Basics

  • "Many DeFi tracking sites use Total Locked Value (TVL) as a reference point. Simply put, TVL represents the amount of assets that are currently being staked in a specific protocol. This value is by no means meant to represent the amount of outstanding loans, but rather the total amount of underlying supply being secured by a specific application and/or by DeFi as a whole."
  • From a Kyber update (14-12-2019):

"One metric the DeFi space especially likes to look at when comparing DeFi dapps is Total Value Locked (TVL). TVL measures the total value of the tokens locked within these dapps with the argument going that the higher the value locked up in a DeFi dapp, the better.

We’d like to counter that this can be a skewed metric to compare liquidity providers because it does not take into account how much each unit of locked up token is utilized. For example; each token pair on Uniswap requires its own individual ETH pool. Kyber reserve managers on the other hand, can provide liquidity to multiple tokens from the same ETH pool, ie. 1 ETH might serve 10 different ERC20 tokens’ liquidity needs on Kyber, while Uniswap would require 10 ETH to serve those same 10 tokens. As a result, Kyber Network requires far less assets locked up to provide the same level of liquidity (as validated by the tight spreads and low slippage on Kyber) and therefore $1M locked up in Kyber is not the same as $1M locked up on Uniswap or $1M locked up on Bancor.

tl/dr: TVL not a good measure to compare liquidity providers"

  • Other similar terms are TVPL and TLL.

Numbers

"In 2018, this value more than tripled from ~$70 million to $300 million.

In 2019, it more than doubled to $667 million on December 31, 2019."

  • And on 6-2-2020 it passed 1 billion dollars in value. There was critique (6-2-2020) on this number however:

Defi Pulse monitors each protocol’s underlying smart contracts on the Ethereum blockchain,” explains the website whose defi valuation is referenced by the entire industry. “Every hour, we refresh our charts by pulling the total balance of Ether (ETH) and ERC20 tokens held by these smart contracts. TVL(USD) is calculated by taking these balances and multiplying them by their price in USD.”

It’s a methodology which mimics the way in which the market cap of cryptocurrencies is calculated. However, market cap has long been regarded as an imperfect reckoner, and the same accusation has been levied against defi. “What percent of the “$1 billion dollars” that’s “locked up” … is: 1) made up of ICO tokens (illiquid?) 2) not fluffed by Consensys or Ethereum foundation/Ethereum founders?” protested one bitcoiner.

“$1B isn’t locked up in Defi,” weighed in crypto legal commenter Preston Byrne. “At least $300mm of that is in ether that early investors don’t want to sell and thereby incur the tax hit, if Dai proponents are to be believed. It’s the difference between saying “Jeff Bezos is worth $100bn” and saying “Jeff Bezos has $100bn in cash.” Defi doesn’t have $100BN locked in it, it has ether that early holders didn’t want to sell, the value of which is appreciating in the middle of a nascent bull market.”"

  • Due to the Corona outbreak the whole market plunged downwards. TVL as well (20-3-2020), ending up at 633.2M.
  • During the summer of 2020, DeFi had a small bull run, which propped up the TVL up to $12.5B (25-10-2020). Despite the cooling DeFi hype after the summer, the total value locked in these financial protocols continued to make new all-time highs.

Criticism

  • From this blog (29-4-2020):

"TVL in isolation is an incomplete metric. First, TVL denominated in USD is a bit misleading and is often driven by fluctuations in the price of ETH. Moreover, for projects that lock collateral in ETH and a stablecoin like DAI, TVL denominated in ETH actually increases when the ETH price goes down because the DAI/ETH price ratio gets larger, and vice versa.

More importantly, it’s an open secret that DeFi usage is very whale heavy, or that a handful of users are responsible for the vast majority of usage. A single MakerDAO CDP holder #3088 has 127,274 ETH as collateral, 17x the amount of collateral as the next largest CDP holder. Three users are responsible for ~80% of all user deposits on InstaDApp. These are just two examples of extremely unequal distributions of usage, and there are countless more.

Whale heaviness is bad because TVL is artificially inflated by a small number of power users. The DeFi ecosystem is dependent on them to provide the vast majority of liquidity and collateral for different projects, making DeFi less decentralized.

Thus, we need to look at the total number of users to complement total value locked and provide a more holistic view of DeFi adoption."

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