What is Total Value Locked (TVL)?

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Total Value Locked or TVL for short is a formula that shows an indicator of how much asset value is ‘locked up’ or staked in a Defi lending or money market. More specifically TVL can be used to track the category of DeFi referred to as the Yeilding Market. TVL numbers are often found in DeFi tracking sites and are most commonly seen used through USD, ETH, and BTC.

To calculate a DeFi money markets TVL a formula must be enacted. By multiplying the Circulating Supply by the Current Price you find the Current Market Cap. Then by dividing the Current Market Cap by the max supply and the current price you are left with Total Value Locked. This TVL is considered by many to be a good indicator of when an asset is over or undervalued. High TVL usually indicates a more active DeFi Market and often indicates greater levels of Yield Farming.

To track various TVL’s various tracking sites provide up to date metrics on the market. Defi Pulse, DeBank, and DefLlama are considered to be leading TVL tracking services. These services and TVL in general are used as a means of giving a broad assessment of the health of a market.

Criticisms

One of the main criticisms of TVL as a valuation metric is that it may be yielding something of a false positive in terms of growth and there are various reasons for this possibility. 

DeFi ecosystems while still being involved in the movement of billions, are still relatively small when compared to other financial markets. As such there are some key stakeholders, often referred to as ‘whales’ whose activities and financial patterns disproportionately ‘move the needle’ in terms of market growth. 

As such these large stakeholders by hyping up a new asset or piece of technology can lead to the market speculatively investing on an increasingly short-term level, rather than more stable long-term utility. This increased focus on short-term growth can increasingly destabilize a market, and in a  market as interconnected as DeFi this could theoretically lead to disastrous ‘contagion’ effects. As one market upset could rapidly spread into other connected markets. 

In this sense, inaccurate TVL ratios may be of serious concern when interacting with DeFi markets. And many different tracking sites have come under some criticism for the possibility of double and even triple counting of TVL ratios. With different tracking sites using different methodologies, people have begun searching for the most accurate. DeFi Pulse has come under some of the heaviest levels of criticism, to which Founder Scott Lewis has strongly countered. Claiming Defi Pulse’s methodology specifically accounts for double counting and that DeFi Pulse is likely the most conservative of TVL Tracking sites.