TVL Investments: Diversification Strategies for Institutions

Total Value Locked (TVL) is a key metric in decentralized finance (DeFi) that measures the dollar value of assets locked in smart contracts. For institutions, TVL serves as a benchmark for platform liquidity, trust, and market activity. However, relying solely on TVL can be misleading due to risks like smart contract vulnerabilities, governance attacks, and regulatory uncertainty.

Key Takeaways:

• TVL Growth: DeFi TVL surged from $0.5B in 2020 to $125B by late 2024, driven by institutional adoption.
• Institutional Focus Areas: Ethereum dominates, with Layer 2s (e.g., Arbitrum) and tokenized U.S. Treasuries gaining traction.
• Diversification Strategies:
  • Allocate across blockchains: Ethereum (40–50%), Layer 2s (20–30%), alternative Layer 1s (20–30%).
  • Spread exposure across DeFi sectors: Lending (25–35%), liquid staking (20–30%), DEXs (15–25%), tokenized assets (10–20%).
• Risks: TVL can be inflated by short-term incentives or leverage. Institutions should also assess protocol revenue, user activity, and governance.

Actionable Insights:

1. Use factor-based allocation methods like TVL-weighting, risk-parity, or capped exposure.
2. Partner with advisory firms (e.g., BeyondOTC) for protocol vetting, risk assessment, and compliance.
3. Monitor TVL alongside other metrics like on-chain revenue, collateral quality, and audit history.

TVL is a starting point, not the full picture. Institutions must combine data-driven strategies with robust risk management to build diversified and resilient portfolios.

The Current State of Institutional TVL

TVL Distribution Across Blockchains and Protocol Types

Ethereum remains the cornerstone of institutional activity in decentralized finance (DeFi), holding the largest share of total value locked (TVL). Its established infrastructure, deep liquidity pools, and proven reliability align with the priorities of institutional risk committees. When deciding where to allocate capital, institutions prioritize factors like security, custody solutions, and regulatory clarity – areas where Ethereum consistently excels.

Ethereum’s Layer 2 networks, including Arbitrum, Optimism, and Base, are increasingly capturing attention. These scaling solutions offer reduced transaction fees and faster settlement times while maintaining Ethereum’s security. For institutions, this makes Layer 2s an attractive option for activities like decentralized exchange (DEX) trading, lending, and yield generation, where high gas fees on Ethereum’s mainnet could otherwise cut into returns.

While alternative Layer 1 blockchains, such as Solana, Avalanche, and BNB Chain, host smaller but notable pockets of institutional TVL, they appeal to those seeking unique advantages like faster block times or reduced latency. However, institutions often approach these platforms cautiously, citing concerns about validator centralization, newer codebases, and less mature legal and custody frameworks.

When it comes to protocol categories, lending and borrowing markets dominate TVL figures. These protocols require significant liquidity to support leverage, collateralized loans, and credit strategies. Similarly, DEXs attract substantial TVL as liquidity providers and market makers lock assets to enable trading. Liquid staking protocols have also grown significantly, particularly on Ethereum, allowing institutions to stake assets for yield while retaining liquidity through derivative tokens.

The tokenization of real-world assets (RWA) represents a smaller slice of DeFi’s overall TVL but holds outsized importance for institutional players. Tokenized products like U.S. Treasuries, money market funds, and short-term credit instruments map closely to traditional fixed-income investments, fitting seamlessly into existing risk and investment frameworks. This alignment has driven rapid growth in RWA-linked TVL, often outpacing more crypto-native categories. The following data points highlight these trends.

Data Points Showing Institutional Activity

Metrics clearly demonstrate that institutions are making substantial TVL allocations. Cross-chain DeFi protocols designed with institutional features – such as permissioned liquidity pools, compliance-first architecture, and identity-aware standards – now account for over $7.8 billion in TVL as of 2025.

