What Is Total Value Locked (TVL)?
Total Value Locked (TVL) is a crucial metric in the cryptocurrency world, reflecting the total U.S. dollar value of assets staked on a blockchain or decentralized application (dApp). This measure helps investors gauge a project’s security and perceived value, similar to bank deposits. Understanding TVL is vital for anyone looking to invest in decentralized finance platforms.
KEY TAKEAWAYS
Total Value Locked (TVL) indicates the U.S. dollar value of digital assets locked in a blockchain, reflecting investor interest and platform value.
The rise of decentralized finance (DeFi) platforms in the late 2010s led to the widespread use of TVL as a measure of a platform's success.
TVL is calculated by summing the values of crypto assets locked in a DeFi platform, providing an insight into the security and popularity of the project.
While a high TVL can signal trust in a platform, investors should investigate further to understand the true nature and risks associated with the DeFi project.
TVL can occasionally be misleading; it offers a snapshot of locked assets but does not account for the actual user activity or potential risks of a platform.
The Evolution of Total Value Locked (TVL) in Cryptocurrency
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.1 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.23
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.4
To access a loan, users must stake digital assets or tokens, akin to a mortgage down payment. 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 the importance of an application or network based on the value of staked assets locked on its chain.
Understanding the Calculation of Total Value Locked (TVL)
The total value locked on a chain is calculated by summing the total value of digital assets locked on a specific DeFi platform or dApp. In this respect, 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. For example, if a DeFi platform said it had $1 billion worth of ether, $1 billion worth of bitcoin, and $500 million of tether locked, that would mean it has $2.5 billion of digital assets in TVL.
TIP
The most trusted cryptocurrencies and stablecoins often make up the bulk of TVL.
Some investors use third-party analytics like DefiLlama to get TVL data. 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, looking at the breakdown of the total assets on DeFi Llama on June 9, 2024, Ethereum was listed as the largest, at about $64.5 billion. Tron had about $8.6 billion in total value locked, and the BSC and Solana blockchains were the next two largest, at about $5.6 billion and $4.6 billion, respectively.5
Insights TVL Provides for Investors
TVL is crucial in crypto as it helps investors assess the risks and rewards of DeFi platforms. If a platform has a large amount of assets locked on its network, 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. Declining deposits mean the bank lends less and earns less income.
The DeFi boom from 2020 to 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.64
IMPORTANT
High TVL doesn't guarantee security; investors should research a 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. 23, 2023, the TVL for the crypto sector was around $41 billion. It had risen by June 9, 2024, to about $109 billion.7
Limitations and Risks of Total Value Locked (TVL
TVL will only provide a snapshot of the total value of assets that are locked in a platform; it doesn’t highlight activity levels. If a platform has a high TVL but low user-activity levels, this 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.
FAST FACT
Some bad actors artificially inflate TVL to draw attention to their projects.
That can make it harder for users to accurately gauge the true value of a project, but it 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.
Is TVL Good or Bad?
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.
What Is Total Value Locked USD?
Total Value Locked USD is the amount of cryptocurrency locked in defi applications in U.S. dollars.
What Is the Total Value Locked Check?
A total value lock check refers to checking the total amount of a cryptocurrency locked. It can help you make investment decisions by indicating a crypto's liquidity, a project's perceived value, or investor interest in a project.
The Bottom Line
Total value locked (TVL) serves as a crucial indicator in the cryptocurrency industry, helping investors assess the security and popularity of decentralized finance (DeFi) platforms. A platform with a high TVL suggests strong investor trust, similar to deposits in traditional banking. However, TVL should be used alongside other metrics, as it does not directly account for user activity and can sometimes be artificially inflated. Investors are advised to perform deeper due diligence, looking into a platform's reputation and operational transparency, before making financial decisions. Be mindful that the DeFi space can be unpredictable, with significant risks, as demonstrated by past events like the Terra collapse.
