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2022-06-08 15:28:00

What is Total Value Locked (TVL), and Why it matters in DeFi

  • What is Total Value Locked?
  • Why is TVL important for DeFi?
  • Which blockchain network has the maximum TVL in DeFi?

We can analyze a crypto project from a few different perspectives. This includes Fundamental analysis, Technical Analysis, and On-Chain Analysis. Further, the Fundamental Analysis includes an analysis of the project’s Token Economy (a.k.a. Tokenomics).

Tokenomics involves the analysis of a few key metrics, such as:

  • Market Cap,
  • Token Total Supply,
  • Token Circulating Supply,
  • Fully Diluted Value,

However, for a DeFi (Decentralized Finance) project, there is one more important stat. It’s called Total Value Locked (TVL).

TVL is one of the key statistics used to analyze the performance of a DeFi platform. So, let’s understand more about it.

What is Total Value Locked?

TVL started getting attention in mid-2020 during the DeFi boom. A number of DeFi platforms were able to entice crypto users to deposit their funds on their platform for various reasons such as Lending, Staking, Yield Farming, Liquidity Mining, etc.

Total Value Locked (TVL) can be defined as the amount of crypto assets locked by users on a DeFi platform.

This includes the following:

1. Lending – Crypto assets deposited with a lending platform such as Celcius, AAVE, Compound, MakerDAO

2. Staking – Crypto assets staked with a Layer 1 blockchain such as Ethereum, Polkadot, Solana, Cosmos, etc.

3. Liquidity Pools – Crypto assets deposited with various liquidity pools across platforms such as Uniswap,

4. Yield Farming – Crypto assets deposited with Yield Farming protocols such as Yearn Finance, Beefy Finance, etc.

TVL is also used for the valuation of a DeFi platform. A generally accepted ratio of Market Cap / TVL is 1:1.

Therefore, if the Market Cap to TVL ratio of a project is greater than 1:1, then the project is perceived to be overvalued and vice versa.

Further, these DeFi platforms are built on a blockchain network. TVL is also used as a tool for measuring the performance of a Layer 1 Blockchain Network.

TVL of a platform can be computed in a number of ways. It can either be calculated in the form of cryptocurrency or in the form of Fiat currency. However, the Fiat currency valuation of TVL is generally accepted globally.

Why is Total Value Locked (TVL) important for DeFi?

Every DeFi platform provides a number of services for which it needs liquidity. Let us understand this with a few examples:

1. A Decentralized Exchange such as Uniswap needs liquidity of various crypto tokens. Whenever someone comes to Uniswap to exchange these crypto tokens, the corresponding tokens should be available with the exchange.

Suppose you want to buy ETH (Ethereum) tokens with MANA (Decentraland). Then Uniswap should have an ETH/MANA liquidity pool so that you are able to exchange these tokens successfully. Users like you and me would lock their funds in these Liquidity Pools. The exchange would reward us for providing it with liquidity.

2. A Lending and Borrowing platform like AAVE would need the liquidity of crypto tokens in order to lend these tokens to users. Users would deposit these tokens with AAVE, and in return, AAVE would pay them interest.

Therefore, TVL describes how liquid a DeFi Platform is. The more liquidity, the more reliable the platform is.

As of 6 June 2022, the combined TVL of DeFi is as follows:

DeFi - Total Value Locked
DeFi – Total Value Locked

Layer-1 Blockchain Networks with the largest Total Value Locked (TVL) in DeFi

As already discussed, DeFi platforms are built on blockchain networks. The combined TVL of DeFi platforms built on a network can be termed the DeFi TVL of the network.

Therefore, DeFi TVL of Ethereum means the combined TVL of all the DeFi platforms built on the Ethereum network. As of 6 June 2022, the following are the networks with the largest DeFi TVL.

DeFi - Total Value Locked 2
DeFi TVL of Top Layer-1 Blockchain Networks

Further, you can see a list of Top Protocols on the basis of TVL.

Conclusion – What is TVL, and why does it matter in DeFi?

This is what TVL is and why it is important for the analysis, credibility, and valuation of DeFi platforms. The more the TVL, the more reliable is a project or network. Finally, for a long time, Ethereum has been the blockchain network with the maximum number of DeFi platforms and thus the maximum amount of TVL.

I hope that you were able to understand the meaning of TVL and its importance in DeFi.

If you have any feedback or comments, then let us know in the comments section.

Please note that nothing written in this post is a piece of financial advice. Please consult your financial advisor before making any financial decision.

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