Among the most prominent institutional use cases in DeFi is tokenized U.S. Treasuries. For example, BlackRock launched a tokenized fund platform on Ethereum in early 2024, managing more than $500 million in tokenized Treasuries on public blockchains. Similarly, Franklin Templeton‘s tokenized money market fund, leveraging Stellar and Polygon for settlement, has surpassed $400 million in assets under management.

A 2024 survey conducted by a major digital asset custodian revealed that nearly 75% of institutional investors identified clearer regulatory frameworks as the key driver for increasing their digital asset allocations. This regulatory clarity has encouraged institutions to expand beyond traditional crypto holdings like Bitcoin and Ethereum, embracing yield-generating DeFi strategies.

TVL Comparison by Segment

The table below provides a snapshot of how TVL is distributed across major segments, helping institutions identify where liquidity is concentrated and which opportunities align with their goals:

This analysis highlights the importance of RWA tokenization and cross-chain institutional protocols for U.S. institutions, particularly those seeking dollar-based yields and low-duration risk. These segments align well with traditional portfolio strategies while offering the efficiency of blockchain-based settlement.

Lending markets remain a cornerstone for institutions using leverage or collateral management in DeFi. However, risks like liquidation cascades and reliance on price oracles require careful oversight. DEXs, on the other hand, primarily serve as venues for liquidity provision and trade execution rather than long-term asset allocation. Meanwhile, liquid staking protocols cater to institutions aiming to earn staking rewards without sacrificing liquidity.

For U.S. institutions, the current distribution of TVL suggests a two-tiered strategy: core allocations focus on Ethereum and its Layer 2 ecosystem, where compliance tools and regulatory clarity are strongest, while smaller, satellite allocations target alternative Layer 1s and emerging DeFi use cases with clear liquidity or return advantages. RWA-linked TVL continues to act as a bridge between traditional finance and DeFi, offering familiar investment profiles with the added efficiency of blockchain technology.

Collaborating with advisors like BeyondOTC can simplify access to vetted protocols and curated opportunities, helping institutions diversify their exposure while managing risks around liquidity and compliance. These insights emphasize the need to balance allocations across various TVL segments to optimize returns and manage risks effectively.

DeFi’s Next Frontier: Institutional Capital Meets DeFi | monetsupply | S9 E1

How Institutions Can Diversify TVL Allocations

After reviewing institutional TVL strategies, let’s dive into how institutions can diversify their TVL portfolios effectively. The aim? Balance risks, capitalize on yield opportunities, and avoid over-concentration in any single blockchain or sector.

Diversifying Across Multiple Blockchains

Ethereum remains the backbone of most institutional TVL allocations. However, placing all your eggs in one basket – no matter how sturdy – can expose portfolios to unnecessary risks. A multi-chain strategy spreads exposure across various blockchains, reducing vulnerability to network-specific issues like congestion or technical failures.

• Ethereum (40–50%): This allocation focuses on Ethereum’s well-established protocols, deep liquidity, and reliable custody infrastructure. Ethereum’s resilience through multiple market cycles makes it a solid foundation for large institutional positions.
• Layer 2 Networks (20–30%): Platforms like Arbitrum, Optimism, and Base offer lower transaction costs while benefiting from Ethereum’s security. These networks are ideal for strategies requiring frequent rebalancing or yield optimization, thanks to their scalability and reduced gas fees.
• Alternative Layer 1 Blockchains (20–30%): Chains like Solana and Polygon provide unique advantages. Solana’s high throughput suits high-frequency strategies, while Polygon’s enterprise partnerships cater to compliance-focused institutions. However, these chains often feature newer codebases and smaller validator sets, which require active monitoring and smaller position sizes.

This diversified approach ensures the portfolio remains resilient. For instance, if Ethereum encounters congestion or a major exploit, Layer 2s and alternative Layer 1s can still deliver returns. Similarly, operational issues on an alternative Layer 1 won’t jeopardize the majority of the portfolio anchored on Ethereum.

