What Is Total Value Locked (TVL) in Crypto?

The TVL measures the total value of assets deposited in a particular decentralized finance (DeFi) protocol. It's also possible to calculate the TVL of the entire blockchain ecosystem by aggregating the TVLs of all the different DeFi protocols on that blockchain.

To better understand TVL, imagine that you deposit $1,000 into a DeFi protocol that allows you to earn interest on your deposit. Your $1,000 is now locked or staked in the protocol. Now, if ten other people also deposit $1000 each into the same protocol, the TVL of the protocol becomes $11,000.

How to Calculate TVL

TVL is a way to quantify the level of activity and adoption within a DeFi ecosystem. To calculate TVL, determine the total value of all assets currently locked on that platform. This includes all locked assets, such as collateral, staked, and borrowed assets.

Then convert the value of the assets to a standard unit, such as USD or another fiat currency. Finally, add the total value of all assets to determine the TVL of the DeFi protocol.

Data aggregators are popular sources for tracking TVL in DeFi. These platforms collect data from various DeFi protocols and aggregate it into a single dashboard, making it easy to track the overall growth and adoption of the DeFi ecosystem.

Why Does TVL Matter in DeFi?

TVL is an important metric for understanding the state of the DeFi ecosystem, as it can help users assess the potential of a particular protocol. Here are some of the reasons why TVL is important in DeFi:

1. TVL provides insight into the overall health and growth of a DeFi protocol or platform. A higher TVL generally indicates greater adoption and activity within the ecosystem.

2. TVL can be used as a measure of how much liquidity is available within a particular DeFi ecosystem. The more liquidity there is, the easier it is for users to trade, borrow, lend, or swap assets.

3. A high TVL can also make a DeFi platform more attractive to users. A platform with a large amount of assets locked in may be more trustworthy and stable than a platform with a lower TVL, as it suggests that more users are willing to entrust their assets to the platform.

However, TVL shouldn't be used as the sole metric for evaluating DeFi projects. It's only one of many factors that should be considered in a comprehensive evaluation of DeFi projects. 

In addition, it's important to note that the TVL can fluctuate as users add and remove assets, so it's important to check the TVL regularly to get an accurate picture of the current state of the ecosystem.

Also learn: 7 Indicators Every DeFi Investor Should Know