What Total Value Locked (Tvl) and Why Users Monitor This Metric

What Is Total Value Locked (TVL)?

Total value locked (TVL) is a cryptocurrency metric used to measure the total value of digital assets locked or staked on a particular decentralized finance (DeFi) platform or decentralized application (dApp). These assets can include cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), or stablecoins like Tether USD (USDT). TVL is usually expressed in US dollars, for easy comparisons across different blockchain platforms or protocols. 

Why Is TVL Important?

TVL serves as a key indicator of the overall health, and popularity of a DeFi blockchain or decentralized application.  Typically, a consistently high TVL suggests a robust and stable decentralized application that has strong utility, as well as the trust and faith of its users. These factors can contribute to the overall success of the application as they attract more participants.  Conversely, a lower TVL can signal reduced capital availability, potentially resulting in less attractive conditions for participants.  TVL also helps in identifying a project’s market share, as a higher total value locked in DeFi is indicative of a project’s dominance in the space. 

How Is TVL Calculated?

The calculation of TVL — as the name implies —  simply involves summing up the digital assets locked in a specific protocol at a given time. These assets could range from cryptocurrencies, stablecoins, liquidity tokens, and so on. For example, a decentralized protocol with $125 million in staked ETH, $56 million in wrapped Bitcoin, and $20 million in other ERC-standard tokens will have a total value locked of approximately $201 million. Several DeFi analytics platforms and data aggregator sites offer real-time TVL, and they include; CoinGecko, DeFiLlama, L2BEAT, etc. That said, it is worth noting that TVL can fluctuate with the market value of its locked assets, meaning that the total value locked on a platform may change even if no new assets are deposited or withdrawn.

Limitations of TVL

While TVL is a widely used metric in the DeFi space, it still has its limitations. TVL provides insight into the amount of capital locked in a platform, but some components can affect its reliability and accuracy. Below are some of these problems.

Market Fluctuations

TVL is sensitive to the market value of the underlying assets. A rise or fall in the price of cryptocurrencies like Bitcoin or Ethereum can significantly alter a platform's TVL, even without new deposits or withdrawals. This can give a misleading picture of the platform's growth and stability.

Manipulation

In some cases, TVL can be artificially inflated by actors looking to attract attention to their platform. This manipulation can mislead investors into overestimating the security or popularity of a DeFi project.

Multiple Counting

The total value locked on a chain can be overstated if the same assets are used across multiple platforms. For instance, assets staked in one protocol might be counted again if they are used as collateral in another (on the same chain), leading to inflated TVL figures.