WHAT IS TVL IN CRYPTO? 📊

TVL is an acronym that stands for Total Value Locked.

TVL refers to the total value of assets locked in a DeFi protocol on a particular blockchain or ecosystem.

It reflects how much capital is currently active within a DeFi protocol of a specific ecosystem, which includes lending, borrowing, staking, yield farming, etc. A high TVL on a project indicates how much trust people have in it and how it can be seen as a safer place for investment.

Before going further, let me explain some key terms for better understanding:

ECOSYSTEM: This refers to any network built on a blockchain that contributes to its functionality. An ecosystem includes users, developers, dApps, tools, protocols, DeFi platforms, smart contracts, etc. Each blockchain has its own ecosystem, like Ethereum (ETH), Solana (SOL), Base, Sui, etc.

PROTOCOLS: These are sets of rules built into smart contracts that allow users to perform specific actions like staking, lending, borrowing, trading, etc. Protocols work like crypto apps created through code but are not like regular apps such as Facebook or Twitter.

Examples of protocols include Uniswap, Aave, Lido, etc.

DEFI (Decentralized Finance): This refers to all financial activities done on the blockchain without the need for intermediaries. Think of DeFi as a traditional banking system but built on the blockchain and controlled by smart contracts. DeFi allows you to stake, lend, borrow, and trade.

ASSETS: These are any valuable items you can own, lend, borrow, or trade on a blockchain, e.g., ETH, SOL, SUI, etc.

To summarize:

  • Ecosystem includes everything built on a blockchain.
  • DeFi includes the financial systems that operate on the blockchain.
  • Protocols are tools or platforms that enable DeFi activities.
  • Assets are the items being transacted on the blockchain.

Let’s take a traditional example for better clarity:

Think of an ecosystem like the Dangote Group.

  • It has raw materials, managers, accountants, companies, transport systems, advisors, etc.
  • Dangote Group has various companies under it, like cement, sugar, flour, fertilizer, etc. Think of each of these companies as a different protocol.
  • Dangote Group buys raw materials, produces, sells, gets loans from institutions, and even lends to governments — that’s finance.
  • They also have shares people can buy. When people buy those shares, it’s like locking their money into the Dangote Group’s ecosystem — this shows trust and attracts more investors. This is similar to how TVL works.

That’s the traditional example to help understand TVL. Of course, DeFi works differently, but this gives you a framework.

What causes TVL to increase in an ecosystem?

TVL increases when people deposit or lock assets into protocols such as:

  • Liquidity Pools: Providing liquidity on DEXs (like Uniswap, PancakeSwap, etc.) increases the TVL of the ecosystem.
  • Lending and Borrowing: Platforms like Aave allow lending and borrowing of assets, which also contributes to the TVL.
  • Staking: When you stake an asset on a protocol, it also adds to the TVL.
  • New Protocols, Yield Farming, etc.: These also contribute to a rise in TVL.

Each blockchain has its own TVL (ETH, SOL, Avalanche, Aptos, etc.). Within a chain, different protocols contribute to the chain’s total TVL through their activities. Ethereum currently leads with the highest percentage of total TVL, holding over 65% across all chains.

Note: TVL doesn't refer to the number of coins on an ecosystem, but rather the value of all the coins locked. The calculation is usually done in terms of USDT or another stable currency. For example, one person may stake $100k in ETH, another $10k, another $200k for lending, etc. All these values are added to get the total TVL of that project.

What are the benefits of increasing TVL for an ecosystem?

As explained above, when TVL rises, it shows people are engaging with the ecosystem and money is flowing in. When people are locking their funds, it indicates trust in the protocol, which attracts investors. And in crypto, where the money is — that’s where the opportunity lies.

It also strengthens the blockchain’s security through staking activities.

In the next write-up, I will explain how to identify coins worth trading using TVL combined with other data.

If you found this useful, please share so others can benefit.

Yusuf Samba


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