Total Value Locked (TVL) has emerged as a widely used metric to gauge the popularity and health of decentralized finance (DeFi) protocols. As DeFi continues to expand, with numerous new projects launching each month, understanding what TVL represents—and its limitations—is essential for anyone involved in the space.
DeFi applications enable the creation of self-executing financial contracts that support activities like lending, borrowing, trading, and managing crypto assets. TVL measures the total dollar value of all crypto assets deposited—or "locked"—into a particular DeFi protocol at a given time. This allows for comparisons between different types of DeFi services, such as decentralized exchanges and lending platforms.
Despite its popularity, TVL is a complex and often misleading indicator. Relying solely on TVL can lead to an inaccurate understanding of a protocol’s true scale or stability. This article explores the key challenges associated with using TVL and discusses why better metrics are needed.
Why TVL Became a Standard Metric
TVL gained prominence because it offers a seemingly straightforward way to compare different DeFi protocols. Whether a platform facilitates lending like Aave or trading like Uniswap, each requires users to supply collateral. By converting all locked assets into a single dollar value, TVL creates a common basis for evaluation.
Since 2019, the DeFi ecosystem has experienced exponential growth. TVL is now one of the most tracked metrics on platforms like Coin Metrics, and it is often used to signal the overall adoption and success of DeFi projects.
However, this apparent simplicity masks several underlying complexities.
Key Challenges with TVL
While TVL is useful at a glance, it suffers from three major issues that can distort its accuracy and usefulness.
1. The Illusion of "Total"
The DeFi landscape is extremely dynamic, with new protocols and updated versions launching frequently. Some are original, while others are clones or forks of existing projects. This rapid pace of innovation makes it difficult to keep track of all the value locked across every protocol.
For example, SushiSwap—a clone of Uniswap—grew its TVL from a few thousand dollars to over a billion in just a few days in September 2020. This surge was largely driven by its token incentive model, which rewarded early users.
Such events highlight a recurring problem: the ease of forking protocols and launching new tokens with aggressive rewards can lead to sudden, artificial spikes in TVL. Data providers like Coin Metrics must decide which protocols to track, and manual effort is often required to aggregate TVL across all relevant contracts.
Additionally, many protocols release updated versions (e.g., Uniswap V1, V2, V3), each with its own smart contracts and locking mechanisms. To calculate the full TVL for a protocol, each version must be tracked separately. This becomes even more challenging when considering the expansion of DeFi across multiple blockchains and layer-2 solutions.
Standardization could eventually help, but for now, the rapid rate of change means that any “total” TVL figure is likely an underestimate.
2. The Challenge of Measuring "Value"
DeFi protocols accept a wide variety of assets as collateral. While some impose restrictions, many do not. This creates significant complexity in accurately valuing all locked assets.
Assets can be traded on both centralized and decentralized exchanges, each with its own pricing data. To compute TVL, a reliable and timely price must be obtained for every asset type—including long-tail and illiquid tokens.
Even when data is available, not all price sources are equally trustworthy. Some assets may have low trading volumes or be prone to price manipulation, making it hard to determine their true market value.
Data providers often use reliable sources like Coin Metrics’ reference rates for top assets, but less popular tokens may require using on-chain exchange data, which can be incomplete or unreliable.
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3. The Myth of "Locked" Value
The term “locked” is somewhat misleading. In many DeFi protocols, assets are not permanently locked—users can often withdraw or move their funds quickly. More importantly, the practice of “re-staking” is common.
Re-staking occurs when an asset already used as collateral in one protocol is deposited again in another. For example, a user might deposit ETH in a lending protocol to borrow a stablecoin, and then deposit that stablecoin in a liquidity pool. This means the same underlying value is counted multiple times across different protocols, inflating the overall TVL figure.
This creates a multiplier effect that can significantly overstate the actual amount of original collateral in the ecosystem. Without adjusting for re-staking, TVL does not reflect true economic value—instead, it captures a highly levered and overlapping set of assets.
Toward Better DeFi Metrics
Given these challenges, it is clear that TVL alone is not sufficient for evaluating DeFi protocols. The community is beginning to explore more robust approaches, such as:
- Differentiating between original collateral and re-staked assets.
- Using native units (e.g., ETH, BTC) instead of USD to avoid price volatility effects.
- Counting the number of active contracts or users instead of pure value locked.
Ideal metrics would also help assess systemic risk, liquidity depth, and protocol resilience during market shocks.
Improving how we measure DeFi activity will require collaboration among developers, data providers, and analysts. The goal is to create more transparent, accurate, and useful indicators that support healthier growth across the ecosystem.
Frequently Asked Questions
What does TVL mean?
TVL stands for Total Value Locked. It refers to the total dollar value of all crypto assets deposited in a DeFi protocol. These assets are used as collateral for lending, liquidity provision, or other financial activities.
Why is TVL misleading?
TVL can be misleading because it often includes re-staked assets (counted multiple times), uses prices that may be inaccurate or manipulated, and may not include all relevant protocols or versions. It also doesn’t account for leverage or liquidity risks.
How can TVL be improved?
Better TVL calculations would distinguish between original and re-staked assets, use more reliable pricing sources, and track activity across all protocols and blockchains. Some also suggest supplementing TVL with metrics like number of transactions or unique users.
What is re-staking?
Re-staking is the practice of using an asset that is already collateral in one DeFi protocol as collateral in another. This allows users to increase leverage but also inflates the TVL because the same value is counted multiple times.
Are there alternatives to TVL?
Yes, other metrics include total revenue generated by a protocol, number of active addresses, volume of assets traded or lent, and protocol-owned liquidity. These can provide a more complete picture of usage and health.
Does high TVL mean a protocol is safe?
Not necessarily. A high TVL can indicate popularity, but it doesn’t guarantee security or sustainability. It’s important to also consider audits, tokenomics, governance, and historical performance.
Conclusion
TVL is a useful but flawed metric. Each word in “Total Value Locked” presents its own challenge:
- “Total” is incomplete due to the rapid pace of new protocols and versions.
- “Value” is hard to measure accurately given the diversity and volatility of assets.
- “Locked” is often incorrect due to re-staking and fast-moving liquidity.
The DeFi ecosystem is evolving quickly, and better measurement tools are needed. As the industry matures, more robust indicators will help users, investors, and developers make better-informed decisions.