What is Total Value Locked (TVL) in Crypto and Why Does it Matter?

What is Total Value Locked (TVL) in Crypto and Why Does it Matter?

Since decentralized finance (DeFi) boomed in 2020, financial market experts have come to terms with a new type of investment and have looked at ways to measure its performance.

Other than market capitalization, trading volume, and total and circulating supply, total value locked (TVL) is one crypto indicator that is popular among DeFi investors to assess the overall value of assets – in United States dollar or any fiat currency – deposited across all DeFi protocols or in a single DeFi project.

DeFi assets include rewards and interest, coming from typical services such as lending, staking, and liquidity pools, provided in the form of smart contracts. TVL in staking, for example, is a particularly useful indicator for investors looking to support the DeFi platforms with the highest rewards. It is the total value locked in the DeFi staking protocols and represents the amount of assets deposited by the liquidity providers.

In 2022, TVL has reached nearly $2 billion globally, growing from $400 million in the previous two years. With the increasing popularity and value of DeFi in the cryptocurrency space, TVL has become an essential metric for investors who want to assess if the whole ecosystem or a single protocol is healthy and worth investing in.

While TVL is simply defined as the total value of cryptocurrency locked in a smart contract, there are underlying conditions that may affect the value of DeFi projects.

Various elements concur on TVL’s worth other than deposits, withdrawals, and the amount a protocol is actually holding. The TVL also changes with the value of the fiat currency or the native token. Some protocols’ deposits may be denominated in the project’s native token, so its TVL varies with its value. If a specific token grows in value, so does the protocol’s TVL, too.

Why does TVL matter in DeFi?

For DeFi platforms to function, they require capital to be deposited as loan collateral or liquidity in trading pools. TVL matters because it indicates the capital’s impact on DeFi applications’ profits and usability for traders and investors.

When the TVL of a DeFi platform rises, it is followed by an increase of liquidity, popularity, and usability. These factors contribute to the project’s success. A higher TVL means more capital is locked in DeFi protocols, with participants enjoying more considerable benefits and proceeds. A lower TVL implies lower availability of money, resulting in lower yields.

DeFi protocols' market share can be easily identified through analytics firms’ platforms like DeFi Pulse and DefiLlama, which provide data on the amount of crypto assets locked in their respective smart contracts.

DeFi participants who track down TVL on DeFi Pulse must know that the platform monitors protocols’ smart contract movements on the Ethereum blockchain only by extracting the total balance of Ether (ETH) and ERC-20 tokens. DefiLlama, on the other hand, calculates the TVL by extracting the total balance of all of the DeFi chains combined or each individual platform separately.

Created on 3rd Jun 2022