That said, managing a multi-chain portfolio comes with its own complexities. Each blockchain demands separate custody solutions, gas token management, and monitoring. Institutional custodians like Coinbase Custody and Fidelity Digital Assets simplify this process by offering support for multiple networks under one interface. However, institutions must confirm which chains and protocols are supported before committing capital.

Diversifying Across DeFi Sectors

Blockchain diversification is only part of the equation. Institutions also need to spread their exposure across various DeFi sectors, each with distinct risk-return profiles and revenue sources. This reduces correlation risk and ensures no single market condition dominates the portfolio.

• Lending Platforms (25–35%): Aave and Compound are staples in institutional portfolios, offering predictable yields through interest rate spreads. Their established liquidation mechanisms and multi-year track records make them ideal for conservative strategies.
• Liquid Staking Protocols (20–30%): Platforms like Lido and Rocket Pool allow institutions to earn staking rewards without locking up assets or managing validator infrastructure. Liquid staking tokens (LSTs) can also be used in other DeFi applications for additional yield. However, institutions must monitor the risk of LSTs de-pegging from their underlying assets.
• Decentralized Exchanges (15–25%): DEXs like Uniswap and Curve generate returns through trading fees. While these returns can fluctuate with trading volume and market conditions, they’re suitable for institutions willing to actively manage positions.
• Real-World Asset (RWA) Tokenization Projects (10–20%): This emerging sector bridges traditional finance and blockchain. For example, BlackRock’s tokenized fund on Ethereum managed over $500 million in U.S. Treasuries by early 2025, while Franklin Templeton’s tokenized money market fund surpassed $400 million. These projects offer stability similar to fixed-income investments but with blockchain-based efficiency.

By aligning sector allocations with institutional goals, portfolios can balance stability and yield. For example, lending platforms and RWA tokenization offer more predictable returns, while liquid staking and DEXs provide opportunities for higher yields.

Factor-Based Allocation Methods

Once blockchain and sector allocations are defined, institutions can fine-tune their portfolios using factor-based allocation methods. These approaches optimize position sizing based on specific criteria:

• TVL-Weighted Allocation: Capital is distributed proportionally to each protocol’s TVL. For instance, if Aave represents 30% of the TVL across an institution’s investment universe, it receives 30% of the allocated capital. This method is simple and naturally favors established protocols. However, it may overweight mature protocols with lower yields and underweight emerging opportunities.
• Risk-Parity Allocation: This method sizes positions based on risk contribution rather than capital amount. High-volatility protocols receive smaller allocations, while more stable ones get larger shares. This approach balances risk exposure but requires sophisticated modeling and frequent rebalancing.
• Capped Exposure Models: These set maximum allocation limits for individual protocols, sectors, or blockchains. For example, an institution might cap any single protocol at 10% of the portfolio or any blockchain at 50%. While this ensures diversification, it may limit allocations to high-potential protocols.

Most institutions combine these methods. A common framework starts with TVL-weighting, incorporates risk-parity adjustments, and applies caps to enforce diversification discipline.

Position Sizing and Rebalancing

Position sizes should reflect protocol maturity:

• Established Protocols: Protocols like Aave, Uniswap, and Lido with multi-year track records and over $1 billion in TVL can support allocations of 8–12%.
• Proven but Smaller Protocols: Those with $100 million to $1 billion in TVL warrant moderate allocations of 4–8%.
• Emerging Protocols: Protocols with less than $100 million in TVL should receive 1–3%, limiting downside risk while capturing potential upside.

Rebalancing schedules – quarterly or semi-annually – should be combined with triggers that adjust positions when they drift beyond acceptable ranges, such as ±5% from target allocations. This disciplined approach ensures portfolios remain aligned with institutional objectives while adapting to market changes.

