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Total Value Locked (TVL) Simply Explained

Total Value Locked refers to the number of assets staked inside a specific DeFi protocol. It’s one of the most important metrics to value crypto projects.

What is Total Value Locked (TVL)?

The Total Value Locked is the number of assets currently sitting inside a specific DeFi protocol. The metric is not meant to represent the number of outstanding loans. They solely represent the net assets located inside the protocol’s smart contracts.

It’s probably one of the most important metrics to measure any protocol’s health. You can track the TVL using various analytics platforms. The most common one is DeFi Pulse.

Common Criticism Of Total Value Locked (TVL)

People also use the TVL as a metric to measure the size of the whole DeFi ecosystem. However, some people perceive this to be a misleading metric.

A good example is Uniswap v3. Uniswap v3 is extremely capital efficient, which is why it needs less liquidity than other AMMs. If you would compare SushiSwap with Uniswap v3, you would think that SushiSwap is more successful than Uniswap v3 because it has more Total Value Locked. But the actual reason is that Uniswap v3 is way more capital efficient than Sushiswap and just needs less capital to operate.

Also, some people find the metric confusing. Let’s consider a simple example: You deposit $100 in the Money Market Aave. Then, you take it as collateral and borrow $40 against it. Now, you go ahead and deposit the $40 into Aave again. In the end, your actions would lead to Aave’s TVL increasing by $140 – even though you only deposited $100 in the first place.

In other cases, TVL is definitely a good metric to value DeFi protocols. But that’s why the TVL of any project should only be part of your valuation method.

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