What is Crypto TVL? How to Calculate & 5 Examples TVL
Decentralized finance (DeFi) is a term that refers to financial systems built on blockchain technology, such as Ethereum. The goal of DeFi is to eliminate traditional intermediaries, such as banks and financial institutions, thereby providing broader and decentralized access to various financial services. As in the DeFi ecosystem, Total Value Locked (TVL) measures how much crypto asset value is locked or used in smart contracts on a DeFi protocol. TVL reflects the amount of liquidity and activity in the DeFi ecosystem. To understand what TVL is, how it works, the importance of crypto TVL metrics for investors, its drawbacks, and the difference and relationship between crypto and market cap TVL, check out the following review.
What is Crypto TVL (Total Value Locked)?
Quoting investopedia.com, Total Value Locked (TVL) is a metric used in the crypto world to determine the total value in United States dollars of digital assets locked or staked on a particular blockchain network through DeFi platforms or decentralized applications (dApps). The higher the TVL of a project, the more it is considered safe and valuable.
How does TVL Crypto Work?
Quoting investopedia.com, crypto assets emerged in 2009 with the creation of Bitcoin, designed as a peer-to-peer asset using digital ledger technology that would operate outside of centralized control.
Early projects focused on being a replacement currency for the financial system until the arrival of Ethereum in 2015, which had smart contract functionality and allowed developers to build permanent decentralized applications (dApps) on its network.
That triggered a DeFi boom in 2020-2022, with a number of dApps offering digital financial services, such as loans, that don’t rely on traditional financial intermediaries like brokers, exchanges, or banks.
To gain access to a loan, for example, a user must place a digital asset or token with the app in the same way that a mortgage borrower places a down payment with a lender.
In the crypto world, these placed deposits are “locked” to the network or are still in circulation but cannot be used as long as they are placed.
That led to the term “total value locked,” which can give users a snapshot of the importance of an application or network based on the value of the placed assets locked in its chain.
How is TVL Crypto Calculated, and What is the Formula?
After understanding what TVL is and how it works, it is also important to know how to calculate TVL and its formula.
For example, let’s assume that there are 1,000 XYZ tokens staked in a DeFi protocol, and the current price of XYZ tokens is $10. Thus, the Total Value Locked (TVL) for token XYZ can be calculated as follows:
TVL = 1.000 Token XYZ x $10 = $10.000
Therefore, the TVL for token XYZ in that DeFi protocol is $10,000.
However, it is important to note that in many DeFi protocols, users may stake different types of tokens. When that happens, it is necessary to calculate the TVL for each type of token and then add them up to get the total TVL of the protocol.
For example, in the DeFi protocol, users also stake 500 ABC tokens at a price per token of $20. Therefore, the TVL for ABC tokens can be calculated as follows:
TVL = 500 Token ABC x $20 = $10.000
Thus, the total TVL for the DeFi protocol is:
TVL Total = TVL Token XYZ + TVL Token ABC = $10.000 + $10.000 = $20.000
Why are Crypto TVL Metrics Important for Investors?
Quoting investopedia.com/total-value-locked, TVL is becoming an important metric in crypto assets because it provides investors with a measurement tool to help define the risks and potential benefits of investing in a particular DeFi platform.
If a platform has many assets locked in its network, it gives the impression that it is a safe platform trusted by crypto investors.
The conditions are similar to traditional banks, where investors analyze an institution’s level of deposits.
If a bank attracts deposits, it can make money by lending or investing it.
While deposits decrease, the opposite happens, i.e., the bank cannot lend as much, resulting in less income.
The DeFi boom from 2020 to 2022 happened because financial platforms used their decentralized nature to offer high annual percentage rates (APRs) for staking and lending.
It also comes when global central banks pursue collective monetary policies relying on near-zero interest rates to promote growth.
At its peak in December 2021, decentralized applications had a TVL of over $179,000,000,000. Over the next few months, the peak in tech stocks reduced investors’ appetite for risk, and speculative capital was withdrawn from the crypto sector.
Central banks also undertook aggressive interest rate tight cycles to fight inflation, and investors turned to the safety of government deposits. As of October 24, 2023, the TVL for the crypto sector stands at around $40 million.
What are the Cons of TVL Crypto?
Quoting investopedia.com/total-value-locked, please note that TVL will only provide a snapshot of the total value of assets locked in a platform and does not highlight activity levels. If a platform has a high TVL but low user activity levels, then it may mean that a small number of investors are contributing TVL to the platform.
Generally, that is a red flag and requires further investigation. Investors should also check the data practices of third-party analytics platforms to ensure that all TVL figures are current.
The DeFi industry is not immune to the downfall of trusted institutions, as happened with the collapse of the $60 million Terra (LUNA) lending protocol in 2022. That highlights another problem with TVL: the assets involved in the calculation may not be as secure as believed.
