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Arnaud Deblander
Mar 17, 2022 8:59 AM

We’ve all heard about how Decentralized Finance (DeFi) is disrupting traditional finance by storm and how it could potentially get even bigger from this point on. On the other side of this DeFi bags the question – how do you assess if a DeFi project is worth your attention when you are doing your own research? Does the project have room for growth? What is the metric to analyze and gauge the project’s possible success?

The answer to all the questions above boils down to one key metric in DeFi: Total Value Locked or TVL as the acronym is more commonly known.

What is the Total Value Locked (TVL)?

The Total Value Locked in cryptocurrency is simply the current value of coins or tokens that are deposited and locked on a DeFi protocol earning rewards, interest, new coins or tokens and interest. This value can be denominated in USDT, or in dollars.

As blockchain services are developed on peer-to-peer networks, there is no central governance or authority to build, govern or improve the ecosystem. As a result, investors are rewarded for building these networks from the bottom up with their coins or tokens.

TVL is a crucial metric for investors because it provides them the ability to gauge a project’s robustness. Through TVL, investors are able to determine the popularity of the project as it indicates the usage level of users.

How is TVL calculated?

The total locked value is simply the sum of the locked tokens multiplied by their dollar value. The latter can vary in two ways.

– Either a user decides to withdraw the tokens he has locked in lending, staking or liquidity pools.

OR

– The value of the token of the DeFi protocol used changes, because the latter is subject to the same market laws as the other tokens.

A simple scenario…

Assuming an investor connects his wallet to a DeFi platform and deposits $1,000 to contribute to a money pool to validate transactions on its native blockchain, namely, staking; followed by lending an additional $1,000 on the same platform in return for receiving interest. Based on the assumption that these two businesses are the only transactions that the said platform is getting, its TVL would be $2,000.

Why is TVL crucial?

This is a very useful tool to measure the interest for a particular project. The higher the TVL, the more confidence users will have in the platform. Security is indeed an important point when talking about DeFi.

Some platforms have been created only to defraud their users, by promising astronomical returns just to sell their tokens, leaving them the investors with tokens having a value close to zero. A high Total Value Locked attests therefore to the relative security of a DeFi protocol, even if we are never totally safe.

Sum of the “Total Value Locked”

DeFi protocols have especially gained public interest in the year 2021 and the chart representing the latter looks very similar to that of Bitcoin and other major cryptos.

Over the year 2021, the total locked value of all DeFi projects increased from $18.06 billion to $236.7 billion, an increase of 1210.63%. This value has since fallen back below $200 billion, to $198.82 billion.

This is not a surprise, as the interest in DeFI protocols is also related to general market sentiment.

Current status of TVL in DeFi

To track or check the TVL in DeFi, you can refer to DeFi Pulse. At the time of writing, the TVL in DeFi stands at $76.7 billion, an approximate 20% decline since December 2021.

Does this signify that DeFi is losing momentum? Well, yes and no. It is undeniable that the locked value has decreased in recent months due to market sentiment and the global geopolitical context and uncertainty. In fact, we can see this across all markets and sectors, in the legacy market as well as the bitcoin price.

Nevertheless, according to a report from Consensys, even if LTV is decreasing, the number of unique addresses is increasing, showing a growing adoption. This is a very positive sign that DeFi is gaining traction and is poised for greater growth. To sum up the question of “if DeFi is losing momentum”, we can safely say that this decrease is cyclical and not systemic. Indeed, DeFi has a bright future ahead.