Cryptocurrency investors (and normally most investors) are always looking for an edge when it comes to putting their money where it will yield the largest returns. Crypto investors are often on the lookout for on-chain indicators to evaluate projects. An important metric has merged called Total Value Locked (TVL). This metric has become pivotal in the DeFi space.
Total value locked represents the total value of the cryptocurrency that is currently locked or stored in a DeFi smart contract or application. It is important to remember that TVL is highly affected by price volatility. This metric becomes highly important when looking at DeFi platforms that allow swapping or lending. In general, the higher the TVL, the better. Swaps will take place efficiently and liquidity can be easily supplied to borrowers.
Practical Application of TVL
TVL can be used as a metric to help understand a platform better. For swaps, a low TVL could indicate a higher risk of slippage and receiving a worse price. Higher TVLs for yield farming might indicate that the tokens/coins would be more productively used in other applications.
Rising TVLs can indicate an increase in liquidity, popularity, and/or usability.
Adjusted TVL
Adjusted TVL (aTVL) removes the price effect from calculations and can lock the price as of a certain date. This helps to gain a clearer perspective during times where TVL growth can be exaggerated. It provides a more realistic view of the environment. High-level metrics might distort the real activity (as in liquidity mining) and user engagement needs to be considered to measure success.
Caution Needed
TVL has become a marketing instrument for some projects and thus has some conflicting incentives. Some project websites strive to get themselves onto featured TVL counters to be ranked highly. Do your due diligence and take a measured approach rather than just accepting TVL as the ultimate metric.
TVL does not reflect how assets are being utilized. It often reflects the value of liquidity pools. Since there are different applications for each project, this must be considered. Governance token yields could cause the TVL to be high, but there is little core activity volume taking place.
Resources for Researching Total Value Locked
dAppRadar
DeFiLlama
DeFiPulse
CoinGecko
Please share your favorite resources as well.
As a reminder, none of the above should be taken as investment advice. Continue to do your own research.
