28 December 2022 09:27, UTC
Reading time: ~6 m
In the crypto world, TVL refers to the so-called Total Value Locked, which is the total volume of funds locked specifically on decentralized finance protocols (DeFi).
It is usually expressed as the countervalue in US dollars, although the vast majority of the funds locked in DeFi are obviously in cryptocurrencies, and this can be misleading.
In fact, given the sharp loss in dollar value of all major cryptocurrencies during 2022, the TVL fell regardless of whether funds were withdrawn from the DeFi protocols or not.
Therefore, to correctly interpret this figure, it is necessary to compare its percentage changes over time with those of the overall market capitalization of cryptocurrencies at all times.
The collapses of crypto and TVL in DeFi
DeFi‘s TVL collapsed in 2022, but it did so at different times and for different reasons.
The first collapse is the one that followed the bursting of the speculative bubble last year, after peaks in the first half of November.
It is worth mentioning that DeFi’s TVL had literally exploded in 2021, rising from 15 billion to 180 billion. And it is also worth adding that the peak did not occur on 10 November 2021, which is when the all-time highs of Bitcoin and Ethereum were recorded, but on 2 December, which was three weeks later. This already gives a good idea of how it is not only the dollar prices of cryptocurrencies that cause this metric to vary.
This first collapse stopped in late January 2022 when the TVL fell below $130 billion, and was most likely due in large part to falling prices.
In contrast, the second collapse, in May, was due to the implosion of the Terra/Luna ecosystem, both because it literally made many funds disappear from DeFi protocols and because it caused cryptocurrency prices to fall further.
In just ten days, from 5 to 15 May, the TVL plummeted from $146 billion to $81 billion, nearly halving, and then fell again in June to $53 billion due to the second crypto price drop due to the aftermath of the Terra/Luna ecosystem implosion.
From there to the beginning of November nothing significant happened, but with the FTX bankruptcy came the third collapse that brought the TVL to its current level of $39 billion.
To summarize, since the peak in early December last year, the cumulative loss has been 78%. Interestingly, this is a very similar percentage to that of Bitcoin and Ethereum (-76%), which rather clearly indicates how falling prices are probably the main cause of this collapse.
The blockchains with higher TVL in crypto
One important thing to keep in mind is that DeFi’s TVL is not at all evenly distributed among the various blockchains.
In fact, Ethereum absolutely dominates, with almost 60% of the entire TVL. The second blockchain in this ranking, Tron, has almost six times less TVL than Ethereum.
Ethereum’s dominance in DeFi therefore is total, partly because in fourth, fifth, and seventh place in this ranking are Ethereum layer 2s such as Arbitrum, Polygon, and Optimism. Moreover, only a fourth chain, besides Ethereum, Tron and Arbitrum, exceeds $1 billion in TVL, namely BSC (Binance Smart Chain) with $4 billion.
It is worth mentioning that BNB chain, Binance‘s blockchain, has lost 81% of TVL since its peak, which did not occur in November or December 2021, but in May of the same year.
In fact, it had performed very well especially in the first half of 2021 with the boom of the PancakeSwap DEX, but thereafter the DeFi protocols on Ethereum came back to dominate unchallenged.
The top four blockchains, one of which is a second layer of Ethereum, alone own 82% of all of DeFi’s TVL, despite the fact that as many as 160 chains in total are mapped from this perspective. It is enough to mention that Avalanche, which is sixth in the ranking, has only $0.7 billion of TVL, or only 1.8% of the total.
Moreover, Tron nowadays is primarily used as the preferred blockchain to send USDT, since it has very low cost and time, hence the only real rival to Ethereum seems to be BSC, which in any case is very distant.
The major DeFi protocols
Stablecoins play an important role across the board in DeFi.
It is enough to mention that by far the single protocol with the most TVL is MakerDAO, which is the DAO that issues and manages the DAI stablecoin. It alone has nearly $6 billion in TVL, all on Ethereum, which makes up 15% of DeFi’s entire TVL.
In second place is Lido with $5.8 billion, which is very close to MakerDAO’s level.
It is worth mentioning that there are as many as 13 DeFi protocols with at least $1 billion in TVL, with six of them owning more than $3 billion each.
In addition to MakerDAO and Lido, also above three billion are Aave, Curve, Uniswap, and Convex Finance. PancakeSwap has plummeted to eighth place with just over 2 billion, whereas it once rivaled Uniswap.
Uniswap is the leading decentralized exchange (DEX), although its $3.3 billion is lower than Curve’s $3.6 billion.
Also worth noting is that Aave and Curve in particular have had problems in recent months, but judging from this ranking they have held up quite well. By contrast, the decline of PancakeSwap is surprising, partly because it does not appear to have had any serious problems.
However, it is worth mentioning that the DeFi boom on BSC in the early months of 2021 was largely due to a colossal speculative bubble related to the launch of an immense amount of new tokens with no value or foundation. As soon as this bubble inevitably burst, everything went back to normal.
What does TVL indicate
The TVL of the various DeFi protocols is calculated by checking on-chain in the smart contract wallets to verify how many tokens are there. Those tokens are actually locked within those smart contracts, even though they can be withdrawn at any time, because in order to be used within the smart contract they must remain deposited on their wallets.
Therefore the term “locked” really just means that they are temporarily deposited on a smart contract, although they can be withdrawn freely and at any time.
Once this data has been extracted from all the blockchains, the number of tokens is multiplied by their last market price in dollars, and all the products obtained in this way are added together. That total sum is called the TVL.
Therefore, this is a theoretical value, calculated exactly as is done with market capitalization. However, it is worth specifying that it is for all intents and purposes the users who own those tokens, and not the DeFi protocols or smart contracts. In fact, it is the users themselves who can withdraw them at any time. Therefore, it would be wrong to consider the TVL a kind of “market capitalization” of the DeFi protocols, because it is actually only the market capitalization of the funds that users have temporarily deposited on the smart contracts of the DeFi protocols.
However, TVL remains one of the main metrics for comparing DeFi protocols with each other, since the higher it is the more users are utilizing it.
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