What is TVL and how to calculate it?
TVL stands for Total Value Locked and refers to the total amount of cryptocurrency held in smart contracts. Although this indicator is typically expressed in USD, but some protocols consider it in ETH.
The dynamic indicator is only available for DeFi platforms and is used to calculate the amount of funds locked in liquidity pools by providers. TVL is one of the key metrics for assessing a protocol or smart contract at a given point in time. When compared to the traditional valuation of a financial asset or a company, it is similar to a market value indicator.
There are two levels of Total Value Locked calculation:
1. TVL of liquidity pools represents the value of tokens locked in a specific pool. In other words, it serves as a measure of the cryptocurrency supply protected by a single smart contract. The higher it is, the more interest users have in the app.
2. TVL of the protocol as a whole represents the amount of funds blocked in the project. MakerDAO, for example, has $5.95 billion at the time of writing. And dYdX is currently having only $397.8 million, with volume continuing to decrease.
How TVL is calculated
Let's take the Uniswap DEX exchange as an example. This dApp was the first to develop automated market makers (AMMs), which allow users to exchange tokens without the use of intermediaries. Anyone, for example, can deposit funds into liquidity pools representing paired tokens (such as wBTC-ETH).
Smart contracts lock up user funds, transforming them into liquidity providers (LPs). When other traders want to obtain any of these tokens, they connect to this pool to withdraw its liquidity. Each pool has its own TVL, which shows how many tokens have been locked.
In turn, LPs receive a portion of the proceeds from the token exchange. When all of these pools are combined, we can see the total liquidity of a specific smart contract on Uniswap. We can then combine all liquidity pools from networks other than Ethereum, such as Arbitrum, Polygon, Optimism, and Celo. If we add the value of all locked tokens in all pools, expressed in USD, the total locked value of Uniswap at the time of writing is $2.46 billion.
This is a positive indicator, and the website now has the potential for financial development.
However, it is important to note that TVL does not consider the percentage of the income of liquidity providers or outstanding loans of protocol clients. In other words, you see the net value of the deposited assets, excluding the project's debt to users. TVL only reflects the value of smart contract deposits.
TVL is the main metric used to gauge public interest in a given protocol or dApp. We recommend that you check this indicator through public services before locking funds in the pool. The most popular is defillama.com. Any project with a TVL of less than $1 billion is considered high-risk.