Total Value Locked (TVL) and its role in the DeFi ecosystem.

Decentralized Finance (DeFi) has brought significant changes to the traditional financial institutions. Users can invest, earn interest, and access various blockchain projects by locking their crypto assets into different protocols. Today, we will discuss Total Value Locked (TVL) and its role in the DeFi ecosystem.

What is TVL?

Total Value Locked (TVL) represents the total value of all crypto assets held (or locked) within a specific DeFi protocol for a certain period. These tokens generate utility, including staking rewards, lending, borrowing, and insurance options, for users.

A Valuable Benchmark for DeFi

As a metric, TVL is crucial for understanding the overall health of the DeFi ecosystem. It serves as a quantitative indicator of trust and reliability in each protocol. Here are some key factors to consider:

Adoption and Trust:

• TVL is a key metric for measuring the adoption rates of DeFi protocols and, by extension, the DeFi ecosystem.
• Higher TVL levels may indicate a growing user base, success, and popularity of the protocol.

Liquidity and Yields:

• TVL helps assess liquidity levels within the ecosystem, which impacts yields and trading, swapping, borrowing, and lending opportunities.
• TVL in crypto bridges can illustrate the flow of crypto assets between protocols and target blockchains.

Performance and Security:

• Monitoring TVL allows users to track the performance of protocols over time.
• It’s helpful for identifying the security level of various Proof-of-Stake (PoS) blockchains.

Comparative Analysis:

• Comparing TVL enables users to assess the quality of different protocols.
• Growth rates and TVL-to-circulating supply ratios can be compared between novel and established protocols.

Currently, there are over $70 billion worth of crypto assets locked in over 1800 DeFi protocols, covering staking, lending, liquidity applications, and more. For example, Lido Finance, a popular Ether staking provider, has over $14.15 billion worth of staking deposits, accounting for almost 20% of the entire DeFi TVL market share. Other notable protocols like Aave ($8.61 billion), MakerDAO ($6.31 billion), and Curve ($6.32 billion) also hold a significant market share.

Ethereum Layer 2 (L2) rollups are gaining traction, with TVL figures experiencing a 300% growth since the beginning of the year. The current TVL across all rollups stands at $9.73 billion (ETH 5.14 million). Arbitrum One holds over 60% of the market share with a TVL of $5.89 billion. Optimism follows with $2.32 billion, while the recently launched zkSync Era has reached $584 million, showing similar growth.

Avoiding TVL as a Vanity Metric

While TVL is a valuable metric, it’s essential to consider some factors:

• TVL is denominated in fiat currency and can be misleading due to crypto price volatility.
• It may be used as a marketing instrument to inflate a protocol’s value.
• Focusing on token amounts and other growth indicators can provide a clearer assessment of a protocol’s performance.

By looking at actual token amounts, users can prioritize more reliable metrics that offer a clearer picture of a protocol’s progress and performance. This shift reduces the impact of price fluctuations and provides a more accurate assessment.

In conclusion, TVL is a valuable metric for understanding DeFi’s health, but it should be considered alongside other metrics to gain a comprehensive view of a protocol’s performance. The DeFi ecosystem continues to evolve, attracting more users, and proper monitoring strategies are essential for selecting the best protocols.