Key Questions Answered
The decentralized finance (DeFi) industry currently holds a massive value of over $80 billion locked in the top 125 apps. This value has more than tripled in the last 12 months alone. Measuring and tracking the overall value of the DeFi market has become as critical as following market cap figures. Total Value Locked (TVL) is an important indicator used to measure this value. As the DeFi industry keeps growing fast, TVL indicators will attract as much attention as the news about market caps and platform rankings.
What Is Total Value Locked (TVL)?
TVL is the total value held by a DeFi platform within its smart contracts. It represents the sum of all funds present on the platform in the borrowing, lending, and transactional capacity. The overall industry TVL is the sum of the TVLs held by all individual DeFi apps.
TVL indicates how successful a DeFi app is in attracting real interest from active, transacting users. While market cap is applicable to any blockchain platform that issued its own tokens, TVL is a measure specific to DeFi projects.
Precise calculation of TVL depends on the nature of a DeFi app. Among the top DeFi projects by TVL, there are several distinct types. The three key types are:
- Lending and borrowing protocols:These protocols’ main functionality is using liquidity pools to lend crypto funds to users and to let users borrow funds from the pools. Well-known examples of these protocols are Aave (AAVE), Maker (MKR), Compound (COMP), and Liquidity (LUSD). For these apps, TVL refers to the total value held in the borrowing and lending pools.
- Decentralized crypto exchanges (DeXs):These protocols allow users to swap/trade cryptocurrencies using automated market maker (AMM) Users do not trade directly with each other when swapping crypto assets on these platforms. Instead, they transact with a liquidity pool that holds the requisite pair of cryptocurrencies. The leading examples of these protocols include Curve Finance (CRV), UniSwap (UNI), and SushiSwap (SUSHI). On these platforms, TVL refers to the total value held in all of the coin-pair pools of the protocol.
- Yield optimization protocols: These apps employ algorithms that optimize users’ investment across lending and borrowing platforms. They act as an automated portfolio manager. Platform users deposit their funds into the protocol and the algorithm allocates the funds to the pools with the best-expectedreturns. The biggest among these protocols at the moment are Convex (CVX), Yearn.Finance (YFI), and Balancer (BAL). On these protocols, TVL normally refers to the value lent by users to the app for yield optimization.
At the moment, 10 out of the 12 largest DeFi apps by TVL belong to one of these three types. On platforms with different functionality, TVL calculation principles are largely similar, i.e. TVL includes the sum of the funds used in any borrowing, lending, or transactional form.
Why Is TVL Important?
TVL is the most obvious indicator of a DeFi project’s popularity with active users. It serves as a good measure of the project’s business concept robustness.
Market cap figures may provide an indication of a protocol’s appreciation by the entire market, including passive investors. These passive users are crypto traders who invest in the protocol’s token expecting the project to grow and succeed. They may not necessarily use the protocol itself in any active way.
By buying the platform’s token in the hopes of its price appreciation, these users contribute to the increase in the market cap figure. Using an analogy with traditional finance, these market players can be thought of as the protocol’s “shareholders.”
On the other hand, TVL figures reflect usage of the platform by active players, those who transact using the platform. As such, TVL is a vital alternative measure to the market cap.
If you need a gauge of what the market thinks about a DeFi project’s future potential, look at the market cap figures. If you need to see what the market thinks about the project right now in the present, study the TVL figures.
Additionally, it is useful to look at the TVL ratio, a measure combining market cap and TVL statistics. The TVL ratio is derived by dividing the protocol’s market cap by its TVL. A smaller value of the TVL ratio is preferred. It indicates a protocol that is potentially undervalued and therefore, may have good future growth potential.
Who Are the Top Market Players by TVL?
The world’s top 125 DeFi apps hold a combined TVL of around $83 billion. Although calculating the total TVL of all DeFi projects in existence is virtually impossible, these 125 apps likely represent the lion’s share of all the industry TVL. Given that the app at the 126th spot has a TVL of just $16,000, it is likely that the combined TVL of all the projects outside of the top 125 is well below $1 million. Hence, the DeFi industry is quite concentrated, and the top 10 projects hold slightly over 80% of the total market TVL.
The top 3 spots are currently held by Aave, InstaDApp, and Maker. Let’s have a closer look at the TVLs of these DeFi giants.
Aave is a lending and borrowing protocol that currently holds the industry-leading TVL of just short of $14 billion. The protocol launched on the Ethereum mainnet in early 2020 and crossed the $1 billion mark in mid-August of the same year.
At the start of 2021, Aave had a TVL of nearly $2 billion. Relentlessly advancing since then, Aave is now the leader of the TVL rankings table. Aave’s current market cap is nearly $4 billion, giving it a TVL ratio of slightly less than 0.3.
InstaDApp is a platform that lets users manage their funds held on different DeFi protocols. It can be thought of as a portal to access all of your accounts at various platforms.
Launched in late 2018, InstaDApp is one of the older protocols among the top 10 of DeFi. For the initial two years on the market, InstaDApp was not among the most popular apps. Its TVL reached $500 million only in December 2020.
However, 2021 proved to be the app’s year of stardom. In mid-February, InstaDApp promptly cleared the $1 billion TVL hurdle. It then proceeded to unceremoniously explode in popularity, and by now, closely trails Aave with a TVL of around $12 billion.
InstaDApp’s current market cap is a modest $90 million, giving it a jaw-dropping TVL ratio of 0.0075. If there is a DeFi project that is undervalued and worth a closer look by investors, it is InstaDApp.
Maker is Aave’s key competitor in the lending and borrowing category of DeFi. Unlike Aave, Maker focuses only on stablecoins. While Aave’s largest lending pools are also based on stablecoins, the protocol lets users lend and borrow in a variety of cryptocurrencies.
Maker is a veteran among the top 10 DeFi projects. The protocol launched in December 2017, and reached $1 billion in TVL by mid-2018, before most of its current top 10 competitors even existed.
Rising steadily in the last three years, Maker now holds a TVL of $12 billion. With a market cap of around $2.5 billion, it boasts a respectable TVL ratio of 0.2.
Industry TVL History
The industry-wide TVL calculations started in 2017 as the first DeFi projects hit the market. Initially, the numbers were more than humble, at least by today’s standards. At the end of 2017, the TVL of the entire industry stood at just $120 million.
The industry experienced rapid growth starting from 2018. By the end of that year, the TVL increased to $6.5 billion, a yearly increase of 54000%. However, as the DeFi industry started maturing, yearly increases became much less extreme. By the end of 2019, the DeFi TVL was around $8.5 billion, a yearly increase of 31%. In 2020, the industry TVL grew 188% over the year to a total of $24.5 billion. Now, in late September 2021, the TVL stands at approximately $83 billion.
The numbers indicate that from 2019, the rate of the DeFi industry growth, as measured by TVL, is accelerating.
TVL is a vital measure of DeFi projects’ performance. It is a useful addition to the market cap statistics to analyze DeFi apps.
While market cap is a good future-oriented measure in your analysis, TVL is the best indicator of the current performance. Additionally, using the TVL ratio, an indicator that combines TVL and market cap, you can gain further insight into the DeFi projects of interest to you.
While analyzing the TVL statistics of various DeFi platforms, do take into account that, due to the volatile nature of the DeFi industry, TVL numbers can change drastically, often within a matter of hours or days.