What is the total value locked (TVL) in crypto, and why does it matter?

February 14, 2023

Bitcoin

What is the total value locked (TVL) in crypto, and why does it matter?

As the DeFi ecosystem expands, understanding the essence of Total Value Locked (TVL) becomes increasingly pivotal. TVL serves as a crucial gauge for evaluating the robustness of the DeFi landscape, revealing the amount of value individuals are eager to secure within DeFi agreements. The larger the TVL, the stronger the faith in DeFi. And, with more funds locked in DeFi, the ecosystem’s growth prospects are much more promising.

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What is TVL?

TVL, or Total Value Locked, is a way to track the value of assets kept in DeFi protocols. DeFi stands for Decentralized Finance and refers to financial services that run on blockchain technology, such as staking, lending, and liquidity pools. TVL is the sum of all the coins deposited in these DeFi functions.

The amount of TVL has fluctuated in the past, with a high of $160 billion in April 2022 and a low of $58.4 billion in September 2022. Analysts pay close attention to TVL as it gives an idea of investors’ confidence in the DeFi market.

It’s important to remember that TVL needs to give information about how many loans are active or what interest is being earned. It only shows the current value of assets locked in DeFi protocols. Also, each blockchain network may have a different TVL, with Ethereum being the largest network, having over 500 DeFi projects and accounting for almost half of the entire DeFi TVL.

What is the effect of TVL in Crypto Space?

TVL is a critical metric in the crypto and DeFi space. The Total Value Locked (TVL) reflects the growth and adoption of decentralized finance (DeFi) protocols. Here’s why it’s important to track TVL:

It measures the size of the DeFi ecosystem – TVL gives an idea of how many assets are locked into DeFi protocols, providing a picture of the overall size of the DeFi ecosystem.
Indicates the level of activity – The higher the TVL, the more activity there is in the DeFi space. The more value locked into protocols, the more active the space becomes.
Assesses risk – TVL provides a way to measure the total value at risk in the DeFi ecosystem, allowing us to assess its riskiness.

A higher TVL in a DeFi protocol is a sign of more capital being locked into the platform, leading to better user yields. Conversely, a lower TVL means less capital available, resulting in lower user yields.

Investors can also use TVL to determine if a project’s native token or crypto is overpriced or underpriced. If the market capitalization of a token is significantly higher than the TVL of the project, the token is likely overvalued. Conversely, the token is likely undervalued if the market capitalization is significantly lower than the TVL. The Total Value Locked (TVL) is a key metric that reflects the growth and adoption of decentralized finance (DeFi) protocols. Here’s why it’s important to track TVL:

It measures the size of the DeFi ecosystem – TVL gives an idea of how many assets are locked into DeFi protocols, providing a picture of the overall size of the DeFi ecosystem.
Indicates the level of activity – The higher the TVL, the more activity there is in the DeFi space. The more value locked into protocols, the more active the space becomes.
Assesses risk – TVL provides a way to measure the total value at risk in the DeFi ecosystem, allowing us to assess its riskiness.

Investors can also use TVL to determine if a project’s native token is overpriced or underpriced. If the market capitalization of a token is significantly higher than the TVL of the project, the token is likely overvalued. Conversely, the token is likely undervalued if the market capitalization is significantly lower than the TVL.

How to Determine a Protocol’s Total Value Locked (TVL)?

To determine the TVL of a protocol, you can multiply the amount of tokens or cryptocurrencies held within the protocol by its present value in US dollars. If the protocol accommodates multiple tokens, the TVL must be calculated for each token and added to determine the overall TVL.

DeFi Pulse is another source where the TVL of a specific DeFi protocol can be obtained. This platform analyzes and ranks decentralized finance protocols and provides insight into which protocols have the highest crypto asset staking volume. The TVL data on DeFi Pulse is presented in US dollars, making it easily understandable. It is a helpful tool for those new to the decentralized finance world or seeking to learn more about various projects within the ecosystem.

Is TVL Reliable?

While TVL offers valuable information, it is only sometimes accurate. It is crucial to conduct your research before investing in any project. By utilizing various tools and researching the projects, you can better understand the popularity and activity level of different protocols. Although TVL is significant, it should not be the only factor considered when deciding to invest in a crypto project or DeFi Protocols.

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