Hey Edge readers,
Total Value Locked (TVL) is one of the most widely used metrics in DeFi. It’s often seen as a sign of a protocol’s success, but how useful is it really? This week, we’re breaking down what TVL measures, its strengths and weaknesses, and how you should use it when evaluating pools and protocols. By the end, you’ll have a sharper perspective on whether high TVL is actually a green flag—or just a distraction.
Stay sharp. 🫡
- The Exponential team
What is TVL and how is it calculated?
Total Value Locked (TVL) represents the total capital deposited into a DeFi protocol. It measures liquidity across pools, often serving as a key indicator for a protocol’s adoption and security.
The formula for TVL is:
TVL = (Quantity of Asset 1 × Price of Asset 1) + (Quantity of Asset 2 × Price of Asset 2) + ...For example, if a protocol holds 10,000 ETH at $2,500 per ETH, that portion of the TVL would be $25 million. Since asset prices fluctuate, TVL naturally rises and falls with market conditions.
A quick history of TVL
TVL became popular during the rise of Ethereum’s DeFi boom in 2020. Back then, protocols like Aave, Compound, and Uniswap introduced lending, borrowing, and liquidity provision services, requiring users to deposit assets into their protocols to access those services. This kicked off a surge in TVL as users rushed to deposit funds and discover a new way to earn yield.
Over time, TVL became the go-to metric for measuring a protocol’s size and impact. It provided a quick and easy way to assess how much capital was actively engaged in the system, offering insights into liquidity depth, user confidence, and protocol adoption. However, as DeFi evolved, so did the understanding of TVL’s limitations, with many now viewing it as just one of several key indicators in evaluating protocols.
Pros and cons of using TVL
While TVL is a useful starting point to look at when evaluating protocols and pools, it has its limitations. Let's check them out.
✅ Pros of TVL
- Liquidity & market depth: A higher TVL generally means more liquidity, leading to better trade execution on DEXs and more efficient borrowing in lending protocols.
- Indicator of adoption: A high TVL can indicate that users have confidence in the platform by committing significant capital. This helps to demonstrate the protocol's popularity and user trust.
- Sustains DeFi yields: Many DeFi strategies rely on high TVL to maintain consistent yields for staking, lending, and liquidity provision.
❌ Cons of TVL
- Doesn’t reflect activity: TVL shows total locked assets but doesn’t indicate real user engagement or transaction volume, which are crucial for assessing platform health.
- Vulnerable to market swings: Since TVL is tied to asset prices, it can fluctuate significantly with market conditions, making it less reliable as a long-term stability indicator.
- Can be artificially inflated: Some protocols boost TVL with high APYs or short-term incentives, leading to rapid outflows once the rewards dry up.
Beyond TVL: What else should you look at?
Aside from TVL, there are several other metrics that can be very helpful when evaluating opportunities in DeFi. Instead of just using TVL, consider these other key metrics as part of your evaluation process:
- Revenue & fees: A sustainable protocol should generate income from real economic activity, not just token incentives.
- Trading volume: Essential for DEXs and perpetual exchanges, volume indicates how effectively TVL is utilized. More volume means higher user engagement.
- Utilization rate: In lending protocols, this shows how much of the TVL is actively borrowed. Higher utilization means more fees but could signal liquidity risks.
- User growth: A protocol with increasing active users and transactions suggests real adoption, not just idle liquidity.
- Decentralization & governance: Who actually controls the protocol? If TVL is high but governance is centralized, it might not be as strong as it looks.
While TVL remains a crucial metric, combining it with these other metrics offers a more comprehensive picture of a protocol.
In the news 🗞️
- Trump-linked DeFi platform fuels staked ETH ETF speculation. World Liberty Financial, a DeFi platform tied to Trump, deposited 10,000 ETH ($33M) into Lido, reigniting hopes that the SEC may approve staking for spot ETH ETFs. Approval could boost ETH’s appeal by enabling yield generation, potentially driving a market-wide rally.
- Uniswap launches v4 with major upgrades to its DEX. Uniswap Labs has rolled out Uniswap v4, introducing customizable swaps via “hooks” and significantly improving gas efficiency. The upgrade transforms Uniswap into a developer platform, allowing custom liquidity management and fee structures while reducing pool creation costs by 99.99%.
- Hyperliquid surpasses Ethereum in daily fees and revenue. Hyperliquid, a Layer 1 blockchain built around its decentralized derivatives exchange, edged out Ethereum in fees in revenue. This pushes Hyperliquid into the top 20 fee-generating protocols alongside Ethereum, Solana, and Tron. Optimism is also building around Hyperliquid’s upcoming HyperEVM upgrade.
- Elastos raises $20M to expand Bitcoin DeFi infrastructure. Bitcoin’s DeFi ecosystem is gaining traction as Elastos secures $20 million from Rollman Management to scale BeL2, its Bitcoin-native DeFi utility layer. BeL2 allows BTC holders to collateralize assets and access Ethereum-based DeFi services, including stablecoin minting and lending.