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Risks and Limitations of TVL Investments

TVL (Total Value Locked) often showcases impressive numbers, which can be tempting for investors. But those figures don’t tell the whole story. TVL only reflects the amount of capital held in a protocol at a specific moment – it doesn’t indicate whether that capital is secure, stable, or generating meaningful returns. For U.S. institutions considering DeFi investments, understanding both the benefits and the limitations of TVL is essential.

Main Risks in TVL Investments

There are several risks tied to TVL-focused investments that institutions need to be aware of:

• Smart contract vulnerabilities: Even the most rigorously audited smart contracts can have hidden flaws. These bugs can be exploited by attackers, potentially draining millions – or even billions – of dollars from a protocol. The more capital a protocol holds, the more attractive it becomes to hackers, and unlike traditional finance, there are no safety nets to recover lost funds.
• Governance attacks: In some cases, bad actors can accumulate governance tokens, giving them outsized voting power. This allows them to push through changes that benefit themselves while harming other participants. For example, they could alter collateral requirements or redirect protocol revenues, creating sudden shifts in risk for investors.
• Liquidity fragmentation: As DeFi spans multiple blockchains and exchanges, managing positions becomes increasingly complicated. Each chain has its own gas tokens, custody rules, and monitoring requirements. Exiting positions quickly can lead to higher slippage and execution costs, especially when liquidity is spread thin across different platforms.
• Regulatory uncertainty: The SEC and CFTC continue to debate how to classify tokens, staking, and liquidity provision. This creates a moving target for compliance. A protocol that seems compliant today could face enforcement actions tomorrow, posing both operational and reputational risks for regulated entities like banks and asset managers.
• Cross-chain risks: Portfolios that rely on cross-chain strategies are particularly vulnerable to bridge exploits. Interoperability protocols, which accounted for over $7.8 billion in TVL by late 2024, have been frequent targets for hackers. Each bridge becomes a potential weak point, adding another layer of risk to multi-chain portfolios.

These risks highlight why TVL alone is not enough to assess a protocol’s stability or long-term viability.

Where TVL Falls Short as a Metric

While TVL provides a snapshot of how much capital is locked in a protocol, it doesn’t paint a complete picture of its health or quality. A high TVL doesn’t guarantee that a protocol is well-built or sustainable. In fact, there are several ways TVL can be misleading:

• Temporary incentives: Protocols often inflate their TVL by offering short-term token rewards to attract capital. When these incentives end, the capital can vanish just as quickly, leaving investors exposed to liquidity gaps and higher transaction costs.
• Wash liquidity and leverage: Some protocols artificially boost their TVL through practices like recursive leverage or looping positions, where the same collateral is counted multiple times. This inflates the numbers but doesn’t reflect real user demand or genuine liquidity.
• Concentration risk: A large portion of DeFi’s TVL is concentrated in just a few lending and DEX protocols. This means that what appears to be a diversified allocation may actually rely heavily on a small set of underlying assets, increasing vulnerability.
• Tokenized real-world assets: The rise of tokenized fixed-income products and other real-world assets adds another layer of complexity. These assets often come with off-chain legal claims and jurisdiction-specific regulations, which can make their risk profiles vastly different from purely on-chain assets.

Using Additional Metrics Alongside TVL

To make informed investment decisions, institutions need to go beyond TVL and incorporate other metrics into their analysis. Here are some key areas to consider:

• On-chain revenue and fees: Protocols that generate consistent revenue from user activity – rather than relying on token subsidies – are more likely to have long-term viability.
• User retention and activity: High TVL achieved through short-term incentives may not last. Tracking active addresses and user retention can provide a clearer picture of how “sticky” the deposited capital is.
• Liquidation and collateral performance: During market downturns, the ability of a protocol to handle liquidations smoothly is critical. Protocols with poor performance during past volatility may pose higher risks.
• Audit history and bug bounties: Regular, thorough audits and robust bug bounty programs indicate a commitment to security. These factors can help protect against potential exploits.
• Governance and emergency controls: Transparent governance mechanisms, such as clear voting rules and time-locked upgrades, reduce the risk of sudden, unvetted changes. Emergency features like pause functions or circuit breakers can also help mitigate losses during crises.

