Insight into TVL Value: How to Identify the Real and Fake in DeFi

Recently, a notable event has occurred in the crypto asset space— a Solana developer created multiple layered protocol combinations under different identities within the Solana ecosystem, artificially inflating the chain’s TVL performance. This incident reveals a long-standing yet easily overlooked issue: although TVL is a widely used metric, it is susceptible to abuse and misinterpretation. So, what does TVL truly represent? What is its real significance across different application scenarios?

What Does TVL Actually Measure?

TVL (Total Value Locked) is a core indicator for assessing the scale of DeFi projects. Simply put, it measures how much capital is locked in a protocol. Intuitively, a higher TVL indicates a larger amount of funds attracted by the project, seemingly reflecting its popularity. Investors can even use market cap divided by TVL for a rough valuation—lower TVL suggests relative affordability, while higher TVL indicates higher valuation.

However, this simple logic hides many pitfalls.

Why Is TVL Prone to Misuse?

First, TVL is a static snapshot at a specific point in time. Today’s TVL data does not guarantee that it will remain the same tomorrow, especially in the highly volatile crypto market environment. Short-term incentive adjustments by project teams and token price fluctuations can cause significant changes in TVL.

More importantly, the meaning of TVL varies greatly across different application layers. At the project level, the same TVL number can represent vastly different realities across protocols; at the blockchain level, stacking multiple protocols can lead to serious double counting— the same funds being counted multiple times in different projects’ TVL.

Data platform Defi Llama has recognized this issue. For a period, the platform adjusted its calculation method for chain TVL to avoid double counting of layered protocol stacks, which led to a sharp decline in TVL figures for many chains—bursting the inflated bubble.

TVL in DEXes and Lending Protocols Has Different Meanings

In decentralized exchanges (DEX), TVL reflects the actual liquidity volume. For example, Uniswap’s TVL directly indicates the amount of funds deposited in trading pairs, since it does not involve token staking or liquidity mining.

However, some protocols have added more functions to governance tokens. Curve and Sushi allow users to stake governance tokens to earn a share of trading fees. These staked tokens could theoretically be included in TVL, but data platforms usually list this separately as “Staking” to avoid confusion with liquidity.

In lending protocols, the definition of TVL is entirely different. Compound’s TVL refers to the “deposit minus borrow”— the total deposits minus total loans— representing the remaining available liquidity within the protocol. This metric, along with total deposits and total loans, is crucial because it reflects the actual lending capacity of the protocol.

Aave’s case is more complex. Users can stake AAVE tokens or LP tokens to earn platform rewards, which are also listed separately under Staking. MakerDAO’s logic differs—users borrow DAI stablecoins issued by the protocol rather than cash, so funds deposited in MakerDAO do not decrease due to borrowing; thus, its TVL equals total deposits.

These differences highlight a core fact: one cannot use the same yardstick to measure all protocols’ TVL. Each project’s TVL must be understood according to its unique mechanism.

How Yield Aggregators, Staking Derivatives, and Service Tools Can Inflate TVL

Some projects are inherently prone to double counting of TVL.

Yield aggregator projects automatically deposit user funds into underlying protocols to generate higher yields. Yearn and Convex Finance are typical examples. Convex, designed for Curve miners, holds large amounts of CRV tokens and stakes them to help users earn higher yields. Users can convert CRV to CVXCRV and stake to share rewards but cannot redeem directly through the protocol. On the blockchain level, Convex’s TVL and Curve’s TVL are double counted under traditional methods. When Solana’s ecosystem TVL was only about $10.5 billion, Saber DEX and its built-in yield aggregator Sunny accounted for $7.5 billion, illustrating significant double counting.

Liquidity staking protocols also tend to inflate TVL figures. Lido, for example, issues derivative tokens to provide liquidity for staked PoS assets. These derivative tokens are then used in other DeFi projects. Lido’s staked ETH once reached $7.61 billion, but the issued stETH tokens are used as collateral in Aave (about 21.6%) and provide liquidity in Curve’s ETH/stETH pool (about 14.7%). These funds are counted multiple times across different projects’ TVL.

Now, Defi Llama has adjusted its calculation method to avoid counting staked assets at the chain level, but this introduces new issues: some stETH is stored in centralized exchanges or lending platforms, representing ETH staked on-chain but not reflected in chain TVL, potentially leading to underreporting.

Service protocols facilitate user operations by integrating multiple underlying protocols. Instadapp is a typical “middleware” tool that offers a unified asset management interface for protocols like Aave, Compound, Maker, Uniswap, Liquity, etc., simplifying complex DeFi interactions. Its DeFi smart layer (DSL) aims to be foundational infrastructure for DeFi. With features like flash loans, Instadapp helps users leverage, deleverage, or switch debt positions easily. At one point, Instadapp’s TVL reached $13.5 billion, but since all funds are actually stored in other protocols, it is reasonable that its TVL is not double counted at the chain level.

How to Properly Interpret TVL: The Truth Behind the Data

TVL is prone to misinterpretation but is not entirely without value. The key is understanding its true meaning in different contexts.

At the application level, TVL reflects the actual current fund size of a project and can be used for cross-comparison among similar projects. At the blockchain level, previous double counting inflated figures, but recent improvements have made the data more accurate and reliable.

As bubbles burst, more authentic TVL data becomes even more valuable—no longer an easily manipulated vanity metric, but a genuine indicator of ecosystem liquidity and project scale. Investors and analysts should understand the mechanisms behind TVL rather than blindly chase projects with high TVL. Only then can TVL serve as an effective tool for assessing the health of the DeFi ecosystem.