TVL in DeFi: A Complete Guide to Understanding Locked Value

Basic Concepts: What is TVL?

Total Value Locked (TVL) is one of the key metrics that characterizes the size of assets locked by users in decentralized financial protocols. When you deposit your funds into a DeFi platform to earn yield or participate in staking, these assets become part of the total locked value of the ecosystem.

A simple example: if one user deposits capital into the protocol, and then another nine participants join with a similar contribution size, the TVL of that protocol is multiplied by the number of participants. This allows for the assessment of the scale of adoption and trust in a particular platform.

TVL can be calculated for both an individual protocol and the entire blockchain ecosystem by summing the metrics of all DeFi solutions within a single network.

Methodology of Calculation and Tracking

The process of determining TVL involves several sequential steps. First, it is necessary to identify all assets that are under the protection of the protocol — these can be deposits, collateral, as well as assets involved through staking and lending operations.

The second stage involves converting the value of each asset to a single calculation standard, mostly the US dollar or another reference currency. The final step is aggregating the total value to obtain the final TVL figure.

Specialized platforms for data analysis position themselves as primary information resources for monitoring TVL. They gather information from multiple DeFi protocols, systematize the data into a single information dashboard, which significantly simplifies tracking the dynamics of development and adaptation of the DeFi ecosystem.

Why TVL metrics influence investors' decisions

TVL serves as one of the most indicative indicators of the health and progress of the DeFi ecosystem. Analysts and users use this metric for a comprehensive assessment of protocols and platforms:

Trust and popularity indicator. Protocols with a higher TVL demonstrate a higher level of adoption. This signals that users prefer these platforms and are willing to commit significant amounts of capital to them.

Available Liquidity Level. A higher TVL directly correlates with the depth of liquidity on the platform. It becomes easier for users to execute trading operations, attract funding, take out loans, or exchange assets without significant slippage.

Perception of Stability and Security. A platform with a significant amount of locked assets is often perceived as more reliable and secure than competitors with lower TVL. This is based on the assumption that most users conduct a comprehensive risk assessment before placing funds.

Important Limitations in the Use of TVL

However, it should be remembered that TVL is just one of many criteria for analyzing DeFi projects. Using this indicator as a standalone assessment tool is insufficient for making investment decisions.

TVL constantly fluctuates due to the inflow and outflow of users from the platforms, so regular monitoring and updating of data is critically important to obtain an objective picture of the current state. In addition, it is necessary to consider other parameters — the quality of the protocol, the security of smart contracts, the development team, and the overall development strategy of the project.