Understanding TVL in DeFi
Total Value Locked, or TVL, is one of those metrics that seems straightforward but actually has quite a bit going on beneath the surface. It represents the total value of all assets—coins, tokens, stablecoins, even NFTs—that are locked in a protocol’s smart contracts. These assets can’t be moved until certain conditions are met, which is why they’re considered “locked.”
I think what’s interesting about TVL is how it differs from market cap. Market cap reflects the value of a protocol’s token, while TVL measures the actual assets deposited into the protocol. It’s like comparing the value of a bank building versus the actual money people have deposited in their accounts.
How TVL Gets Calculated
The calculation seems simple enough—just add up the market value of all locked assets. But there’s more to it. Protocols use oracle services to get current prices, and these can vary between different DeFi apps. For multi-chain protocols, they have to calculate TVL across all networks where they operate.
What’s locked in these contracts? Everything from liquidity vaults and lending contracts to decentralized trading pairs. The assets are used for permissionless operations like trading, lending, or generating passive yield.
One thing I’ve noticed is how TVL can be misleading during volatile markets. When ETH or BTC prices swing wildly, the dollar value of TVL changes even if the actual number of tokens locked remains constant. That’s why some people prefer looking at the amount of native tokens locked rather than the dollar value—it gives a more stable picture of growth.
Why TVL Matters and Its Limitations
TVL serves as a proxy for user trust and protocol adoption. When people lock their assets, they’re showing confidence in the protocol. Higher TVL typically means deeper liquidity pools, which is crucial for decentralized exchanges.
But here’s where it gets tricky. TVL doesn’t automatically mean a protocol is profitable or economically active. Some protocols have high TVL but very limited actual usage. And TVL can be artificially inflated through incentives like point farming, where users lock assets temporarily to earn rewards that might disappear later.
There’s also the issue of wash lending, where initial deposits are used to mint stablecoins, then buy more assets to deposit again. This can create an illusion of growth that might collapse during market downturns.
Current TVL Landscape and Tracking Tools
Looking at current numbers, Aave leads with over $43 billion locked, while Uniswap sits around $5.63 billion. Lido, as a liquid staking protocol, has about $35.56 billion in ETH locked. These numbers give you a sense of scale, but they’re constantly changing.
For tracking TVL, DeFiLlama is probably the most accessible tool. It avoids double-counting tokens and excludes liquid staking tokens from chain TVL calculations. DappRadar uses an “Adjusted Value Locked” metric that freezes token prices for specific periods, which can provide more stable comparisons.
As DeFi evolves, TVL is becoming just one piece of the puzzle. People are now looking at revenue, active users, and other metrics to get a fuller picture of protocol health. The rise of tokenized real-world assets, which surpassed $30 billion in value locked recently, adds another layer of complexity to TVL calculations.
Perhaps the biggest challenge going forward is accurately measuring real, active liquidity versus passive staking, especially with Layer 2 chains and bridged assets complicating the accounting.
