There are many articles out there explaining TVL in detail, here I aim to bring a concise summary of what TVL is. Think of this as reference notes.
Total value locked is a figure that represents the spot value (usually in fiat terms i.e. USD) for all the assets that are currently staked in a specific protocol. The assets can be:
- Staked in simple yield protocols that allow depositors to receive an equal representation of their deposited tokens.
- Staked in lending protocols where the deposited assets are collateral for the loans.
- In the liquidity pools in an AMM (Automated Market Maker) exchange.
- Act as underlying for synthetic assets, futures contracts, and options.
- Liquidity for payment protocols facilitating the transfer of assets from l2 (layer 2) to the ETH mainnet.
The TVL figure for Defi would be the total value of the assets staked in the entire Defi system. This value does not represent any leverage created from the underlying assets. An analogy for this would be the funds a bank holds in its deposit throughout the fractional lending process.
The TVL is a metric used to gauge the health of a Defi protocol. The TVL of an asset can be interpreted as how much of the assets’ capital is utilised across the entire Defi ecosystem giving a rough idea of its utility. To make the metric more comparable across assets with different market caps, a TVL Ratio is used which is defined as:
Total market cap of locked asset / Total value locked
The market cap here can either be the total circulating supply or the total supply multiplied by the price of a single unit (token) of the asset. It’s important to note this variability factor in the metric.
The calculation above is accurate in a simple scenario where the value of the token deposited is counted once. However, the complex nature of Defi staking yields scenarios where value is counted twice. For example, say an investor stakes 10 ETH into a protocol and is then given 10 SETH tokens (staked Ethereum tokens) in return. Those 10 SETH tokens validate the investor’s initial stake of ETH and the SETH tokens might be accepted by another protocol allowing the investor to stake their SETH tokens. Whilst the investor has introduced 10 ETH of value into the Defi space when the total TVL is calculated or the TVL per-protocol is calculated the values will be inflated due to this double counting. Such a scenario is common in Defi and thus TVL calculations should be given leeway.
If looking at the TVL as measured by the market cap of the total circulating supply then theoretically the lower the TVL ratio the better since the more saturated the staking pool, the lower the ROI (return on investment) per token. Thus higher the TVL ratio, the lower the value of an asset should be.
Obviously, with the creativity of Defi, not every token is the same, and more factors impact a token’s price than just the TVL. For example, the utility of the token matters, if staking the token doesn’t generate yield then a TVL metric is almost worthless. Tokens that have governance properties may request a premium.
Even though it isn’t an all-encompassing metric for determining the value of a token, it’s still widely used and a great point of reference for investors like the Price to Equity ratio into equities. In fact, a Defi index by Defi pulse (the populariser of the TVL metric) exists to balancing its weights across the incorporated tokens via the TVL metric.
There are various articles on the market explaining TVL intimately, right here I goal to carry a concise abstract of what TVL is. Consider this as reference notes.
Whole worth locked is a determine that represents the spot worth (often in fiat phrases i.e. USD) for all of the belongings which can be at the moment staked in a selected protocol. The belongings could be:
- Staked in easy yield protocols that permit depositors to obtain an equal illustration of their deposited tokens.
- Staked in lending protocols the place the deposited belongings are collateral for the loans.
- Within the liquidity swimming pools in an AMM (Automated Market Maker) trade.
- Act as underlying for artificial belongings, futures contracts, and choices.
- Liquidity for cost protocols facilitating the switch of belongings from l2 (layer 2) to the ETH mainnet.
The TVL determine for Defi could be the entire worth of the belongings staked in the whole Defi system. This worth doesn’t signify any leverage created from the underlying belongings. An analogy for this might be the funds a financial institution holds in its deposit all through the fractional lending course of.
The TVL is a metric used to gauge the well being of a Defi protocol. The TVL of an asset could be interpreted as how a lot of the belongings’ capital is utilised throughout the whole Defi ecosystem giving a tough thought of its utility. To make the metric extra comparable throughout belongings with totally different market caps, a TVL Ratio is used which is outlined as:
Whole market cap of locked asset / Whole worth locked
The market cap right here can both be the entire circulating provide or the entire provide multiplied by the worth of a single unit (token) of the asset. It’s essential to notice this variability issue within the metric.
The calculation above is correct in a easy situation the place the worth of the token deposited is counted as soon as. Nevertheless, the advanced nature of Defi staking yields eventualities the place worth is counted twice. For instance, say an investor stakes 10 ETH right into a protocol and is then given 10 SETH tokens (staked Ethereum tokens) in return. These 10 SETH tokens validate the investor’s preliminary stake of ETH and the SETH tokens is likely to be accepted by one other protocol permitting the investor to stake their SETH tokens. While the investor has launched 10 ETH of worth into the Defi house when the entire TVL is calculated or the TVL per-protocol is calculated the values will probably be inflated because of this double counting. Such a situation is frequent in Defi and thus TVL calculations must be given leeway.
If wanting on the TVL as measured by the market cap of the entire circulating provide then theoretically the decrease the TVL ratio the higher for the reason that extra saturated the staking pool, the decrease the ROI (return on funding) per token. Thus greater the TVL ratio, the decrease the worth of an asset must be.
Clearly, with the creativity of Defi, not each token is similar, and extra elements affect a token’s value than simply the TVL. For instance, the utility of the token issues, if staking the token doesn’t generate yield then a TVL metric is nearly nugatory. Tokens which have governance properties could request a premium.
Despite the fact that it isn’t an all-encompassing metric for figuring out the worth of a token, it’s nonetheless extensively used and an incredible level of reference for buyers just like the Worth to Fairness ratio into equities. The truth is, a Defi index by Defi pulse (the populariser of the TVL metric) exists to balancing its weights throughout the integrated tokens through the TVL metric.