For U.S. institutions, integrating these additional metrics into their risk frameworks – covering market, credit, operational, legal, and model risks – is crucial. TVL should be just one of many data points in a comprehensive evaluation.

Organizations like BeyondOTC offer specialized advisory services to help institutions navigate the complexities of DeFi. They assist with protocol screening, risk assessment, and portfolio design, ensuring that yield and security are balanced within regulatory boundaries. BeyondOTC has already facilitated over $5 billion in funding for clients, including $40 million in TVL DeFi allocations, by leveraging vetted protocols and advanced monitoring tools. While these services can reduce some of the information gaps in DeFi, institutions must still take responsibility for building robust risk models.

In short, TVL is a useful starting point, but it’s far from the whole story. Smart investment decisions require a deeper dive into protocol operations, governance, and risk management practices. By broadening their analysis, institutions can build more resilient and diversified portfolios.

Putting TVL Diversification into Practice

To successfully diversify Total Value Locked (TVL) exposure, U.S. institutions need a well-organized strategy. This includes clear allocation guidelines, access to carefully vetted opportunities, and infrastructure that aligns with both regulatory and operational standards.

Typical Institutional Allocation Models

Institutions often begin with small pilot investments, typically allocating 1–3% of their total assets under management (AUM) or 5–15% of their digital asset mandate. For example, a Chief Investment Officer (CIO) overseeing a $500 million portfolio might allocate $10 million to test the waters. This approach allows institutions to fine-tune their operational processes, evaluate risk-adjusted returns, and build expertise before committing to larger investments.

Investment decisions are usually made by an investment committee, which may be supported by specialized digital-asset subcommittees or external advisors. These committees set formal guidelines that outline permissible blockchains, protocol types (e.g., lending, decentralized exchanges, liquid staking), and exposure limits – typically capping any single protocol at 10–15% of the DeFi allocation. Detailed due diligence is a cornerstone of this process, covering areas like smart-contract audits, TVL trends, oracle designs, and governance structures. These policies are revisited periodically for updates and re-approval.

A practical model often begins with chain-level exposure limits. For instance, an institution might allocate:

• 50–70% of the DeFi sleeve to Ethereum and major Layer 2 solutions,
• 20–30% to established alternative Layer 1 blockchains,
• 5–10% to emerging chains as an exploratory bucket.

Sector-level caps further manage risk, with allocations such as 30–40% to lending and borrowing, 20–30% to decentralized exchange (DEX) liquidity, and 10–20% to liquid staking. Smaller portions might go to derivatives, yield aggregators, or structured products.

To mitigate risks tied to smart contracts, institutions often require independent audits, robust bug bounty programs, and strong governance. Additional safeguards include insurance coverage, conservative collateral ratios, and diversified counterparties to minimize the impact of underperformance by any single protocol.

Monitoring is another critical component. Institutions use analytics platforms to track TVL data across blockchains and protocols, receiving alerts for significant changes, such as 20–30% drawdowns or spikes within a short timeframe. This real-time data enables teams to monitor TVL distribution across chains and sectors, making informed decisions about rebalancing on a weekly, monthly, or quarterly basis.

Specialized advisory services often play a key role in helping institutions implement these models effectively.

How TVL Funding Advisory Works

For institutions without in-house expertise in DeFi, advisory services simplify the complexities of TVL investment. Firms like BeyondOTC offer end-to-end solutions, helping institutions design and implement strategies aligned with their risk tolerance, return goals, and regulatory requirements.

