TVL Analysis for DeFi Protocols

TVL Analysis for DeFi Protocols: What It Really Tells You About Value

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.

What TVL Actually Measures

The Basic Definition

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

What TVL Doesn't Tell You

• 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

TVL Manipulation and Inflation

Double Counting

The same dollar can appear multiple times:

1. Deposit $1000 ETH into Aave
2. Borrow $600 USDC
3. Deposit $600 USDC into Curve
4. 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+.

Incentive-Driven TVL

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.

Self-Referential TVL

Some protocols count their own token as TVL:

• Token staking counts as TVL
• Protocol-owned liquidity in own token
• Inflates TVL without external capital

Adjusted TVL Metrics

Excluding Native Tokens

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.

Excluding Incentivized TVL

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.

Quality-Adjusted TVL

Weight TVL by quality:

TVL to Revenue Analysis

The Key Ratio

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% |

Revenue Per Dollar of TVL

Compare across protocols:

*Hypothetical numbers for illustration

Higher efficiency = TVL generating more value per dollar.

TVL vs Market Cap

TVL to FDV = TVL / Fully Diluted Valuation

Liquidity Quality Analysis

Sticky vs Mercenary Liquidity

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

Measuring Stickiness

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

Historical Volatility

TVL Volatility = Standard Deviation of Daily TVL Changes

High volatility = unstable liquidity base = risk during market stress.

Comparative TVL Analysis

Same-Category Comparison

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

Cross-Category Comparison

Different categories have different TVL characteristics:

Red Flags in TVL

Sudden TVL Spikes

Question rapid TVL increases:

• What's driving the growth?
• Are incentives sustainable?
• Is it whale concentration?

Whale Concentration

Check TVL distribution:

• Top 10 wallets holding >50% = concentrated
• Single wallet >20% = very concentrated
• Protocol vulnerable to whale withdrawal

TVL vs Activity Mismatch

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.

Building a TVL Dashboard

Key Metrics to Track

1. Raw TVL - Headline number
2. Adjusted TVL - Excluding native token and obvious inflation
3. TVL Change - 7-day, 30-day trends
4. Revenue/TVL - Efficiency metric
5. Utilization - For lending protocols
6. Concentration - Top wallet %
7. Retention - Post-incentive stickiness

Data Sources

• DefiLlama - Comprehensive TVL tracking
• Token Terminal - Revenue and efficiency metrics
• Dune Analytics - Custom queries for deeper analysis
• Protocol dashboards - First-party data

Weekly Review Process

1. Check TVL changes for holdings
2. Compare vs category benchmarks
3. Investigate any >10% changes
4. Assess sustainability of any growth
5. Update position sizing based on analysis

TVL-Based Valuation

Simple Framework

Fair Value Range = TVL × Efficiency × Multiple

- **Where:** Efficiency = Revenue / TVL
Multiple = 10-30x (varies by growth, quality)

Example

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

Adjustments

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

FAQs

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.