When evaluating DeFi projects, the TVL (Total Value Locked) indicator plays a crucial role. We explain TVV to you here and provide meaningful examples related to DeFi on Ethereum (ETH) and others.
Decentralised Finances (DeFi) have proven to be a fundamental growth driver for the crypto industry. To measure this soberly in numbers, one usually makes use of the key figure TVL. The abbreviation stands for “Total Value Locked”, roughly translated as “fixed capital”. Data services such as DeFiLlama show how the assets contributed to DeFi across all projects together exceeded the US$10 billion mark for the first time in September 2020, and even after the crash of Terra (LUNA) and UST, TVL currently still totals well over US$100 billion.
While TVL’s curve for the overall DeFi market depicts general trends, investors like you analyze in a more nuanced way. You get the figures broken down by blockchains, cryptocurrencies or protocols, for example, from DeFiLlama or also DeFi Pulse. Because the rule of thumb is: the more capital has been committed to a particular project, the more likely there is a professional team, a mature product and high standards of security. Important: DeFi Pulse evaluates data for the ecosystem around Ethereum (ETH), DeFiLlama is much broader.
How is TVL calculated?
Basically, the metric TVL is calculated by converting the number of tokens of the respective cryptocurrency brought to DeFi into US dollars times the current market price. In the case of Ethereum, however, ERC-20 tokens are often also added, and in the case of protocols such as LIDO, there are cryptocurrencies from different ecosystems flowing together at once. The aforementioned data services break down these details and also allow, for example, to exclude staking for the calculation of TLV. TVL can also be used to quantify the “ratio” indicator, which relates the general market capitalization of a specific cryptocurrency to the capital defined at DeFi.
Many experts give investors two tips here: TVL for a project or cryptocurrency should be at least $1 billion to assume high security standards. Ratio values of less than 1 indicate undervaluation, while high ratio values could indicate overvaluation.
TVL applied in practice
Let’s take a look at the current TVL charts together. With around $72 billion TVL, Ethereum is still the benchmark for DeFi, with ETH and ERC-20 tokens accounting for more than 60 percent of all capital invested with DeFi. Second most important ecosystem is Binance Coin (BNB) with the Binance Smart Chain (BSC). Initiated by the world’s largest crypto exchange Binance, the increasingly independent ecosystem has reached 8 billion TVL and 8 percent market share.
This market dominance of Ethereum is also reflected in the most capitalized DeFi protocols. MakerDAO (TVL just under $10 billion) is number one here, followed by Curve with $9 billion. Both protocols are attractive mainly due to their linkage with Ethereum. For BSC and BNB, PancakeSwap is the flagship project with TVL of just over USD 4 billion.
Bottom line: include TVL in DeFi strategies.
Those who invest capital in Ethereum and co. towards DeFi can achieve good returns there with methods ranging from staking to yield farming. However, when making a concrete decision for a project or protocol or the underlying cryptocurrency, your own research is indispensable. Where fabulous returns of 20 percent and more are promised, skepticism is called for, as the fate of LUNA and UST with the linked protocol Anchor painfully demonstrated. TVL as a measure of market share and trends is an indicator that is very important in DeFi – but as a stand-alone indicator, it would not have warned against Terra and Anchor.