What is Total V...
What is Total Value Locked in DeFi: Explained
Total Value Locked, or TVL, is a critical metric in decentralized finance (DeFi). As DeFi emerged as a powerhouse in 2020, financial experts began to explore new ways to evaluate these novel investment opportunities. Beyond traditional metrics like market capitalization, trading volume, and supply data, TVL has risen as a key indicator for DeFi investors.
It quantifies the total assets denominated in USD or other fiat currencies committed to a DeFi protocol or across the entire DeFi landscape. These assets encompass rewards and interest generated by services such as lending, staking, and liquidity pools; all facilitated through smart contracts.
For instance, TVL in staking is a valuable metric for investors seeking to back DeFi platforms offering the most lucrative rewards. The global DeFi TVL peaked in 2021 at almost $200 billion and now in 2023, it is sitting at $38 billion. With DeFi's escalating prominence in the crypto sector, TVL has solidified its role as an indispensable tool for investors assessing the health and investment potential of a DeFi protocol or the entire ecosystem.
Also Read: What is Defi
Calculating the TVL of a DeFi protocol involves considering three primary factors: the project’s supply (market cap), the maximum circulating supply, and the asset's current price. TVL encompasses all coins deposited across various DeFi services, including staking, lending, and liquidity pools. To compute the TVL, one must first determine the market cap by multiplying the protocol’s asset supply by its current price. This market cap is then divided by the maximum supply to yield the TVL.
Also Read: What is Defi Staking
Calculating TVL in a crypto project is straightforward: multiply the total number of tokens the protocol holds by the token’s current USD value. For DeFi projects accepting various tokens for staking, it is essential to compute the TVL for each token type separately before aggregating them to ascertain the protocol’s overall TVL.
For example, if a DeFi protocol allows staking of Crypto X, Y, and Z, calculate the total staked amount of each crypto and multiply it by its current USD market value. Sum the results for all three cryptos to determine the entire DeFi project’s TVL. The process can be summarized as follows:
Step #1: Identify the market capitalization of the DeFi project by multiplying the circulating supply of the project’s tokens by its current price.
Step #2: Calculate the Total Value Locked by dividing the protocol’s market capitalization by the protocol’s maximum circulating supply. This division yields the TVL ratio, a critical indicator for investors to discern if a DeFi token is overvalued or undervalued.
Also Read: Defi Tokens
The burgeoning crypto and DeFi markets continually welcome new platforms, emphasizing the need and challenge of accurately determining the Total Value Locked within the entire market and assessing the safety level of a specific platform for prospective investors.
Additionally, a robust development team is a positive sign. High TVL tends to attract investors (lenders) and participants (borrowers), contributing to a healthier project. However, caution is advised when encountering a DeFi platform with a low TVL that offers exceptionally high yields. At the same time, this could be a promotional strategy; it may also signal potential scams, such as a rug pull, especially when the platform has minimal or no participants.
Also Read: Ethereum Staking Rewards
While TVL is a widely used metric in the DeFi space, it may not always accurately represent the actual valuation of a DeFi project. Large investors, known as whales, can significantly influence a project's TVL with substantial deposits or withdrawals. Sometimes, these whales may be incentivized to boost a DeFi protocol, sending positive signals to attract potential investors.
Consequently, the TVL might not accurately reflect the true state of the project. Investors, therefore, should consider additional indicators beyond TVL to determine the viability of a specific DeFi protocol as an investment.
Also Read: Matic Staking Rewards
Market capitalization represents the total market value of a DeFi project, reflecting its support from active and passive investors. TVL, conversely, measures a project’s performance within the DeFi space, indicating the total assets currently locked in the protocol. While market capitalization is a key metric for investors assessing the future potential of a DeFi protocol, TVL serves as a measure for evaluating the project’s current status and popularity among active users.
The DeFi industry saw remarkable growth in 2021, attracting significant capital. However, 2022 brought challenges, with a report by CryptoRank indicating a 68.3% drop in the total DeFi market TVL from December 2021 to September 2022.
Despite this decline, numerous DeFi platforms continue to offer diverse investment solutions, with Ethereum, Curve, and Aave being significant contributors to the growth of TVL in the decentralized finance space.
Also Read: Tradfi vs Defi
TVL is a crucial metric as it allows users to assess the risks and potential benefits of investing in a specific DeFi ecosystem. However, the need for a standard method for calculating TVL across different analytics platforms can make user comparisons challenging.
While TVL is a valuable metric for assessing a DeFi platform's popularity and usage, it has limitations. It does not account for actual user activity levels, and a high TVL does not guarantee a platform’s quality or security.
TVL can be influenced by various external factors and, in some cases, can be artificially inflated. Therefore, investors should not rely solely on TVL when making investment decisions and should conduct thorough research into other platform aspects.
Also Read: Cex vs Dex
Total Value Locked is a significant indicator in the crypto space, shedding light on the immediate status of a DeFi project. However, investors should view it as one of many factors to consider when evaluating the value of existing or new crypto projects. Continuous learning about Total Value Locked and its role in the decentralized landscape remains essential for all aspiring investors.
Also Read: What is Cryptocurrency
Q: Why does TVL matter in DeFi?
A: TVL matters in DeFi as it indicates the amount of capital locked in protocols, which impacts the applications' profitability and usability. A higher TVL suggests more liquidity, popularity, and usability, contributing to the project's success.
Q: How is crypto TVL calculated?
A: Crypto TVL is calculated by summing the total value of all assets locked in a DeFi protocol’s smart contracts, often expressed in a common currency like USD.
Q: Which crypto has the highest TVL?
A: As of August 2023, Ethereum [ETH] was reported to have the highest TVL among cryptocurrencies.
Q: Why should you care about Total Value Locked?
A: TVL is a key metric for investors to assess the strength of DeFi and crypto projects, but it should be used in conjunction with other indicators for a comprehensive evaluation.
Q: How can the total value locked be higher than the market cap?
A: TVL can exceed market cap when a project has more value locked up than in circulation, indicating extensive staking or locking of tokens.
Q: What is a good TVL ratio?
A: TVL ratio below one is generally considered attractive, suggesting the protocol may be undervalued.
Q: How does TVL affect the price?
A: Lower TVL ratio (under 1) can indicate an undervalued asset, potentially making it more attractive to investors, while a higher ratio may suggest overvaluation.
Q: What is the largest DeFi protocol by TVL?
A: As of August 2023, MakerDAO was reported to be the largest DeFi protocol by TVL.
Q: What is TVL in Blockchain?
A: TVL in blockchain refers to the total value of assets locked in smart contracts, liquidity pools, or staked in a blockchain node.
Q: What is the total value locked in all DeFi?
A: TVL in all DeFi represents the aggregate value of all crypto assets held within DeFi protocols.
Q: What is the largest TVL blockchain?
A: As of the latest data, Ethereum holds the top position among blockchains by TVL, followed by BSC, Tron, Arbitrum, and Polygon.
Join Stader’s newsletter
Get the latest updates, new DeFi strategies and exclusive offers right in your email box