Total Value Locked became the go-to metric for DeFi valuation. But raw TVL is misleading—inflated by incentives, double-counted across protocols, and disconnected from actual usage.
This guide shows you how to analyze TVL properly.
TVL = Total value of assets deposited in a protocol
For a lending protocol:
TVL = Supplied Assets + Borrowed Assets (sometimes)
For a DEX:
TVL = Liquidity Pool Value
- Whether the TVL is profitable for the protocol
- How much of TVL is real vs incentivized
- Whether TVL will stay when incentives end
- Actual protocol usage or revenue
The same dollar can appear multiple times:
- Deposit $1000 ETH into Aave
- Borrow $600 USDC
- Deposit $600 USDC into Curve
- LP token into Convex
Actual capital: $1000
Reported TVL: $1000 (Aave) + $600 (Curve) + $600 (Convex) = $2200
Aggregate TVL metrics often count this $1000 as $2200+.
High APY incentives attract TVL that leaves when incentives end:
Week 1: 200% APY → $100M TVL
Week 4: 50% APY → $40M TVL
Week 8: 10% APY → $10M TVL
The "real" TVL was $10M. Everything else was mercenary capital.
Some protocols count their own token as TVL:
- Token staking counts as TVL
- Protocol-owned liquidity in own token
- Inflates TVL without external capital
Calculate TVL without the protocol's own token:
Adjusted TVL = Total TVL - (Native Token TVL)
A protocol with $500M TVL but $400M in its own staked token has only $100M in real external capital.
Estimate organic TVL:
Organic TVL ≈ TVL × (1 - Incentive Rate / Total APY)
If a pool offers 50% APY with 45% from incentives:
Organic TVL ≈ TVL × (1 - 45/50) = TVL × 0.1
Only 10% of that TVL would likely stay without incentives.
Weight TVL by quality:
| Source |
Quality Weight |
| Organic, long-term |
1.0 |
| Moderate incentive |
0.5 |
| High incentive |
0.2 |
| Native token |
0.1 |
TVL Efficiency = Annual Revenue / TVL
This tells you how hard the TVL is working.
Benchmarks: | Protocol Type | Good Efficiency |
|---------------|-----------------|
| DEX | >2% |
| Lending | >1% |
| Yield Aggregator | >0.5% |
| Liquid Staking | >0.3% |
Compare across protocols:
| Protocol |
TVL |
Revenue |
Efficiency |
| Uniswap |
$5B |
$500M |
10% |
| Aave |
$10B |
$100M |
1% |
| Lido |
$20B |
$60M |
0.3% |
*Hypothetical numbers for illustration
Higher efficiency = TVL generating more value per dollar.
TVL to FDV = TVL / Fully Diluted Valuation
| Ratio |
Interpretation |
| >1.0 |
TVL exceeds token valuation |
| 0.5-1.0 |
Reasonable relationship |
| <0.5 |
Token may be overvalued vs TVL |
| <0.1 |
Significant speculation premium |
Sticky liquidity: - Long-term depositors
- Lower yield sensitivity
- Often protocol-aligned (vested tokens, long-term believers)
- Stays during market stress
Mercenary liquidity: - Yield-chasing capital
- Leaves immediately when incentives drop
- Often leveraged or farming strategies
- Exits during market stress
Track TVL retention after incentive changes:
Retention Rate = TVL (30 days post-incentive cut) / TVL (pre-cut)
Good: >70% retention
Concerning: <50% retention
Red flag: <30% retention
TVL Volatility = Standard Deviation of Daily TVL Changes
High volatility = unstable liquidity base = risk during market stress.
Compare protocols doing similar things:
Lending protocols: | Protocol | TVL | Utilization | Revenue | Token FDV |
|----------|-----|-------------|---------|-----------|
| Aave | $10B | 40% | $100M | $2B |
| Compound | $3B | 35% | $30M | $500M |
| Morpho | $2B | 60% | $40M | $800M |
*Hypothetical
Insights: - Morpho has best capital efficiency (utilization)
- Aave has best revenue but lower utilization
- FDV/TVL ratios vary significantly
Different categories have different TVL characteristics:
| Category |
Typical TVL/Revenue |
TVL Volatility |
Mercenary % |
| Liquid Staking |
300x |
Low |
Low |
| DEXs |
30x |
Medium |
Medium |
| Lending |
100x |
Low |
Medium |
| Yield Farming |
20x |
High |
High |
Question rapid TVL increases:
- What's driving the growth?
- Are incentives sustainable?
- Is it whale concentration?
Check TVL distribution:
- Top 10 wallets holding >50% = concentrated
- Single wallet >20% = very concentrated
- Protocol vulnerable to whale withdrawal
High TVL but low activity signals problems:
- Capital parked, not being used
- Inefficient protocol design
- Potential for TVL flight
Activity Ratio = Daily Active Users / TVL
Declining ratio over time = TVL growing but usage isn't.
- Raw TVL - Headline number
- Adjusted TVL - Excluding native token and obvious inflation
- TVL Change -
7-day, 30-day trends
- Revenue/TVL - Efficiency metric
- Utilization - For lending protocols
- Concentration - Top wallet %
- Retention - Post-incentive stickiness
- DefiLlama - Comprehensive TVL tracking
- Token Terminal - Revenue and efficiency metrics
- Dune Analytics - Custom queries for deeper analysis
- Protocol dashboards - First-party data
- Check TVL changes for holdings
- Compare vs category benchmarks
- Investigate any >10% changes
- Assess sustainability of any growth
- Update position sizing based on analysis
Fair Value Range = TVL × Efficiency × Multiple
- **Where:** Efficiency = Revenue / TVL
Multiple = 10-30x (varies by growth, quality)
Protocol X:
- TVL: $500M
- Revenue: $10M (2% efficiency)
- Growing 50% annually
Fair Value = $500M × 2% × 25 = $250M FDV
If current FDV is $100M → potentially undervalued
If current FDV is $500M → potentially overvalued
Increase multiple for:
- Sustainable TVL (sticky)
- Growing efficiency
- Market leader position
- Strong team/development
Decrease multiple for:
- Mercenary TVL
- Declining efficiency
- Competitive pressure
- Token unlock coming
Is high TVL always good?
No. TVL quality matters more than quantity. $100M of sticky, efficient TVL beats $1B of incentivized, inactive TVL.
How do I find organic TVL?
Look at TVL history before and after incentive programs. The baseline without incentives approximates organic TVL.
What's a good TVL growth rate?
Depends on stage. Early protocols: 50-100%+ annually is good. Mature protocols: 10-20% is solid. Declining TVL is a warning sign.
Should I invest based on TVL?
TVL is one input, not the decision. Combine with revenue analysis, competitive position, team quality, and token economics.