Advisory services typically follow four stages:

• Needs Assessment: Advisors collaborate with institutions to clarify objectives – whether the focus is on yield generation, strategic partnerships, or diversification. They also define acceptable risk levels and identify permissible chains and protocols.
• Opportunity Curation: Advisors evaluate protocols based on factors like TVL size, growth trajectory, audit history, and sector relevance. They present a curated list of options, such as lending pools, liquidity provider (LP) positions, staking programs, or tokenized vaults. BeyondOTC, for example, performs rigorous risk assessments and facilitates connections with OTC desks, market makers, and liquidity providers, often negotiating tailored terms for large liquidity commitments.
• Structuring and Documentation: Advisors assist with drafting legal agreements, counterparty contracts, and on-chain execution frameworks. They also connect clients with specialized U.S. legal firms to ensure compliance with evolving regulations.
• Ongoing Monitoring and Optimization: Continuous oversight is provided through advanced analytics, real-time alerts, and reallocation recommendations. For example, BeyondOTC offers tools for smart monitoring and APY optimization, serving as a centralized resource for managing diversified DeFi portfolios, including $40 million in TVL allocations.

Tools and Considerations for U.S. Institutions

Beyond allocation models and advisory support, institutions must address key infrastructure and compliance challenges. Secure custody and wallet solutions are essential. Most institutions rely on qualified custodians or institutional-grade wallet providers capable of supporting multiple blockchains and ensuring secure interactions with smart contracts. These setups often use multi-signature or multi-party computation (MPC) approvals, role-based access controls, and tiered wallet systems (cold, warm, and hot wallets). Transaction policies further enhance security by enforcing limits and requiring dual approvals for high-risk actions.

Regulatory and compliance considerations are equally critical. Institutions must navigate securities law, Commodity Futures Trading Commission (CFTC) oversight for derivatives-like products, anti-money laundering (AML) and know-your-customer (KYC) obligations, and Office of Foreign Assets Control (OFAC) sanctions compliance. Many institutions opt for permissioned or whitelisted pools, where counterparties are thoroughly vetted. Regular consultation with legal counsel ensures protocol interactions align with both internal risk frameworks and regulatory requirements.

Finally, institutions must adhere to U.S. accounting standards for valuation and reporting. TVL-linked positions are typically marked to fair value in U.S. dollars, using reliable pricing sources and time-stamped valuations that account for both the underlying asset values and any accrued rewards.

Conclusion

Total Value Locked (TVL) – the total USD value of digital assets locked in DeFi smart contracts – has become a key metric for sizing market opportunities and comparing protocols. For U.S. institutions, TVL serves as a tool to evaluate liquidity depth and monitor adoption trends across blockchains and DeFi sectors. While it reflects liquidity and user trust, TVL has notable blind spots. It doesn’t account for factors like protocol solvency or the sustainability of yields. Additionally, it can be distorted by token price surges or short-lived incentive programs. To get a clearer picture, institutions should complement TVL with other metrics such as protocol revenue, fee yields, collateral composition, on-chain activity, and security performance to assess risk and potential returns more accurately.

Given these limitations, a diversified approach becomes crucial. Spreading exposure across various blockchains – such as Ethereum, Layer 2 solutions, and alternative Layer 1s – helps reduce risks tied to smart contracts, consensus mechanisms, and ecosystem concentration. Similarly, diversifying across DeFi sectors like lending, decentralized exchanges, liquid staking, yield aggregators, and stablecoin protocols minimizes reliance on a single business model or incentive structure. Using factor-based allocation strategies that consider protocol maturity, TVL stability, collateral quality, on-chain revenue, and historical performance can further boost resilience. A 2024 Fidelity Digital Assets report highlights that 74% of institutional investors identified clearer regulatory frameworks as the primary driver for increasing digital asset allocations, emphasizing the importance of compliance-focused diversification.

This approach aligns with broader digital asset portfolio management strategies. Institutions incorporating TVL into their portfolios need strong governance, compliance, and risk management frameworks. This includes setting clear TVL objectives and risk thresholds, adopting advanced analytics tools, creating a diversified allocation plan, consulting with specialized advisors and legal experts, and establishing ongoing monitoring and review processes. All TVL-related activities must adhere to U.S. legal, tax, and reporting standards, prioritizing compliant custodians, verified counterparties, and transparent audit trails.