That can make it more difficult for users to assess the true value of a project accurately, but it shouldn’t be a problem when valuing DeFi projects or dApps with a strong reputation.
TVL is a useful metric for assessing the quality of a decentralized finance project or application, but it should not be the only measure used for an investment.
In that regard, investors can conduct careful analysis in other areas, such as the experience of the founders, the platform’s governance model, tokenomics, or the size of the platform’s community.
Example of a DeFi Platform with TVL Crypto Value
Quoting cermati.com/artikel/tvl-crypto, almost all DeFi platforms have Total Value Locked (TVL).
However, the size of the TVL depends on the popularity among crypto investors and the number of tokens locked in. Here are five examples of DeFi platforms with the highest TVL among them:
1. Lido Finance
Lido Finance is a DeFi platform that focuses on Liquid Staking Derivatives (LSD). As of March 2023, Lido Finance has a TVL of $10,460,000,000. The platform allows users to stake ETH tokens and earn stETH tokens as proof of staking. stETH owners can access various DeFi services and features on this protocol.
2. Maker DAO
Maker DAO is a Decentralized Autonomous Organization (DAO) that designs DAI stablecoins and develops decentralized lending services on the Ethereum blockchain. As of March 2023, the TVL value on this protocol reached $7,710,000,000.
3. Aave
Aave is a DeFi platform with a TVL of $5,600,000,000 as of March 2023. The platform makes it easy for users to make crypto asset loans and earn returns. Originally known as a decentralized lending platform, Aave was built on Ethereum and is famous for its fast loan service.
4. Curve Finance
As an example of the fourth DeFi platform, Curve Finance is a DEX (Decentralized Exchange) platform with an Automated Market Maker (AMM). As of March 2023, the TVL of this protocol reached $4,600,000,000. Curve Finance offers efficient services for crypto token exchange with low fees and slippage.
5. Uniswap
Uniswap, the first DEX protocol on the Ethereum network, is known as the pioneer of the DEX platform. As of March 2023, Uniswap has a TVL of $3,700,000,000.
5 Crypto Assets with the Highest Total Value Locked
Quoted from defillama.com, here are the five (5) crypto assets with the highest Total Value Locked (TVL) as of September 12, 2023:
|
Name |
Chain | Category |
|
Lido (LDO) |
Ethereum, Solana, Moonbeam, Moonriver, Terra Classic |
Liquid Staking |
|
MakerDAO (MKR) |
Ethereum |
Collateralized debt position (CDP) |
|
AAVE (AAVE) |
Ethereum, Polygon, Avalance, Arbitrum, Optimism, Base, Metis, Fantom, Harmony |
Lending |
|
JustLend (JST) |
Tron |
Lending |
| Uniswap (UNI) |
Ethereum, Arbitrum, Polygon, Optimism, Celo, Base, BSC, Avalance |
Dexes |
1. Lido
Lido is a DeFi protocol designed to solve staking issues on Ethereum that can limit economic activity and inhibit users from seeking additional profits.
Lido provides an alternative to Ethereum staking, typically regulated by centralized, custodial exchanges. With a market share of 74.1%, Lido is one of Ethereum’s largest liquid staking platforms.
2. MakerDAO
MakerDAO is a crypto asset lending platform that operates on the Ethereum network. Maker offers loans in the form of DAI stablecoin with crypto assets as collateral locked in smart contracts.
3. Aave
Aave adalah protokol yang memungkinkan pengguna mendepositokan aset kripto untuk mendapatkan bunga sekaligus meminjam aset kripto untuk investasi atau kebutuhan lainnya.
4. JustLend
JustLend is a specialized lending protocol on the Tron network. This protocol has two functions, as lenders and borrowers, who can interact directly with the protocol to earn interest determined by the algorithm.
5. Uniswap
Uniswap is a DEX application that facilitates exchange transactions between ETH and ERC-20 tokens on the Ethereum blockchain.
Is TVL Crypto and Liquidity Related?
It is often misunderstood, so it is worth noting that Total Value Locked (TVL) is not the same as liquidity. TVL only reflects how many assets are locked in a protocol, not how many assets are tradable.
What is the Difference and Relationship between TVL Crypto vs Marketcap?
Quoting investopedia.com/total-value-locked, the difference between TVL and market capitalization is that the former calculates the value of digital assets locked in an application. At the same time, the latter is the market value of the project that develops and operates the DeFi platform or dApp.
Meanwhile, to quote cermati.com/artikel/tvl-crypto, last but not least, many people are also confused about the difference between TVL and market cap or market valuation.
As we know, market capitalization is the total market value of all crypto tokens that have been issued by a blockchain platform or protocol.
In that regard, the TVL value indicates how much asset value is locked up in the protocol. At the same time, market capitalization measures how much asset is circulating in the market as a whole.
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