TVL in DeFi: why this metric is critical for evaluating protocols

Why investors monitor the volume of locked assets

The TVL metric (Total Value Locked) has become one of the key indicators of the health of the decentralized finance sector. It reflects the total amount of crypto assets that users have deposited into various DeFi protocols. To understand the essence, imagine a simple example: you deposit $1000 into a DeFi protocol, expecting income from the deposit. Your funds are now locked on the platform. If ten more participants do the same, the total TVL of the protocol will reach $11 000. This total volume is the main benchmark for assessing the scale and attractiveness of the platform.

How is TVL calculated and why is it needed

The calculation of TVL is based on a simple principle: it is necessary to determine the total value of all assets that are frozen within the protocol at a specific point in time. This calculation includes all types of locked funds — collateral, assets in staking mode, borrowed resources, and other forms of capital lock-up.

After determining the number of assets, their value is converted into a universal unit of account, usually USD or other fiat currencies. The final stage is summing all the converted values to obtain the final TVL figure for a specific DeFi protocol.

To track these indicators across various protocols and ecosystems, there are specialized monitoring platforms. They aggregate information from numerous DeFi protocols, consolidating data on a single information dashboard. This makes it possible to track overall growth trends and the level of adoption of the decentralized financial sector.

The Meaning of TVL as a Barometer of DeFi Development

TVL serves as a reliable indicator of the state and prospects of a specific protocol or the entire blockchain ecosystem as a whole. That's why this parameter is so significant:

Assessment of activity and trust levels. High TVL values demonstrate wide recognition of the protocol by users and the intensity of its use. This indicates the willingness of investors to entrust their assets to the platform.

Measuring liquidity in the ecosystem. TVL directly correlates with the volume of available liquidity in the DeFi protocol. A larger volume of locked funds means more opportunities for trading, lending, and exchanging assets, making the platform more functional and attractive.

Stability and reliability indicator. A protocol with a large amount of locked capital is usually perceived as more stable and secure. This size of TVL serves as a signal that the community has already verified the platform for reliability and is ready to participate in it.

Limitations of TVL as the Sole Evaluation Criterion

Despite the importance of TVL, it should not be used as the sole criterion when selecting a DeFi protocol for investment. It is just one of many parameters that require analysis. It is important to remember that the value of TVL is dynamic—it constantly fluctuates depending on the actions of users who add or withdraw their assets.

To get a complete picture of the state of the DeFi ecosystem, it is recommended to regularly monitor the TVL indicator, while also analyzing other metrics: the quality of smart contracts, the reputation of developers, the level of security audits, and overall market trends. Only a comprehensive approach will allow for informed investment decisions.