In the world of decentralized finance (DeFi), an increasing number of indicators are emerging that allow for the assessment of the efficiency and reliability of various blockchain projects. One such key indicator is TVL, or Total Value Locked. This metric not only reflects the current state of affairs in the DeFi world but also provides a deep understanding of the dynamics and potential of blockchain projects.
What is TVL
Total Value Locked (TVL) is a key indicator that helps assess the value of blockchain services, protocols, or applications. The use of smart contracts in these applications leads to innovations in the financial sector, as they automate contractual processes and eliminate the need for traditional financial intermediaries such as banks and exchanges.
Smart contracts contribute to the development of decentralized finance (DeFi). Thanks to the transparency of the blockchain, which serves as a public ledger of transactions, TVL allows for monitoring the volume of funds involved in individual smart contracts and in the entire ecosystem of blockchain applications (for example, on Ethereum). TVL is a primary indicator that shows user interest in various protocols, known as decentralized applications (dApps).
Principles of Calculation and Significance of TVL
To understand the mechanism of calculating TVL, one can consider the example of Uniswap, one of the largest decentralized exchanges (DEX), which pioneered the creation of automated market makers (AMMs). This allowed users to exchange tokens without intermediaries.
Anyone can invest funds in Uniswap's liquidity pools, which consist of paired tokens. These pools lock user funds, turning them into liquidity providers. When traders want to exchange tokens (for example, USDT or ETH), they use the corresponding pool. Liquidity providers earn a percentage of the token exchange.
The total liquidity of the Uniswap exchange is determined by summing the funds of all its pools. Similarly, one can calculate TVL by combining liquidity pools of different networks supported by Uniswap, such as Arbitrum, Polygon, Optimism, Celo, and others. As of early July, the total value of tokens locked in all Uniswap pools amounted to $4.11 billion according to DefiLlama.
The same method of calculating TVL is applicable to lending protocols, such as Aave or Curve. However, certain nuances of calculations should be considered:
- TVL does not take into account unpaid loans and the yield of deposits for liquidity providers, but only reflects the value of smart contract deposits.
- When calculating TVL for an entire blockchain network (for example, Ethereum), the total TVL of all applications is considered. As of July, the TVL of all dApps in the Ethereum network was $26.77 billion, accounting for about 60% of the entire DeFi market.
It is also worth noting the significant functions of TVL
| Aspect of TVL | Description | Impact on Projects |
|---|---|---|
| Volume of Deposits | Shows the amount of funds invested in the protocol or blockchain network. | Reflects the popularity and trust of users in the project. |
| Liquidity | A higher TVL indicates high liquidity of the protocol. | Ensures efficiency and stability of operations within the project. |
| Stability of Currency Circulation | A low TVL may indicate instability. | Affects the profitability of liquidity providers and the overall state of the protocol. |
| Ratio to Market Capitalization | Comparison of TVL with the market capitalization of dApp. | Helps assess whether the protocol is overvalued or undervalued. |
| Influence of Major Investors | Large deposits or withdrawals can significantly change TVL. | Affects the stability and predictability of TVL. |
| User Activity | The total number of users influencing TVL. | Shows the real user interest and participation in the project. |
| Artificial Activity | Actions aimed at inflating activity (e.g., anticipation of airdrops). | Can distort the real picture of TVL, creating a false perception of popularity. |
The Reliability of Total Value Locked
If the market capitalization of a dApp exceeds its TVL, this may indicate an overvaluation of the protocol. Conversely, a market capitalization to TVL ratio less than one suggests potential undervaluation. This ratio for DeFi services often changes.
Market capitalization depends on the price of the main token of the service, multiplied by its total circulating supply. For example, for Uniswap, this token is UNI. Its price is influenced by market trends, listings on exchanges, protocol updates, and other events.
A lower market capitalization than TVL at Uniswap ($4.11 billion versus $4.127 billion) indicates a slight overvaluation. Platforms with a TVL of less than $1B should be considered cautiously due to risks.
Another factor affecting TVL is the actions of large investors or organizations with significant crypto assets. They can significantly increase or decrease TVL by making or withdrawing large sums.
It is also important to consider the total number of users of the protocol or blockchain.
The growing popularity of airdrops in blockchain projects leads to artificial increases in activity. People use bots and accounts to maximize actions in anticipation of airdrops, affecting TVL. Project representatives believe that developer activity (code updates) can be a more objective indicator than TVL. This activity can be tracked through Github or Developerreport.
Comments