TVL Composition refers to the specific assets that make up the total locked value. It's not just about the headline number.

• A protocol's TVL could be concentrated in a single volatile asset or diversified across stablecoins.
• For example, a lending platform with $1B TVL in mostly ETH carries different risk than one with $1B in USDC.
• Understanding composition helps assess exposure to asset-specific volatility and the stability of the protocol's economic base.

This examines where the yields paid to users ultimately come from, which dictates long-term viability. Sustainable yields are crucial for protocol health.

• Sources include trading fees, lending interest, or protocol token emissions.
• A yield farm paying 100% APR solely in new tokens is likely unsustainable versus a DEX sharing actual swap fees.
• Evaluating the source helps you distinguish between genuine revenue and inflationary, short-term incentives that may devalue.

Protocol Utility measures how essential and frequently used the core service is, creating organic demand for locking assets. High utility often supports healthier metrics.

• A decentralized exchange (DEX) needs liquidity for swaps, creating direct utility for provided capital.
• In contrast, a single-staking vault may have less inherent utility beyond the staking action itself.
• Assessing utility helps gauge whether TVL is driven by genuine need or speculative farming, impacting its stickiness.

Smart Contract Risk is the potential for bugs or exploits in the protocol's code that could lead to loss of locked funds. It's an inherent risk separate from market volatility.

• All TVL is ultimately custodied by immutable code on the blockchain.
• Historical examples include the Poly Network or Wormhole bridge exploits, where hundreds of millions were drained.
• This risk necessitates researching audit history, bug bounty programs, and the team's reputation before committing capital.

Centralization Vectors are points of control that could allow a small group (developers, DAO) to manipulate the protocol or user funds, contradicting DeFi's decentralized ethos.

• These include admin keys to upgrade contracts, pause functions, or multi-sig treasuries.
• For example, a protocol with an un-renounced contract owner could theoretically alter fee structures or withdraw liquidity.
• Identifying these vectors is critical for assessing custodial risk and the true decentralization of a protocol's TVL.

TVL is often reported as an aggregate sum, but its distribution across different blockchains or layers significantly impacts its characteristics and risks.

• TVL on Ethereum L1 has different security assumptions and costs than on an emerging L2 or alternative L1.
• Bridged assets between chains introduce additional trust assumptions and potential bridge vulnerabilities.
• Analyzing TVL by chain helps you understand the technological stack and associated risks supporting your locked value.

TVL composition refers to the specific assets making up the total locked value. A high TVL dominated by a single, volatile, or illiquid asset creates concentrated risk.

• A protocol's TVL could be 90% composed of its own native token, which may collapse independently of platform utility.
• During a market downturn, reliance on stablecoins like USDT or USDC is safer than volatile crypto assets.
• This matters because users may mistake a large, unstable TVL for security, not realizing their funds are tied to a single point of failure.

Incentivized TVL is value temporarily attracted by high yield farming rewards, not organic usage. This creates a false sense of growth and sustainability.

• Protocols often offer massive token emissions to liquidity providers, artificially pumping TVL numbers.
• Once incentives dry up, a 'rug pull' effect can occur, with TVL plummeting and leaving remaining users exposed.
• This matters as it misleads investors about genuine product-market fit and long-term viability, leading to sudden capital flight.

TVL measures assets deposited, not net obligations. It does not reveal the protocol's debt or outstanding liabilities from lending/borrowing activities.

• A lending platform can have high TVL from deposits while simultaneously having an even larger volume of bad debt from undercollateralized loans.
• The 2022 collapse of several lending protocols showed high TVL right before insolvency.
• This matters because users need to assess the balance sheet health, not just the asset side, to understand true solvency risk.

TVL is agnostic to security. A high number does not imply the underlying smart contracts are audited, battle-tested, or free from critical vulnerabilities.

• Billions in TVL have been lost to exploits and hacks, like the Poly Network or Wormhole bridge incidents, despite impressive metrics.
• TVL also doesn't indicate custody risk—whether assets are in non-custodial smart contracts or held by a centralized entity.
• This matters as users must evaluate technical and custodial risks separately; a large TVL can be a larger target for attackers.

TVL is highly correlated with broader crypto market prices. It often rises and falls with asset valuations, masking protocol-specific performance and creating liquidity traps.

• In a bull market, TVL inflates due to rising token prices, not necessarily new capital inflows.
• During a crash, rapid withdrawals can be hampered by smart contract limits or network congestion, locking in losses.
• This matters because users may over-attribute growth to the protocol and underestimate systemic market risk and exit liquidity challenges.