The Total Value Locked ( TVL ) DEFI projects or blockchains in general. This indicator measures the total quantity of assets blocked in a project, whether on decentralized financial protocols or in the native mechanisms of a blockchain. It quantifies the interest and the confidence that users and investors give to an ecosystem. This article aims to analyze in depth what TVL , how it is calculated, and why it is essential to assess the solidity of crypto projects.
Table of contents
What is TVL in crypto?
The Total Value Locked ( TVL ) represents the total value of the assets blocked in a crypto project or a blockchain. It is an essential metric to assess the health and adoption of a project in the DEFI ecosystem. TVL TVL having a specific role in decentralized protocols.
TVL TVL can also be assessed in the native cryptocurrency of the project (for example, ETH for Ethereum ). This approach makes it possible to better understand the evolution of TVL , regardless of market price fluctuations.
How is TVL calculated?
The total Value Locked ( TVL ) is calculated by adding the value of all the assets blocked in a project or a blockchain. Several elements are taken into account to obtain this figure, notably staking , decentralized exchanges (DEX) and intelligent contracts used for financial instruments such as loan and loan.
Staking staking process by which users lock their cryptocurrencies to participate in the validation of transactions on a blockchain, as in the case of blockchains using the Proof of Stake (POS) . In exchange, they receive awards in the form of new cryptos. These stake funds are included in the TVL .
Decentralized exchange pools (DEX) : users can drop their cryptos in liquidity pools on decentralized exchange platforms like Uniswap , PANCAKESWAP, or Drift . These liquidity allow other users to exchange cryptos directly without intermediaries. In return, liquidity suppliers gain part of the transaction costs, and their deposits increase TVL .
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Intelligent contracts : These autonomous programs perform transactions automatically as soon as the conditions defined are met. They are used in financial instruments such as loan and loan . For example, a user can deposit cryptos as guaranteed in an intelligent contract on a platform like Aave or Compound , then borrow other assets in exchange. As long as the conditions are met, the contract automatically manages the process, including the reimbursement and unlocking of the guarantees.
A concrete example: imagine that a user deposits USD 100,000 from Ethereum in a liquidity pool on Uniswap . These funds will be used by other users to exchange Ethereum Ethereum other cryptos. Simultaneously, this user can receive liquidity tokens in return, which themselves can be reinvested in other DEFI protocols Yield Farming strategies .
- The guarantees for stablecoin S : Some platforms allow users to deposit cryptocurrencies as a guarantee to issue stablecoin S (cryptos whose value is generally indexed to the US dollar). For example, on Makedao , users can lock Eths in an intelligent contract to obtain DAIs , a stablecoin . This guarantee is included in the TVL , as these funds are blocked in the protocol.
In summary, the TVL includes all the funds that are blocked or engaged in these different mechanisms, making it possible to generate yields or facilitate transactions.
So when you buy Near and store it in your Personal Portfolio Near, this value is not included in the TVL (Total Value Locked). TVL represents only funds blocked in smart contracts on decentralized finance platforms (DEFI). It measures the value of the assets engaged in DEFI protocols, such as loan platforms, liquidity pools, or stakingservices, where funds are effectively used or blocked for specific activities.
Thus, if your Near Tokens are simply stored in your personal wallet, they are not counted in the TVL , because they do not actively participate in contracts or protocols DEFI on the Near blockchain. In order for your NEAR to be included in the TVL , you should put them on decentralized applications ( DApp S staking , decentralized (DEX), or loan platforms
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Why is TVL an essential indicator for investors?
TVL is a key indicator for investors because it makes it possible to assess the health of a protocol, its ability to attract capital and the TVL that users grant it. Indeed, a TVL reflects a strong adoption, which means that many users block their funds in the protocol, whether for activities such as staking , liquidity pools , or loan and borrowing via smart contracts. This shows that the project offers attractive financial products and encourages investors to place their assets.
However, it is important to note that the evaluation of TVL in dollars can sometimes be misleading. A large part of the funds blocked in a protocol are cryptocurrencies , the value of which fluctuates strongly compared to the stablecoin s . Consequently, a drop in TVL in USD may not reflect a real drop in the quantity of cryptos engaged, but simply a fluctuation in the price of underlying assets. To obtain a real health assessment of the protocol , it may be more relevant to assess the TVL in the native currency of the project, such as ETH for Ethereum Ethereum the soil for Solana . This makes it possible to analyze the performance of the protocol independently of market price variations speculation of investors who buy the token without blocking it in the protocol.
In summary, the evolution of TVL is a crucial indicator to follow the confidence of investors , the financial stability of a project, and its ability to offer attractive return opportunities , while taking into account natural fluctuations in the cryptocurrency market.
TVL and capitalization: not always a direct link with the value of cryptos
TVL TVL project and its market capitalization are not always directly correlated. Indeed, a protocol with strong TVL does not necessarily imply a high market capitalization . Some projects attract a lot of funds blocked in their smart contracts, but the purchase of their token remains unattractive for investors, which leads to relatively low capitalization. This can be explained by the value capture of the token: if the latter does not have a central role or a clear utility in the protocol, investors may not feel obliged to buy it, even if many funds are blocked in the project.
Conversely, certain projects with low TVL can benefit from high market capitalization thanks to strong speculation around their token. This generally happens when investors bet on future development promises or strategic partnerships, rather than the real value of funds blocked in the protocol.
