TVL metric on DeFi protocols and How to know its calculations

By July 30, 2022Ethereum
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TVL metric on DeFi protocols and How to know its calculations

Over time, the TVL metric has become another outstanding technique available for DeFi subscribers to measure the aggregate value of assets. Fully known as the total value locked metric, the trend presently serves as a technique for aiding and calculating the weights of DeFi indexes. Investors in DeFi projects like staking, lending, derivatives, decentralized exchanges, and a host of others commonly use the TVL indicator to realize the appropriate value of their respective tokens and the aggregate capital enveloped in a given protocol. As mandated, this article seeks to explain the total value locked metric of those protocols and how they become calculated.

What does knowing DeFi TVL brings?

It is not news anymore that DeFi protocols require investors to commit or lock their investments into their trading pools. These assets are grossly secured in the smart contracts of the respective DeFi protocol. Through the TVL metric, investors realize the vitality of any of the protocols they intend to subscribe to and this thus helps them to know if such protocol is worth their investments.

Also, investors after committing their capital tend to know the effects of such investment on the concerned protocol. Certainly, the existence of the TVL plays an instrumental role in coming to terms with the amount of capital obtainable in a protocol. Without further ado, the massive booming of DeFi protocols in 2020 incredibly skyrocketed their overall TVL metric. DeFi Llama, an analytics firm, confirmed that all DeFi protocols recorded an aggregate of $630 million TVL in 2020.

Now, it has even grown beyond millions owing to the increasing adoption and investment in DeFi projects. In early 2022, renowned DeFi projects like MakerDAO, Aave, and Curve recorded over $10 billion TVL in their respective pool Presently, the Ethereum DeFi network ranks as the first in TVL metric. According to Multi.O research outfit, it possesses over $125 billion locked assets, equivalent to 54.31% of the total TVL.

Understanding the approaches and technicalities involved in the measurement of DeFi TVL is not as difficult as it appears. Although, the way in which each of the DeFi projects do the calculations of their respective TVL differs. Now, this article shall analyze some of these DeFi categories and how they usually arrive at their respective TVL metrics.

Decentralized Exchanges

Decentralized exchanges as one of the existing DeFi projects run as peer-to-peer marketplaces without a central authority. These exchanges foster crypto trading by linking buyers and sellers without any intermediary or custodian. This, however, becomes obtainable through the presence of smart contracts which allow traders to execute the processes. To calculate the TVL metric for decentralized exchanges, the value of committed all assets in the smart contract of these exchanges becomes measured. For instance, the measurement of the total deposited assets on UNISWAP as a decentralized exchange tends to produce its TVL metric.

Lending

Lending as another DeFi program usually runs on the Ethereum DeFi network. These platforms pave way for crypto investors to put up their assets for lending purposes. It also provides grounds for borrowers to take loans by depositing collaterals. As of now, some of the risks associated with lending include; impermanent loss, flash loan attacks, etc. Its TVL stays determined by the committed funds deposited into the smart contract by both borrowers and lenders. Examples of DeFi lending platforms include Aave, Oasis and host of others.

Derivatives

More so, another project associated with DeFi are derivatives. As programmed, derivatives function by serving as financial instruments for investors to wave any fluctuations in the crypto market. Traders use it to speculate on potential possibilities in the volatile crypto market. It aids the strengthening of products like options, futures, and prediction markets with deposited assets. Examples of derivative trading protocols include Synthetix, Universal Market Access, Mirror Protocol, etc. Derivatives TVL metrics usually manifest by calculating the worth of all assets in its smart contract.

Payment Protocols

Payment protocols as another DeFi-oriented program usually function by availing peer-to-peer payments via the blockchain. These solutions allow crypto traders to effect crypto payment in a way that is seamless and user-friendly. More so, with Defi payment protocols, users enjoy accelerated and cost-effective transactions. Examples of these solutions include Depay, Flexa, and a host of others. Here, the measurement of the TVL metric is beyond the aggregate value of assets deposited into the smart contracts alone. But, the value of those assets in the smart contract becomes relayed into the side chain of the involved payment protocol.

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