The Total Value Locked (TVL) is a key metric for determining investors’ confidence in a blockchain project. It is the value of digital assets that are staked, deposited, or locked in Decentralized Finance (DeFi) protocols and apps (known as dApps).
Investors often pay great attention to the TVL when considering a project. It is regarded as a health indicator of a cryptocurrency, as it measures multiple factors that may shed light on the token’s adoption rate.
What is the TVL composed of?
Below are some of the DeFi activities that contribute to the TVL of a cryptocurrency:
Liquidity: Crypto holders can also provide liquidity (liquidity providers) in decentralized exchanges, where virtually anyone with a crypto wallet can buy and sell tokens. In exchange for providing liquidity, a share of the fees charged by the decentralized exchange is sent to the liquidity providers. It is also known as yield farming.
Staking: As noted earlier, Staking is locking your tokens in exchange for a fixed or dynamic yield. The yield is calculated as an Annual Percentage Rate (APR) or an Annual Percentage Yield (APY). Holders of layer one chains such as Ethereum can also use their tokens to secure the network, contributing to the TVL.
Borrowing and lending: When cryptocurrencies are used in borrowing and lending platforms, including collaterals, they are factored into the TVL.
High TVL shows more money is available in the ecosystem. When more capital is available in the token’s ecosystem, it acts as a positive signal for potential investors as it shows high interest in the crypto project.
How to calculate the TVL?
Rather than attempting to calculate the TVL on your own, there are free blockchain analytics platforms that do the job for you.
Here is a list of platforms you may use for measuring the TVL of crypto projects:
1. DeFiLlama
2. DappRadar
3. Glassnode Studio (contains paid features)
The most popular platform is DeFiLlama. The TVL across numerous chains and tokens is presented, including other data such as revenue and fees.
ETH TVL | source
The TVL chart shows Ethereum reached its peak in 2022. The recovery started in 2024 and currently stands at around $77 billion TVL.
You will also notice that as the TVL increased, so did the ETH price in the market.
ETHUSD price chart | source
While it is true that if Ethereum’s value increases, so does the value of the locked ETH, there are occasions where the TVL spikes ahead of meaningful price movement.
Likewise, when the TVL drops, it is often reflected in a lower value of the cryptocurrency.
What affects the TVL?
There can be numerous reasons why a cryptocurrency’s TVL rises or falls. Below are the most popular triggers for a surge or rapid decline in the total locked value.
What contributes to a high TVL?
- Mainnet launch/upgrade: If the project’s network is due to go live or undergo a major upgrade, traders often buy and stake the cryptocurrency before the event. As a result, the TVL may rise.
- Partnerships: A major partnership announcement indicates confidence and affirms the project’s legitimacy. TVL could rise as a result.
- New features: When the blockchain project developers reveal a new feature, the market assesses its potential. If regarded as meaningful, it may bring more money to the ecosystem, thus leading to a higher TVL.
What contributes to a low TVL?
- Exploits: When the smart contracts of the cryptocurrency are exploited, investors rush to unlock their tokens. In turn, the TVL may decline.
- Departures: When a notable figure from the project, such as a reputable developer, decides to leave, investors may lose confidence and, in turn, withdraw their locked tokens from DeFi protocols, leading to a drop in the TVL.
- Delayed upgrades: Every project has a roadmap outlining the expected upgrades/features to the token. Investors do not react positively to the news when a major upgrade is delayed (sometimes constantly delayed). As a result, the TVL tends to drop. Cardano (ADA) is an example of a project that delayed upgrades in the past.
The drawbacks
While the TVL is an important indicator, it does not measure user activity. Millions of dollars may locked with minimal user activity, which reflects the token’s inability to create attractive uses.
There may also be instances where the TVL is exceptionally high (possibly due to manipulation) but has low trading volumes and minimal on-chain activity. It is, therefore, important to assess multiple factors and not rely solely on the TVL metrics.
There may also be incidents where the staked assets are counted (by error) multiple times, especially when used as collateral for borrowing and lending across different DeFi protocols.
Look for new stablecoins on the chain
Some more conservative crypto holders opt for stablecoins to limit their exposure to price fluctuations. Many stablecoin providers exist, some of which are more popular than others.
When a new stablecoin is minted on the chain, it is often associated with higher user activity. Stablecoins are only minted on layer 1 (such as Ethereum, Solana, and Cardano) and layer 2 chains (Optimism, Base, and Arbitrum).
If a token was launched on Solana and a new, popular stablecoin is minted on the chain, Solana may see higher user activity and a higher TVL that may draw more money into the network. As a result, Solana’s price may increase, and tokens that are based on Solana may see an uptick in their value.
