What’s TVL in crypto? How to evaluate DeFi dApp reliability
Dec 16, 2025・5 min read
The lack of intermediaries in decentralized finance (DeFi) is both a draw and a concern for many new crypto traders. Since the decentralized applications (dApps) in DeFi use blockchain technology, there are no counterparties to step in and regulate network activity.
On the positive side, this gives users complete control over their digital assets. However, the privacy and peer-to-peer nature of DeFi opens the door to security threats, such as hacks and scams.
Examining each platform’s total value locked (TVL) is one of the most common ways to screen DeFi dApps and find the most reliable options. By learning what TVL is in crypto, you’ll be better equipped to make confident choices with your portfolio.
What’s TVL in crypto?
TVL is a metric that shows the total deposited cryptocurrency and other digital assets on a blockchain or dApp. You can think of TVL as a real-time snapshot of the assets committed to a particular Web3 protocol.
Users typically send these cryptocurrencies into blockchain-based programs called “smart contracts,” which are then used to offer DeFi-related services like intermediary-free lending or trading on decentralized exchanges. So because TVL primarily measures the user deposits locked up in those smart contracts, it can provide information about a project’s current treasury when funds are stored on-chain.
Why is TVL important?
By default, DeFi lacks the same regulatory credentials and third-party oversight that centralized crypto platforms offer. Although this creates a trustless environment for traders, it also raises questions about the reliability and liquidity of each protocol.
Reporting TVL lets DeFi blockchains and dApps prove the overall health of their projects. High TVLs often correlate with positive traits, like robust investor confidence, high utility, and improved security. DeFi protocols with low TVL suggest less user adoption, which gives them a higher risk profile in terms of scam activity and pricing inefficiencies like slippage.
So by comparing the TVL for various DeFi protocols, crypto traders gain quick, actionable insights and are better able to assess the risks associated with different offerings.
How is TVL calculated?
Calculating TVL involves adding the total value of assets stored in a protocol’s smart contracts. This includes deposits users commit to liquidity pools, tokens staked for rewards, and assets committed to lending and borrowing. For convenience, dApps convert the value of these cryptocurrencies into the equivalent amount of a fiat currency (typically USD).
The simplest type of TVL calculation subtracts total withdrawals from total deposits. For example, if a dApp has $500 million in deposits and $100 million in withdrawals, the current TVL is $400 million.
But when DeFi protocols offer more complex features like lending, staking, and borrowing, they often use the following equation:
TVL = total supplied assets + total staked assets − borrowed assets
Suppose a platform has $100 million in supplied tokens, $20 million staked in its native token, and $30 million borrowed. Its TVL would be calculated as follows:
TVL = $100 million + $20 million − $30 million = $90 million
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What are the limitations and risks of TVL?
Despite TVL’s widespread usage, it’s not always a reliable metric. Here are the current limitations when using TVL to assess dApps:
- Lack of standardization: There’s no one standard way to calculate TVL, so each dApp uses its own definitions. That means TVL calculations for various platforms can include or exclude different digital assets, making it harder to draw direct comparisons.
- High volatility: Price swings in the global crypto market cap constantly influence TVL, since DeFi projects hold volatile assets like Ethereum (ETH). In some cases, the rise and fall in TVL is more related to current market dynamics than the strength of a particular protocol.
- Oversimplification: A seemingly “good” TVL can obscure other problems, such as lackluster security audits or governance inequalities. Rather than relying too heavily on TVL, traders must incorporate it into a more comprehensive analysis.
- Potential to increase vulnerability: Ironically, a high TVL can make a dApp riskier once it starts attracting bad actors. Any dApp with a higher-than-average TVL needs stronger defenses against exploits and losses, as it’s more likely to become a target.
3 key considerations when using TVL to evaluate crypto platforms
TVL is a helpful snapshot, but it shouldn’t be your only consideration when evaluating DeFi options. You’ll also need to consider the protocol’s security, incentive structure, and user trust to get a better sense for its reliability.
1. Assess security
High TVLs over long time periods typically suggest that a protocol is well established and widely used. However, dApps can artificially inflate their numbers by employing short-term incentives or complex token models to create a false sense of credibility.
For an unbiased view, crypto investors often turn to third-party aggregators like DefiLlama, which track TVL across the Web3 ecosystem. Traders also incorporate other findings, such as third-party security audits and team member transparency, to get a more complete picture of a dApp’s reputation.
2. Compare yield opportunities
Traders sometimes use TVL in conjunction with a DeFi platform’s advertised yields to decide whether the rewards are sustainable. For example, a platform offering extremely high returns with a low TVL raises warning flags, while modest yields and a growing TVL suggest the protocol has the support needed to offer reliable rewards.
3. Identify growth potential
If TVL trends upward over time, it may indicate growing interest and adoption of a particular dApp, which could translate into more opportunities and increased security. So crypto traders sometimes employ TVL trend analysis to research the growth potential for DeFi-related tokens. Although it’s a more speculative use case, using TVL to identify growth opportunities in the crypto market may help traders spot promising projects early and assess how a specific DeFi protocol compares to competitors.
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The surge in TVL levels shows that many traders are pouring billions into the DeFi ecosystem. If you want to follow suit and take advantage of the opportunities DeFi offers, just keep in mind that these activities often come with tax implications. To remain compliant, you’ll need to let the IRS know about every token swap and reward received on dApps.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.
FAQ
What does TVL stand for?
TVL stands for “total value locked,” and refers to the total amount of cryptocurrencies deposited on a DeFi protocol.
Is TVL a good metric?
TVL is a useful metric that gives you a quick picture of user commitment and engagement in DeFi, but it’s limited in scope and works best when considered alongside other factors like advertised yields.
What’s a TVL check?
A “TVL check” typically involves researching the latest TVL for specific dApps or entire blockchains on third-party aggregator sites like DefiLlama.
How does TVL reflect market sentiment?
Increased TVL often correlates with greater confidence and enthusiasm for a dApp, while falling TVL scores suggest waning interest and trust.