Why is the total locked value a key metric of the DeFi ecosystem

How the Strength of DeFi Protocols is Measured

In decentralized finance, one of the most watched indicators is the total value locked (TVL). This is the aggregated value of all assets that users have deposited into a specific DeFi protocol. Think of it this way: when you deposit $1,000 into a DeFi protocol with the aim of earning interest, your money is now locked in the system. If the same step is taken by another ten investors with the same amount, the TVL of that protocol will reach $11,000. In this way, the development of the DeFi ecosystem can be tracked and how well it is attracting capital.

How is TVL calculated and interpreted

To properly understand the state of any DeFi ecosystem, it is necessary to understand the methodology for calculating TVL. The process involves summing all values of collateral, staked, and borrowed assets that are locked in the protocol or on the blockchain network at a given moment. All these assets are converted to a common currency, most often US dollars, thus providing a comparable figure. Data aggregators commonly monitor the TVL of individual DeFi protocols and provide a comprehensive overview through analytical dashboards. These tools enable investors to track not only the value of a specific protocol but also the development of the entire blockchain ecosystem.

Four Important Insights on the Significance of TVL

Health and adoption of the protocol: A higher TVL generally indicates stronger adoption of the protocol within the DeFi community and more intense economic activity. When it leads to a high TVL, it signals the health and stability of the platform.

Liquidity and trading efficiency: TVL is directly related to the liquidity available in the ecosystem. Protocols with higher TVL provide better conditions for trading, lending, and asset exchange. Users can execute their transactions more easily without significant price slippage.

Trustworthiness and Stability: A platform that has a significant amount of assets locked in the DeFi ecosystem typically evokes greater trust. The fact that thousands of users entrust their assets to the protocol serves as an indicator of security and reliability. Such protocols are perceived as more resilient to failures.

Comprehensive assessment is essential: Although TVL is a very relevant metric, it should not be the only metric when selecting a DeFi protocol. Many other factors—such as security audits, the development team, the innovativeness of the solution, or transparency—should be part of a thorough evaluation. Keep in mind that TVL constantly changes depending on user deposits and withdrawals. Regularly monitoring TVL development will give you the most accurate picture of the current state of the DeFi ecosystem.