DeFi Explained — What Is TVL?

Increasingly, cryptocurrency investors are looking for on-chain indicators to evaluate projects. Total Value Locked, or TVL, has emerged as an important metric in evaluating the decentralized finance space. But what does TVL mean?

What Does TVL Stand For?

TVL represents the total value of cryptocurrency that is “locked”, or stored, in a DeFi application or smart contract. For most DeFi platforms, especially those related to lending or swaps, TVL is an important metric as it can directly affect the yields and usability of these applications for end users. For these applications in general, the higher the TVL, the better, as swaps will be more efficient and lending markets can more effectively supply liquidity to borrowers.

What Does TVL Measure?

While TVL is defined as the total value of cryptocurrency that is locked in a smart contract, it actually requires more nuanced view to understand fully. When considering TVL as an indicator, the use case of the platform in question matters. TVL can be seen as a metric for the popularity of a dApp when directly comparing two with similar functions. TVL can also be seen as a proxy for slippage in the case of a DEX such as Uniswap. In terms of slippage, lower TVL means there is more risk of getting an unexpectedly worse price, especially for larger trades.

TVL In Yield Farming

Further, for yield farming applications such as Impermax, TVL can help in determining the actual yield received by yield farmers. A higher TVL with fixed or decreasing token emission will dilute rewards relative to a lower TVL. Additionally, TVL can actually be seen as a measure of capital inefficiency in the case of an automated yield seeking strategy or a protocol treasury; these assets are certainly locked in a smart contract, but could be productive elsewhere, but are not being actively deployed for one reason or another.

What Does It Mean When TVL Is Going Up?

In the simplest terms, when the TVL of a DeFi application is rising, it is gaining liquidity, popularity, and/or usability. An increase in TVL may also be due to the prices of the tokens locked rising, so it is important to choose a consistent denominator when analyzing TVL growth — is the number of actual tokens increasing, or only their fiat price? This requires a closer look at the application you’re evaluating. Overall, rising TVL means rising usage and confidence in the dApp.

What Will Cause Impermax’s TVL To Go Up?

Yields on Impermax could attract users from other DeFi lending applications when the kinked interest rate becomes active and lending yields are driven to triple digits or higher in the underlying token with no risk of Impermanent Loss — an extremely attractive prospect. In other words, when lending and borrowing is high, Impermax yields become very high and more users will tend to add their funds to the Impermax dApp.

Growth Attracts More Growth

This in and of itself is likely to bring more users to Impermax, and when users deposit more assets to Impermax to be borrowed, TVL is increased. Similarly, as more pools are added to Impermax, more users with UNI-V2 tokens may be incentivized to deposit them for additional yield. An increase in TVL and decrease in the relative utilization rates of each Impermax lending pool leads to a constantly calibrated equilibrium in the lending rate.

This brings us to the third group of users who can drive TVL growth on Impermax: yield farmers. As borrowing rates are brought back to equilibrium from an increase in TVL, yield farmers will be more likely to farm IMX token due to the higher yields, thus leading to further increases in TVL. In this way, the prior simple assumption can be applied to Impermax as well: an increase in TVL on Impermax is attributable to increased popularity, usability, and liquidity.

We're developing a DeFi ecosystem that will enable investors to leverage their LP Tokens