What Is Total Value Locked (TVL)?
Total value locked (TVL) is a metric used in the cryptocurrency sector to determine the total U.S. dollar value of digital assets locked, or staked, on a particular blockchain network via decentralized finance (DeFi) platforms or decentralized applications (dApps). The higher the TVL of a project, the more secure and valuable it is perceived to be.
- Total value locked (TVL) measures the U.S. dollar value of assets locked on a blockchain.
- It is an important indicator of investor and developer interest in a blockchain or decentralized application (dApp).
- TVL is similar to bank deposits for decentralized finance (DeFi) projects.
How Total Value Locked (TVL) Works
Cryptocurrency arrived in 2009 with the creation of Bitcoin, which was designed to be a peer-to-peer currency using digital ledger technology that would operate outside of centralized control. Early projects focused on being a replacement currency for the financial system until the arrival of Ethereum in 2015, which has smart contract functionality and allowed developers to build permanent dApps on its network.
That led to a DeFi boom in 2020-2022, with a host of DApps offering digital financial services, such as lending, which don’t rely on traditional financial intermediaries like brokerages, exchanges, or banks.
To get access to a loan, for example, users must stake digital assets or tokens with the application in the same way a mortgage borrower would place a down payment with a lender. In cryptocurrency, this staked deposit is “locked” on that particular network, or still in circulation but not usable while it is staked.
This led to the creation of the term “total value locked,” which can give users a snapshot of an application or network’s importance based on the value of staked assets locked on its chain.
How Total Value Locked Is Calculated
The total value locked on a chain is calculated by summing the total value of digital assets locked on a specific DeFi platform or application. Digital assets are cryptocurrencies or stablecoins that are being used as collateral for loans or to add liquidity to a platform.
DeFi platforms can potentially provide their own data for investors to calculate their TVL. If a DeFi platform said it had $1 billion worth of ether, $1 billion worth of bitcoin, and $500 million of tether locked, for example, that would mean it has $2.5 billion of digital assets in TVL.
The largest cryptocurrencies and stablecoins by market capitalization usually will account for the majority of TVL, as these are the most trusted assets. Bitcoin, ether, and tether are the most common.
Investors tend to use third-party DeFi analytics platforms, such as DefiLlama, for the numbers. These platforms will use application programming interfaces (APIs) and other computing technologies to gather data from crypto applications; users can simply search the site for their desired information.
For example, DefiLlama said Aave had $5.4 billion total value locked on Oct. 24, 2023. Looking at the breakdown of those total assets, Ethereum was listed as the largest, at about $4.6 billion. The Polygon and Avalanche blockchains are the next two largest, at about $287 million and $193 million, respectively.
What TVL Can Tell Investors
TVL became a critical metric in cryptocurrency because it gave investors a measuring stick to help define the risks and potential benefits of investing in a particular DeFi platform. If a platform has a large amount of assets locked on its network, then it gives the impression that it is a secure platform, trusted by crypto investors.
This is similar to traditional banks, where investors analyze the level of deposits held by an institution. If a bank is attracting deposits, it can earn money by lending or investing that money. If deposits are declining, then the opposite is true—the bank can’t lend as much, leading to less income.
The DeFi boom between 2021 and 2022 happened because the finance platforms used their decentralized nature to offer large annual percentage rate (APR) interest-rate yields for staking and lending. This also happened at a time when global central banks were pursuing a collective monetary policy that relied on interest rates near zero to spur growth.
A platform with a high TVL level may not necessarily be a secure platform. Investors interested in DeFi projects should dig deeper to gauge the project’s reputation.
At a peak in December 2021, decentralized applications had a TVL of more than $179 billion. Over the following months, a peak in technology stocks reduced investors’ appetite for risk, and speculative capital was drawn from the crypto sector. The central banks also went on an aggressive interest-rate tightening cycle to combat inflation, and investors moved to the safety of government deposits. On Oct. 24, 2023, the TVL for the crypto sector was around $40 billion.
Drawbacks of TVL
TVL will only provide a snapshot of the total value of assets that are locked, or staked, in a platform, but it doesn’t highlight activity levels. If a platform has a high TVL but low user-activity levels, that may mean that a small number of investors account for the TVL on that platform—generally, this is a red flag and would require more investigation. Investors should also look at the data practices of third-party analytics platforms to ensure that all the TVL figures are up-to-date.
The DeFi industry isn’t immune to the collapse of trusted institutions, as was evident with the $60 billion collapse of the Terra (LUNA) lending protocol in 2022. This highlighted another problem with TVL—the assets involved in the calculation may not be as secure as believed.
There also have been cases in which TVL numbers can be artificially inflated by bad actors who want to attract attention to their platform or project.
That can make it harder for users to accurately gauge the true value of a project, but shouldn’t be a problem when assessing DeFi projects or dApps with a strong reputation.
TVL is a handy metric for assessing the quality of a decentralized finance project or application, but it shouldn’t be the only measure used for an investment. Investors can perform due diligence in other areas, such as the experience of the founders, the platform’s governance model, tokenomics, or the size of the platform’s community.
What Is the Difference Between TVL and Market Capitalization?
The difference between TVL and market capitalization is that the former calculates the value of digital assets parked on an application, while the latter is the market value of the project that develops and operates the DeFi platform or dApp.
Which Cryptocurrency Has the Highest TVL?
On Oct. 24, 2023, Ethereum had the highest TVL. There was $22.32 billion in ether locked, according to DefiLlama.
Is Total Value Locked a Good Metric?
Crypto fans use TVL to gauge interest in a cryptocurrency app or platform. For this purpose, it is a good metric, but it should also be used with other metrics in an analysis.
The Bottom Line
Total value locked (TVL) is an important metric used in the cryptocurrency sector that allows investors to gauge the popularity and activity of a decentralized finance platform or application.
Lending platforms will aim to attract investors by offering an attractive APR yield, and any digital assets locked on the network to earn that yield will boost the network’s TVL figure. Locking is generally done by staking tokens on a blockchain, which also serves to give the token staker the ability to earn fees by validating transactions.