To navigate these complexities, institutions often rely on specialized advisory services and tools. TVL funding advisors can fill gaps in DeFi research, execution, and governance capabilities. These services assist with protocol selection, structuring TVL commitments, negotiating terms, coordinating with liquidity providers, and integrating monitoring and reporting into existing workflows. Agencies like BeyondOTC offer comprehensive TVL investment solutions tailored for institutional clients, acting as a single point of contact within the broader DeFi ecosystem. Their expertise has proven effective in enabling large-scale institutional engagement.

As the TVL market evolves and institutional involvement deepens, partnerships with specialized agencies can streamline the process and enhance risk management. While TVL provides a foundation for disciplined participation in DeFi, true success lies in leveraging data, expertise, and diversification. By building resilient and diversified TVL structures, institutions can better position themselves to thrive in the growing institutionalization of the DeFi landscape.

FAQs

What are the main risks of using Total Value Locked (TVL) as the sole metric for institutional DeFi investments?

Relying on Total Value Locked (TVL) as the sole metric for evaluating institutional investments in DeFi can be misleading. While TVL measures the total assets locked in a protocol, it doesn’t paint the full picture of its overall health or performance. Key factors like user activity, token distribution, and security risks are left out of the equation.

Here are some of the risks associated with focusing only on TVL:

• False sense of stability: A high TVL might look impressive but could be artificially inflated by short-term incentives, such as high-yield rewards, rather than reflecting a protocol’s long-term sustainability or security.
• Overlooked vulnerabilities: TVL doesn’t expose potential risks like smart contract flaws or governance weaknesses, which could jeopardize the protocol.
• Impact of market swings: Since TVL depends on the value of the locked tokens, it’s highly sensitive to cryptocurrency price volatility, making it an unreliable indicator during market fluctuations.

To make smarter investment decisions, institutions should go beyond TVL. Metrics like user activity, transaction volume, and results from security audits can provide a more well-rounded view of a protocol’s actual performance and risk profile.

How can institutions diversify their Total Value Locked (TVL) investments across blockchains and DeFi sectors to reduce risks?

Institutions looking to manage their Total Value Locked (TVL) investments more effectively can benefit from spreading their funds across multiple blockchains and different sectors within decentralized finance (DeFi). This approach reduces the risks tied to specific protocol failures, market swings, or issues unique to a particular blockchain.

When diversifying, it’s crucial to evaluate several factors: the reliability and security of various blockchains, the level of development and trustworthiness of DeFi protocols, and the potential returns in areas like lending, staking, or liquidity provision. A well-rounded strategy combines investments in established platforms with newer opportunities, balancing risk and return for a more secure portfolio.

For more tailored strategies, institutions can seek expert advisory services. These professionals can help identify curated TVL investment options and connect institutions with dependable DeFi protocols, streamlining the decision-making process.

What other key metrics should institutions evaluate alongside TVL when assessing DeFi protocols?

While Total Value Locked (TVL) is a key metric for assessing DeFi protocols, relying on it alone doesn’t provide the full picture. Institutions should also examine other important factors, such as:

• Protocol Revenue: Look at the fees the protocol generates. This can help indicate its financial health, user activity, and long-term viability.
• User Growth: Monitor how the number of active users changes over time. A growing user base often signals increasing adoption and community interest.
• Security Measures: Review the protocol’s track record on audits, bug bounty programs, and any past vulnerabilities. This helps evaluate its overall security and risk level.
• Liquidity Depth: Check the available liquidity for trading, lending, or borrowing. Adequate liquidity ensures smoother market operations and reduces slippage risks.

Taking these factors into account alongside TVL can help institutions make smarter decisions when evaluating DeFi investments and planning diversification strategies.

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