How do you measure the overall health of a DeFi protocol? Total value locked (TVL), a metric used in the crypto sector, refers to the overall value of crypto deposited in a decentralized finance (DeFi) protocol, a specific sector of the crypto market. It includes all the coins deposited across various functions a DeFi protocol offers, including staking, lending, and liquidity pools.
In this blog post, we will discuss the significance of total value locked and how it serves as a useful metric to check the robustness of a project. Read on to learn more.
What is Total Value Locked?
The total dollar value held by the DeFi platform in its smart contracts is known as the total value locked. It represents all the funds stacked or locked on a specific blockchain network in transactional, lending, or borrowing capacity. The overall industry TVL is the sum of all the value locked across various DeFi apps.
This metric indicates investor and developer interest in a blockchain of decentralized applications (dApps). A higher-value lock suggests a more valuable or robust project or network.
The locked value doesn’t reflect the yield the deposits are expected to earn. It only refers to the current value of the deposits.
A project’s TVL is calculated based on the number of tokens stacked on the network. This means it will change with activities such as new deposits or withdrawals. Besides, TVL is the dollar value of the stacked tokens and hence will vary with the price fluctuations in the underlying token. When the native token appreciates, the TVL will increase and vice versa.
Significance of Total Value Locked: TVL vs. market cap
TVL is an important metric for evaluating the quality and popularity of a DeFi project or a dApp. It provides valuable insights into investor interest, project security, and network activity. A higher TVL vouches for a secure and trusted platform. In other words, a higher-value lock is similar to a traditional bank with high deposit levels.
Market cap indicates appreciation for a protocol from both active and passive investors. Passive investors invest in the protocol for long-term appreciation but are not using the protocol.
On the other hand, TVL points to the usability of a platform by its active players, the investors who use the network to transact. Thus, it takes preference over the market cap, though the market cap is a useful metric in itself. However, TVL should not be used in isolation if you consider staking or investing in crypto projects.
To be sure, TVL provides a snapshot of the total value of assets locked in the network but does not reveal the activity level. A platform with high TVL and low user activity might signal a small investor base, which calls for a thorough study of the fundamentals and technicals of the project.
Types of DeFi projects and TVL for each type
Decentralized exchanges (DEXs)
These platforms facilitate crypto trade without the need for a centralized intermediary. Uniswap, PancakeSwap, and SushiSwap are examples.
Lending and borrowing platforms
Lending and borrowing platforms enable users to leverage their crypto assets or borrow from others using over-collateralized loans. Aave, Compound, and Marker belong to this category.
Yield farming platforms
Yield farming platforms allow users to earn rewards by providing liquidity to various DeFi protocols. Curve and Convex Finance are yield farming platforms.
Derivatives platforms
Derivatives platforms offer derivative products such as options and futures with digital assets as their underlying products. dYdX and Perpetual Protocol are examples of derivatives platforms.
Top 10 tokens by total value locked
According to data from DefiLlama, the top 10 tokens by total value locked as of June 28, 2024, are:
| Rank | Name | TVL |
| 1 | Ethereum | $59.02 billion |
| 2. | Tron | $7.879 billion |
| 3 | BSC | $4.863 billion |
| 4 | Solana | $4.548 billion |
| 5 | Arbitrum | $2.831 billion |
| 6 | Base | $1.567 billion |
| 7 | Blast | $1.415 billion |
| 8 | Bitcoin | $1.047 billion |
| 9 | Polygon | $854.63 million |
| 10 | Avalanche | $757.84 million |
Source: DefiLlama
It’s important to note that these rankings and TVL values are subject to change over time as the DeFi landscape evolves.
Conclusion
Both in traditional finance and digital assets markets, financial metrics are vital indicators that help investors assess the prospects of a stock, project, or token. Total value locked indicates the health and growth of the decentralized finance ecosystem by providing valuable insights about investor interest, network security, and network activity.
