What Is Total Value Locked (TVL), and Why It Matters in Defi
Total value locked (TVL) is the total value of crypto assets deposited in decentralized finance (DeFi) protocol or DeFi protocols in general. It has become a meaningful way to measure people’s interest in that particular part of the crypto industry.
TVL has all of the coins that have been put into all of the functions that DeFi protocols offer.
1. Lending: Putting crypto assets on a platform for lending, like Celcius, AAVE, Compound, or MakerDAO.
2. Staking: Crypto assets staked with a Layer 1 blockchain, such as Ethereum, Polkadot, Solana, Cosmos, etc.
3. Liquidity Pools: Cryptocurrency assets that are put into different liquidity pools on platforms like Uniswap,
4. Yield Farming: Crypto assets deposited with Yield Farming protocols like Yearn Finance, Beefy Finance, etc.
It’s important to note that it doesn’t show the expected return on these deposits. It only means how much the stakes are worth right now.
What Does the Total Value Locked Mean?
Since decentralized finance (DeFi) took off in 2020, experts in the financial market have learned about a new type of investment and looked for ways to measure how well it does.
Other than market capitalization, trading volume, and total and circulating supply, total value locked (TVL) is a popular crypto indicator used by DeFi investors to estimate the total value of assets deposited across all DeFi protocols or in a single DeFi project. These assets can be valued in US dollars or any other fiat currency.
Assets in DeFi come from services like lending, staking, and liquidity pools, which offer rewards and interest in the form of smart contracts. For example, TVL in staking is a good sign for investors who want to support the DeFi platforms with the highest rewards. It is the total amount of money locked up in the DeFi staking protocols and shows how much money the liquidity providers put in.
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TVL has grown from $400 million in the two years before 2022 to almost $2 billion in 2022. With the growing popularity and value of DeFi in cryptocurrency, TVL has become an essential metric for investors who want to figure out if the whole ecosystem or a single protocol is healthy and worth investing in.
TVL is simply the total value of the cryptocurrency locked in a smart contract, but other factors could change the value of DeFi projects.
Aside from deposits, withdrawals, and the amount a protocol holds, other things agree with TVL’s value. The value of the fiat currency or the native token also affects the TVL. Some protocols’ deposits may be made in the project’s native token, meaning that the TVL changes with the token’s value. If the value of a specific token goes up, so does the TVL of the protocol.
What does TVL Have to Do with DeFi?
Every DeFi platform offers a variety of services that require liquidity. Let’s look at a few examples to see what I mean:
1. A decentralized exchange like Uniswap needs to be able to buy and sell different crypto tokens quickly. When someone comes to Uniswap to trade these crypto tokens, they should be able to do so with the right tokens.
Let’s say you want to use MANA to buy ETH (Ethereum) tokens (Decentraland). Then Uniswap should have an ETH/MANA liquidity pool so you can successfully trade these tokens. Users like you and me would put their money in these Liquidity Pools. If we gave the exchange money, it would pay us back.
2. A platform for lending and borrowing like AAVE would need the liquidity of crypto tokens so that users could borrow these tokens. Users would give these tokens to AAVE, paying them an interest in return.
So, TVL is a measure of how fluid a DeFi Platform is. The more people who use the platform, the more reliable it is.
How do you Calculate TVL?
It’s easy to figure out the TVL of a project. The TVL of a project is found by multiplying the number of tokens that have been put into it by its current price in USD. If a project accepts deposits in more than one token, the TVL of each token must be calculated and then added together to get the TVL of the project.
Next, we need to figure out the project’s TVL ratio to see if its native token is undervalued or overvalued. To do this, we need to divide the token’s TVL by its market cap. Market capitalization is just the current price of all tokens in circulation times the number of tokens in circulation. If the TVL ratio is less than one, the asset is undervalued, and vice versa.
What Cryptocurrency has the Most TVL?
Because DeFi grew so quickly in 2020, the total TVL of all DeFi protocols rose quickly.
According to DefiLlama, the total TVL of all DeFi platforms at the start of 2020 was about $630 million. It was worth more than $172 billion in the first quarter of 2022.
More than half of that was in MakerDAO, which, along with Curve and Aave, was one of the most important protocols. The curve has 9.7% of the market and a TVL of $17 billion. It is followed by Lido, which has a TVL of $15.4 billion; Anchor, which has a TVL of $12.6 billion; and MakerDao, which has a TVL of $11.5 billion.
Is TVL Accurate?
TVL has flaws, just like every other metric. It can sometimes give an inaccurate picture of how healthy and busy a DeFi protocol is. This is because large investors in DeFi protocols, called “whales,” can change a project’s TVL with a single deposit or withdrawal. This would send the wrong message to investors about the project.
Whales are sometimes given a reason to promote a project by giving it a lot of money. This can give the wrong impression of a project to people who might want to invest in it. So, while TVL is important, investors need to look at a few other metrics as well to decide if a token is worth investing in or not.
What is TVL, and Why does it Matter in DeFi?
This is what TVL is, which is why it’s essential for analyzing, judging, and valuing DeFi platforms. The more TVL a project or network has, the safer it is. Lastly, Ethereum has been the blockchain network with the most DeFi platforms and, therefore, the most TVL for a long time.
I hope you were able to figure out what TVL means and how important it is in DeFi. So, we recommend hiring a top reputable DeFi development company and getting started with your DeFi projects.