What Is Total Value Locked (TVL) in Crypto?

How TVL Works in Crypto and Why It Matters

Total Value Locked (TVL) measures the dollar amount of digital assets (cryptocurrencies, stablecoins, etc.) locked in DeFi protocols, like lending platforms or liquidity pools. When assets are staked, they are pledged to specific functions, such as earning interest or providing liquidity, which builds trust by signaling confidence in a platform's security and usability.

Calculating TVL

TVL sums up the market value of assets locked across DeFi projects, reflecting how much capital is currently tied up. For instance, if a platform has 100 ETH worth $2,000 each, 50 BTC at $60,000, and 200,000 USDT, the total TVL would be $3.4 million.

Importance of TVL for Investors

A high TVL generally indicates ample liquidity, trust, and growth potential within a platform. However, TVL isn’t foolproof, as projects may inflate their numbers. Therefore, it’s important to consider additional metrics, like user engagement and sustainability, to make informed investment decisions.

Top TVL Tracking Platforms

Platforms like DefiLlama, DeFi Pulse, and CoinGecko track TVL, providing real-time updates and insights into DeFi projects across networks. These tools allow investors to compare TVL figures without manual calculations, making TVL tracking straightforward and reliable.

TVL vs. Market Cap

Market cap measures a cryptocurrency’s total circulating value, while TVL focuses on the assets actively locked in DeFi. The TVL ratio (Market Cap / TVL) can help assess if a project is undervalued or overvalued. A low TVL ratio suggests potential growth, while a high ratio might indicate overvaluation.

TVL’s Influence on Crypto Prices

Higher TVL can increase a token’s liquidity and user confidence, sometimes positively influencing token prices. However, price movements also depend on broader market sentiment and the platform’s unique utility.

Leading Chains by TVL

Ethereum leads in TVL, followed by Tron and Solana. Ethereum's Layer 2 solutions contribute to its dominance, while Tron and Solana are growing due to their focus on low fees and scalability.

Limits of TVL as a Metric

TVL is useful but limited; it fluctuates with token prices and can be manipulated. Investors should complement it with metrics like user activity and tokenomics for a more complete view of a DeFi project’s health.

In short, TVL is an essential metric for DeFi but should be evaluated alongside other factors to accurately gauge a platform's growth and reliability.