In addition, the different roles of tokens within protocols can affect investor incentives. Some tokens are essential to participate in specific actions , such as staking or governance, while others can have a more peripheral function, which influences them on the market. For example, a protocol that obliges its users to buy and have its token to access certain functions or to obtain yields can see its capitalization increase, even if its TVL remains modest. Conversely, a protocol that does not directly bind its token to key activities can have an TVL without however its capitalization follows the same trajectory.
Thus, although TVL can be a good indicator of the health of a project , it is essential not to confuse this figure with market capitalization , because the dynamics between the two depends on multiple factors related to value capture and the roles allocated to token in the protocol.
Liquidity Providing and Yield Farming: their impact on Crypto TVL
These two DEFI mechanisms are directly linked to TVL because they depend on the funds blocked in smart contracts.
Liquidity Providing
The Liquidity Providing consists of depositing cryptomonnaies in liquidity pools on decentralized exchange platforms ( DEX ), such as Uniswap , Drift or DYDX .
These DEFI protocols largely depend on the liquidity brought by users. The more liquidity there is, the higher TVL These funds allow users to carry out transactions on the platform, and in exchange, liquidity suppliers are rewarded with a share of transaction costs and native tokens of the platform.
Yield farming
The Yield Farming , on the other hand, consists in using the liquidity already deposited in the DEX, which are then reinvested in different DEFI protocols to generate higher yields. Users thus obtain awards in the form of additional tokens. In practice, Yield Farming often involves funds blocked in several protocols at the same time, which contributes to increasing the TVL of the ecosystem.
These mechanisms allow investors to have assets while generating capital gains .
Factors influencing TVL in crypto
Several factors can influence the TVL of a project, apart from market fluctuations:
Fluctuation in cryptocurrencies' prices : as TVL is generally calculated in US dollars, a drop in the price of cryptocurrencies can lower TVL , even if the amount of blocked assets remains constant. It is therefore useful to follow the TVL both in fiduciary currency and in native crypto to have a clear overview.
Incentives : Incentives (or incentives) are rewards offered to users to block their funds in a protocol. This may include high yields, additional tokens, or advantages such as reductions in transaction costs. These incentives are essential to maintain or increase TVL , as they encourage users to block their funds over a long time.
Network effect : The more users a project, the more its TVL tends to grow. This snowball effect strengthens the credibility of the project and attracts new participants.
Wash Trading: A TVL trap
Wash Trading is a common practice in certain DEFI protocols and exchange platforms . It consists of performing artificial transactions between accounts controlled by the same person or entity to inflate trading volumes and, potentially, TVL of a project. This gives an impression of increased liquidity or popularity, deceiving investors on the true health of a project.
How to locate the Wash Trading?
Wash trading can be detected by observing repetitive patterns in transactions volumes, or abnormally similar purchase and sale orders executed in a very short time. In some cases, analysis platforms like Nansen or Glassnode monitor these suspicious activities to warn users.
Comparison of TVL between blockchains: Ethereum vs Challengers
Ethereum : the TVL leader
Ethereum remains the dominant Blockchain in TVL thanks to its large ecosystem of DAppS and Defi protocols. However, in 2024, TVL growth on Ethereum stabilized, while emerging blockchains experienced a dazzling ascent.
Solana, Suis, Aptos and Base: Expanding Challengers
In 2024, Solana , Suis or even Aptos stood out by rapid growth in their TVL . Solana , thanks to its ability to treat a large number of low -cost transactions, attracts an increasing number of projects and users with TVL from $ 330 million in October 2023 to 5.6 billion in October 2024 , corresponding to a variation of 14 million to 39 million soil locked in the protocol.
Conclusion
The Total Value Locked ( TVL ) is an essential indicator for assessing the health and solidity of projects in the crypto ecosystem, whether it is deffi or blockchains. It is crucial to analyze not only the gross value of TVL , but also its evolution over time, the incentives offered, and practices like Wash Trading. With challengers like Solana , Suit or even Aptos the future of their TVL seems promising, although the Ethereum continues to dominate.
FAQ on TVL in the crypto
1. What is Crypto TVL ?
The Total Value Locked ( TVL ) represents the total value of the assets blocked in the smart contracts or staking S of a crypto project, whether on blockchains or DEFI protocols. It measures user engagement and interest in a project, thus reflecting its popularity and financial solidity.
2. What is the difference between the TVL of a blockchain and that of a Defi protocol?
The TVL of a blockchain measures assets blocked in the native mechanism (such as staking) to secure the network and participate in governance. For a DEFI protocol, TVL represents blocked funds in intelligent contracts used to lend, exchange or generate yields, such as DEX or loan platforms.
3. How do Yield Farming and Liquidity Providing affect TVL ?
The Liquidity Providing contributes to TVL by allowing users to deposit cryptocurrencies in liquidity pools to facilitate transactions on DEX, thus increasing the TVL . The Yield Farming then uses these liquidity to reinvest them in other DEFI protocols, which further increases TVL by generating additional yields.
4. How to protect yourself from Wash Trading in Defi projects?
Wash Trading TVL data by artificially creating high exchange volumes. To avoid it, it is advisable to use blockchain analysis tools like Nansen or Glassnode which detect suspicious patterns of repetitive transactions. It is also important to verify the legitimacy of the trading volumes of a project before investing.
5. What is an incentive in a DEFI project and how does it impact TVL ?
Incentives incentives offered to users to block their funds in a DEFI project, generally in the form of yields, bonus tokens, or advantages such as reductions in transaction costs. These incentives attract more liquidity, thus increasing the TVL of the project.
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Yohan Uzzan
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
