What is TVL (Total Value Locked)?
In the world of decentralized finance (DeFi), Total Value Locked (TVL) measures the total dollar value of crypto assets deposited in a specific protocol, platform, or across the entire DeFi ecosystem. These assets are typically “locked” in smart contracts for purposes like lending, liquidity provision, or staking. TVL is a popular metric because it gives a snapshot of how much assets a platform is actually handling and, by extension, how much trust and usage it currently has from its users.
Disclaimer: This content is provided for informational purposes only and does not constitute financial or investment advice. Always conduct your own research before making any financial decisions.
How TVL is Calculated
TVL is calculated by taking the total amount of assets locked in a protocol and multiplying each asset by its current market price, then summing these values across all assets. This figure is usually expressed in U.S. dollars for easier comparison, though it can also be shown in native token terms.
For example, imagine a DeFi lending platform that holds:
- 10,000 ETH worth $2,000 each = $20,000,000
- 5 million USDC worth $1 each = $5,000,000
- 50 BTC worth $30,000 each = $1,500,000
The platform’s total TVL would be:
$20M + $5M + $1.5M = $26.5M
What makes TVL unique in DeFi is the transparency of blockchain data. All assets locked in a protocol’s smart contracts are visible on-chain, meaning anyone can verify balances directly or use public data providers like DeFiLlama, DappRadar, or Token Terminal to pull real-time TVL figures. This transparency reduces the reliance on trust — you don’t have to take a company’s word for it; you can check the numbers yourself.
In traditional finance, it’s very different. If a big bank claims to have $500 billion in assets under management, that figure is self-reported in quarterly or annual filings, and the public has no way to directly verify it. You must trust the bank’s accounting, auditors, and regulators, whereas in DeFi, verification is as simple as querying the blockchain.
It’s important to note:
- TVL changes constantly as crypto prices fluctuate and users deposit or withdraw assets. A sudden 20% drop in ETH price, for example, could reduce TVL significantly even if no one moves their assets.
- Only assets “locked” in smart contracts count toward TVL. Assets sitting in a user’s wallet are not included.
- Locked can mean different things—sometimes assets are truly inaccessible until unstaking or unlocking, while other times they can be withdrawn instantly but are still counted as “locked” if they’re part of a liquidity pool or lending position. In reality, DeFi assets often move between protocols as users seek better returns, and the ability to quickly and permissionlessly shift funds is a key advantage over traditional finance.
Why TVL Matters
A higher TVL generally means:
- More Liquidity: Easier for users to trade, borrow, or withdraw without major price slippage.
- User Trust: People are more likely to deposit assets in platforms they trust and see as secure.
- Ecosystem Health: Rising TVL across the DeFi space can signal growth and adoption.
For example, Uniswap—a decentralized exchange—tracks billions of dollars in TVL, signaling it has deep liquidity pools for users to trade against.
Limitations of TVL
While TVL is a useful metric for gauging the scale and activity of a DeFi protocol, it has several important limitations that investors and users should keep in mind:
1. Price Dependency
TVL is heavily influenced by the market prices of the tokens locked in the protocol. If ETH or BTC prices drop sharply, TVL can fall even if no one withdraws their assets. Conversely, TVL can rise during a bull market without any real increase in user deposits or adoption.
Example: In May 2021, Ethereum’s TVL dropped from ~$85B to ~$52B in a matter of days—not because of mass withdrawals, but because ETH’s price fell by over 40%.
2. Not an Indicator of Profitability
A protocol can have billions in TVL but still be unprofitable or unsustainable. TVL tells you how many assets are in the system but not how efficiently it’s being used or whether the protocol generates revenue.
Example: During the 2020 “DeFi Summer,” protocols like SushiSwap and Harvest Finance attracted huge TVL through aggressive liquidity mining rewards. However, much of that TVL vanished once incentives ended, revealing limited organic usage.
3. Short-Term Spikes from Incentives
Many projects run promotional reward programs to attract liquidity. While this can temporarily boost TVL, it doesn’t always translate into long-term loyalty.
Example: In April 2021, PancakeSwap saw a TVL spike of over 60% in two weeks due to high-yield farming pools. When rewards decreased, TVL quickly fell as yield hunters moved on to other platforms.
4. Security and Risk Are Not Reflected
A high TVL doesn’t mean a protocol is safe. In fact, high TVL can make a protocol a prime target for hackers.
Example: In February 2022, the Wormhole bridge on Solana had over $320M in TVL when a vulnerability was exploited, resulting in one of the largest DeFi hacks in history. TVL didn’t warn users about the smart contract risk.
5. Can Be Concentrated in a Few Users
Sometimes a large share of a protocol’s TVL comes from a small number of “whales” or institutional investors. This concentration means that if a few large players withdraw, TVL can plummet, impacting liquidity and user confidence.
Example: In late 2021, on-chain data showed that over 40% of Curve Finance’s TVL came from just a handful of addresses. When two of those addresses withdrew significant liquidity in early 2022, TVL dropped sharply overnight.
TVL is a helpful snapshot of how much assets are engaged in a protocol, but it should never be the only metric you rely on. Pair it with other data—like protocol revenue from Token Terminal, active user counts from DappRadar, and security audit reports—to get a full picture of a project’s health and sustainability.
TVL is a valuable tool for gauging activity and trust in DeFi platforms, but it’s not a complete picture of a project’s health. Always consider TVL alongside other metrics like protocol revenue, security audits, and user adoption trends before making investment decisions.
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