What is Total Value Locked (TVL)?
Total Value Locked or TVL is a formula that shows the total value of all crypto assets locked up (or staked) in a Defi (decentralized finance) protocol. TVL is often used to represent the total activity, interest and even value of a Defi protocol for potential investors. This number is usually represented in USD, although some protocols represent the number in total ETH or BTC value.
How to calculate total value locked
You can calculate the total value locked in a Defi protocol by taking the total number of tokens staked on that protocol and multiplying that total by the current value of each token in USD.
If a protocol allows users to stake many different types of tokens (which is usually the case), the TVL of each individual token type should be calculated separately and then added up together to arrive at the protocols total value locked.
For example, if a protocol allows users to stake three different token types (Token A, Token B, and Token C), one would need to take the total number of Token A staked and multiply that by the current value of each individual Token A in USD. They would then repeat that process for Token B and Token C and add up the results of all three token types to arrive at the TVL (in USD) for the entire protocol.
Rather than figuring out the total value locked on a protocol by yourself, you can often use Defi tracking sites, such as Defi Pulse, DeBank, or DefiLlama to search for the TVL of most major Defi protocols.
One of the main criticisms of TVL as a valuation metric is that it can often misrepresent the true health and activity on a given Defi protocol. There are various reasons for this possibility.
One is that Defi protocols are often dominated by key stakeholders (referred to as ‘whales’) whose activities and financial patterns disproportionately ‘move the needle’ in terms of protocol metrics. In other words, TVL does not give any way to authentically show which assets (and which percentages of the TVL) are controlled by which participants. This means that one whale could control a huge percentage of the TVL (sometimes even 90% plus).
This would obviously give potential investors a false sense of the health and activity on the protocol, since this one whale could cause such a huge percentage of value to disappear should they choose to remove their tokens.
More troublesome is that these large stakeholders are often financially incentivized to intentionally overhype the activity on the protocol to attract new stakers and investors.
Therefore, while an important metric, TVL should not be considered alone and should be closely scrutinized and combined with other metrics when considering whether or not to invest or stake in a given platform.