the market share of different DeFi protocols.
The more value locked, the better the DeFi protocol performs and generates more profits for its participants. Conversely, a lower TVL means both lower operations and lower potential profits.
Sometimes it can be difficult to evaluate whether the TVL of a DeFi protocol is high enough or not because the entire DeFi ecosystem is young and in its development phase. However, market experts agree that audited DeFi protocols starting with a $1 billion TVL can be considered safer options to use.
Interpretation of TVL growth
Many investors and analysts measure DeFi protocols by the amount of TVL. Therefore, the higher the total value locked on it, the better the overall health of the project.
Logically, this means the project is in demand. The project can have a strong development team, good use cases and user experience that will attract the most users and increase the scale of the TVL, while also increasing the value of the project
TVL and token prices of DeFi protocols are often correlated. Typically, when TVL increases, so does the token price and vice versa.
The downside of TVL
The majority of decentralized finance applications are built on the Ethereum blockchain. As a result, more than 50% of all TVL on DeFi is linked to the Ethereum network at the time of this writing.
However, the TVL growth of DeFi dApps on Ethereum does not necessarily mean an increasing number of dApps or user engagement with them.
With that said, the size of the TVL correlates to the price of the protocol. Therefore, as the price of ETH increases, so does the amount of total value locked on the underlying blockchain.
In addition, the size of the TVL can increase artificially by doubling the amount of the same capital. This happens when users deposit their cryptocurrency into dApp-1, which grants them their own synthetic tokens. Users then deposit these synthetic assets into another protocol or dApp-2. Both deposits will be calculated in TVL. However, only the first cryptocurrency deposit will be from real capital here.
Another reason why TVL could be the presence of whales. Large capital investors such as hedge funds, institutions holding large amounts of cryptocurrencies, or even project developers themselves, have the ability to fake large value transactions and thus falsely promote TVL of the project.
Ultimately, DeFi remains a growing market operating in an unregulated environment. This leads to more on-chain activity, focused on speculation and short-term profits. Users who lock up their cryptocurrency to generate passive income can withdraw it after a certain period of time, resulting in a reduction in the total value locked.
TVL viewing sites
You can typically find the TVL for a specific project by visiting that project's website. You can also use some websites like:
Defy Pulse.
Defi Llama.
Conclude
Total Value Locked (TVL) reflects the user's level of trust in the project, depending on each DeFi protocol, this number reflects different levels of usage.
In some circumstances, high TVL reflects the strength of liquidity potential, in addition to the level of market supply with Native Tokens. Each protocol will have a different level of evaluation, based on each project. TVL is only a relative parameter. When using it, you need to learn about other factors for reference and to make an accurate analysis.
