Introduction
Total Value Locked (TVL) has become one of the most cited metrics in decentralized finance (DeFi). Market commentators, analysts, and even institutional investors use TVL to gauge the scale of DeFi activity and the health of specific protocols. Yet the Bank for International Settlements (BIS), in its Working Paper “Towards verifiability of TVL”, cautions that current measurement practices lack transparency and consistency.
The report proposes new approaches to ensure that TVL figures are verifiable, standardized, and resilient to manipulation—a prerequisite if DeFi metrics are to play a meaningful role in institutional adoption and regulatory oversight.
Understanding TVL
In simple terms, TVL represents the total amount of assets deposited into DeFi protocols. It captures how much liquidity is “locked” in lending pools, automated market makers (AMMs), derivatives platforms, or other smart contracts. High TVL is often interpreted as a signal of trust, adoption, and economic weight.
However, the BIS notes that TVL as currently reported suffers from several flaws:
- Double counting: assets used as collateral in one protocol can be re-hypothecated across multiple protocols, inflating numbers.
- Volatility of valuations: TVL is often reported in USD terms, making it sensitive to crypto price swings rather than actual user deposits.
- Opaque methodologies: data providers use different sampling, weighting, and aggregation techniques, producing inconsistent outcomes.
These weaknesses undermine TVL’s credibility as a metric for risk assessment and regulatory monitoring.
The BIS Proposal: Verifiable TVL (vTVL)
The report introduces the concept of verifiable TVL (vTVL)—a framework to make TVL measurement transparent and auditable.
Key elements include:
- On-chain proof of reserves
- Protocols should enable independent verification of locked assets directly on-chain.
- Zero-knowledge proofs and Merkle trees can support privacy-preserving verification.
- Standardized methodology
- Harmonized definitions for what constitutes “locked” assets.
- Rules for excluding double-counted or recursively leveraged assets.
- Auditability and attestations
- Third-party attestation, similar to financial audits, should validate reported TVL.
- Public dashboards could disclose methodologies, assumptions, and discrepancies.
- Separation of valuation from deposits
- Distinguish between nominal asset amounts and their fluctuating fiat values.
- This would reduce noise from crypto market volatility.
Why Verifiability Matters
The BIS argues that unreliable metrics create risks at multiple levels:
- For investors: Inflated TVL figures may give a false impression of liquidity depth and safety.
- For regulators: Lack of verifiability makes it difficult to monitor systemic risks, such as concentration of funds or potential contagion channels.
- For institutions: Adoption of DeFi by banks or asset managers requires robust metrics for risk management and compliance.
By contrast, vTVL could become a cornerstone metric, comparable to Assets Under Management (AUM) in traditional finance.
Implications for Institutional Adoption
For institutional actors, the shift from TVL to vTVL carries several implications:
- Risk management: More reliable measures will allow institutions to evaluate exposure and stress scenarios with confidence.
- Product design: Tokenized products and structured DeFi investments may include vTVL as a benchmark for portfolio allocation.
- Compliance integration: Regulators could require vTVL reporting as part of disclosure standards for permissioned DeFi pools.
- Market discipline: Transparent metrics would incentivize protocols to adopt safer designs and discourage opaque practices.
Broader Policy Context
The BIS situates its recommendations within the broader debate on data integrity in DeFi:
- Transparency as public good: Reliable metrics can help align incentives between developers, investors, and regulators.
- Role of standard setters: International bodies such as the FSB or IOSCO could coordinate global adoption of vTVL standards.
- Technological innovation: Zero-knowledge proofs, proof-of-reserves frameworks, and oracles play central roles in bridging trust gaps.
The paper also notes that fragmentation across data providers mirrors earlier stages of traditional financial markets before the emergence of standardized reporting frameworks (e.g., IFRS, Basel). DeFi may undergo a similar evolution as it matures.
Comparative Perspectives
Other jurisdictions and industry groups are already exploring similar initiatives:
- United States: Proposed stablecoin legislation (GENIUS Act) includes reporting standards for reserves that could inspire vTVL frameworks.
- European Union: Under MiCA, providers of significant crypto-asset services may be required to maintain transparent reporting, paving the way for standardized DeFi metrics.
- Industry consortia: Blockchain analytics firms are experimenting with open-source methodologies for transparent TVL tracking.
Conclusion
The BIS working paper makes a clear case: TVL in its current form is insufficient for institutional-grade analysis and regulatory oversight. Without verifiability, the metric risks misleading investors, undermining trust, and masking systemic vulnerabilities.
By proposing the concept of verifiable TVL (vTVL), the BIS outlines a path toward more reliable and transparent measures. For regulators, it offers a tool to integrate DeFi into financial stability monitoring. For institutions, it provides a benchmark akin to AUM—critical for due diligence, compliance, and integration with traditional finance.
As DeFi evolves, the success of its institutional adoption may hinge not only on technology or regulation but also on the integrity of the data that underpins decision-making. Verifiable TVL could become the bridge between innovation and trust.
Reference:
Bank for International Settlements. (2025). Towards verifiability of Total Value Locked (TVL) in decentralized finance. BIS Working Paper No. 1268. Available here