TVL in cryptocurrency: a key indicator for evaluating the DeFi ecosystem

Why TVL Matters for Crypto Investors

If you’re new to DeFi, you’ve probably heard of TVL (Total Value Locked). It is one of the most critical indicators for understanding the health and development of decentralized finance. TVL reflects the total value of assets that users have locked in various DeFi protocols and platforms. Simply put — it’s the money people have “deposited” into smart contracts, expecting returns or other benefits.

A high level of TVL in the crypto ecosystem signals that users actively participate in DeFi and trust the protocols with their assets. It indicates that the platform is attractive and likely provides good conditions for trading, lending, and asset swapping.

How TVL Works in Practice

Imagine a simple scenario: you deposit $1000 USDT into a DeFi protocol to earn interest on your deposit. Your $1000 assets are now considered “locked.” If ten more investors do the same and also deposit $1000 each, the total TVL of this protocol will reach $11 000.

At the level of an entire blockchain, such as Ethereum or Solana, (TVL is calculated by summing all locked assets across all DeFi protocols on that network. This allows assessing the scale of the entire DeFi ecosystem within a specific blockchain.

TVL Calculation Methodology

Calculating TVL involves several steps:

1. Asset Identification — all types of locked assets must be considered: collateral ), staking assets, borrowed funds, and other financial instruments on the platform.

2. Currency Standardization — all values are converted into a single measurement unit, usually USD or another fiat currency. This enables comparison of protocols across different blockchains.

3. Data Aggregation — all assets are summed to produce the final TVL figure. Specialized data aggregators are used in the crypto space to collect information from various DeFi protocols and display it on a unified dashboard.

What TVL Indicates About DeFi

Liquidity and Trading Convenience — a high TVL means there is sufficient liquidity on the platform. Users can trade, borrow, lend, and swap assets more easily without significant slippage.

Reliability and Scale — a platform with a large TVL is generally perceived as more stable and trustworthy. When many investors are willing to lock their assets in a protocol, it indicates its security and reliability compared to protocols with low TVL.

Ecosystem Growth — changes in TVL show whether the DeFi ecosystem is expanding. Growing TVL indicates increasing adoption and user interest, while a decline may signal capital outflows or loss of confidence.

Important Nuances in Analysis

However, when evaluating DeFi projects, one should not rely solely on TVL. It is just one of many metrics. It’s also essential to consider protocol security, fee structure, development history, and the team behind it.

Additionally, TVL can fluctuate significantly depending on user actions — adding or withdrawing assets. For this reason, it’s recommended to regularly check TVL metrics across different platforms to get an up-to-date picture of the DeFi ecosystem’s state.

Using TVL as an analytical tool in conjunction with other metrics allows investors to make more informed decisions in the crypto space.