How Can a Protocol’s Total Value Locked (TVL) Be Used as a Proxy for Financial Performance?
TVL, the total amount of assets deposited in a protocol, is a common proxy for usage and market share, especially in Decentralized Finance (DeFi). While not a direct measure of revenue or profit, a higher TVL often correlates with higher protocol fees generated, which are the basis for DCF models.
Investors can use the Price-to-TVL ratio as a comparative metric. However, TVL can be inflated by temporary liquidity mining incentives, so it must be analyzed alongside real usage metrics.
Glossar
Tvl
Value ⎊ The total aggregate worth of all assets deposited into a specific decentralized finance protocol, typically denominated in a stable unit for consistent measurement.
Total Value Locked
Collateralization ⎊ Total Value Locked, within decentralized finance, represents the aggregate value of crypto assets deposited in smart contracts, functioning as collateral for various protocols.
Value Locked
Collateral ⎊ The term "Value Locked" within cryptocurrency, options, and derivatives primarily quantifies the aggregate notional value of assets deposited or pledged as security to support positions or protocols.