What is Total Value Locked (TVL)?

TVL represents the locked value on a network and serves as a crucial data source for assessing DeFi projects and making investment decisions.

Total Value Locked (TVL) is a term used in the cryptocurrency world, specifically in the context of Decentralized Finance (DeFi) protocols. It refers to the total value of assets locked on a blockchain within a DeFi protocol. TVL is utilized to assess liquidity and trading volume within the protocol and is crucial for measuring growth and activity in the DeFi ecosystem.

Why is TVL important?

TVL is considered an indicator reflecting the size and popularity of a DeFi protocol. A higher TVL indicates that the protocol has attracted more assets from users and investors, which could signify its reliability and effectiveness. Additionally, TVL serves as a benchmark to monitor the success of DeFi projects and developments within the ecosystem. Investors and DeFi users often analyze TVL data to evaluate which projects are gaining more attention and have the potential for growth.

How is TVL calculated?

TVL calculation generally represents the total value of all locked assets in a specific DeFi protocol in terms of US dollars. These assets typically consist of cryptocurrencies, tokens, or other digital assets. During TVL calculation, the value of each asset type is calculated using current exchange rates, and these values are summed to provide the total value. This process enables the determination of the total locked value within the protocol.
TVL serves as an important metric for analyzing the DeFi ecosystem and evaluating the popularity of projects. However, it should not be the sole factor in investment or decision-making processes. Considering other factors to gain a broader perspective is always advisable.
Types of TVL

• Staking TVL: Staking TVL arises when users lock a specific cryptocurrency asset within a protocol to contribute to the network’s security. This type of TVL is commonly observed in blockchain networks employing Proof of Stake (PoS) consensus mechanisms. Users stake a certain amount of cryptocurrency, participate in the blockchain’s transaction validation process, and receive rewards in return.
• Liquidity Pool TVL: Liquidity pool TVL refers to the total value of assets that users provide as liquidity within a DeFi protocol. These assets usually involve pairs of two different cryptocurrencies or tokens. Users lock these assets in liquidity pools and can receive transaction fees or liquidity provision rewards in return.
• Borrowing TVL: Borrowing TVL reflects the value of assets users lock as collateral to borrow within DeFi protocols. Users can borrow by using these assets as collateral. Borrowing TVL indicates how much borrowing is taking place and the total amount of debt within the protocol.
• Other TVL Types: The DeFi ecosystem is constantly evolving, and different DeFi projects may have varying use cases. Therefore, besides staking, liquidity pools, and borrowing, other types of TVL specific to different DeFi use cases could emerge. For instance, there might be TVL types specific to prediction market protocols or other specialized DeFi use cases.

These TVL types are used to gain a better understanding of the DeFi ecosystem and assess different aspects of various protocols. Each type helps measure users’ interactions and contributions within the DeFi ecosystem.

Factors Affecting TVL

• Underlying Asset Price: One of the fundamental factors influencing TVL is the price of the underlying assets used in DeFi protocols. If the prices of these underlying assets increase, users might be more inclined to lock these assets and invest in DeFi protocols. Conversely, a decrease in underlying asset prices could negatively impact TVL as investors’ risk appetite might diminish.
• Interest Rates: Interest rates also hold significant sway over TVL. Higher interest rates have the potential to attract users to DeFi protocols for activities such as borrowing or providing collateral. Users might lock more assets in liquidity pools or for borrowing due to the allure of higher interest rates.
• New DeFi Protocols: The DeFi ecosystem is a fertile ground for the continuous development of new protocols. When new DeFi protocols are launched, users might lock their assets to capitalize on their potential. This can lead to increased competition and the dispersion of TVL across different projects.
• Regulatory Changes: The cryptocurrency and DeFi space are highly sensitive to regulatory changes. Alterations in cryptocurrency regulations within a country or region can impact interest in DeFi protocols. Regulatory uncertainties or unfavorable regulatory actions can decrease investor and user confidence in DeFi protocols, potentially lowering TVL.

These factors are crucial dynamics that can affect TVL in the DeFi ecosystem. Fluctuations in TVL often arise as a result of the interplay between these factors and should be taken into account for the sustainability and growth of DeFi projects.

Using TVL for Investment Decisions

Investors can make informed investment decisions using TVL data. However, TVL alone isn’t a sufficient indicator and should be evaluated alongside other factors. Here are some tips on how TVL can be used for making investment decisions:

• Growth Trends: Analyze TVL data to understand the growth trend of a DeFi project. If TVL is consistently increasing, the project’s popularity and user interest might be on the rise.
• Competitive Analysis: Compare the TVL data of different DeFi projects to conduct a competitive analysis. Try to comprehend which projects are receiving more attention and why they are so popular.
• User Activity: TVL can reflect the interaction among users within a protocol. Rising TVL might indicate that users find the project’s offerings valuable.
• Risk Assessment: Higher TVL often signals project reliability and investor willingness to take risks. However, you should still evaluate other factors such as the technology behind the project, security measures, and the team.

Tracking Developments: Monitoring changes in TVL can help you understand the project’s developments and user behavior. Feature updates, new integrations, or major news can lead to fluctuations in TVL.