What is total value locked (TVL)?
Total value locked (TVL) measures the total value of assets users have deposited in DeFi protocols. Examples include deposits on lending platforms and tokens in liquidity pools on decentralized exchanges.
A protocol’s TVL measures the assets deposited in that application. A blockchain’s TVL combines the TVL of DeFi protocols operating on that network. It does not represent the total value of all tokens on the blockchain.
TVL helps put the size and development of comparable protocols or blockchain ecosystems into perspective.
How is TVL calculated?
TVL is calculated by multiplying the amount of each deposited token by its current market price and adding the results together.
Example: A DeFi protocol holds $8 million worth of ETH and $2 million worth of stablecoins. Its TVL is $10 million.
TVL changes as users deposit or withdraw assets and as token prices fluctuate. If the price of ETH rises, for example, TVL can increase even without any additional deposits.
What does the market cap to TVL ratio mean?
This ratio compares a token’s market capitalization with the value locked in its associated protocol or blockchain ecosystem:
Market cap/TVL = Token market capitalization ÷ TVL
For example, a market cap of $2 billion and a TVL of $1 billion give a market cap to TVL ratio of 2.
A low ratio means the token’s market value is small relative to TVL. It does not necessarily mean the token is undervalued. You also need to consider whether and how the token benefits from the protocol’s use. Comparisons are most useful between projects with similar structures.
What are the limitations of TVL?
TVL is a useful metric, but it does not fully capture a project’s usage or quality:
Not a user count: A small number of large depositors can account for a high TVL.
Not proof of security: A large amount of deposited capital does not prevent bugs or exploits.
Affected by token prices: Rising TVL does not necessarily mean new capital is flowing in.
Deposits may be temporary: Reward programs can attract capital that leaves once the incentives end.
Dependent on methodology: Data providers may include different types of deposits. DefiLlama, for example, excludes native blockchain staking from TVL.
Consider TVL alongside other metrics, such as active users, trading volume and fee income.
Since 2017, Philipp Duringer has been deeply involved in Bitcoin, crypto assets and digital financial markets. As the founder of Coinbird, he combines years of crypto experience with more than 15 years of technical experience in IT and digital products. His goal is to make crypto easier to understand, more transparent and easier to compare.
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