As the DeFi space continues to grow, so does the importance of understanding total value locked (TVL). TVL is a good way to measure the health of the DeFi ecosystem. It shows how much value people are willing to lock up in DeFi contracts, and the higher the TVL, the more confidence people have in DeFi. And the more money locked up in DeFi, the more potential there is for growth in the ecosystem.
What Is TVL? What Does TVL Mean?
In simple terms, TVL measures the total value of all assets locked into DeFi protocols. TVL includes all the coins deposited in all the functions that DeFi protocols offer, including staking, lending, and liquidity pools.
The total value locked in the crypto market declined from $160 billion in mid-April 2022 to $58.4 billion in September 2022, the lowest level since March 2021. The TVL is a measure of the funds deposited in smart contracts, and this figure is closely watched by analysts as an indicator of investor confidence in the market.
However, it’s important to note that TVL does not indicate how many loans are currently outstanding or what yield these deposits earn. It only reflects the current value of the deposits.
In addition, if DeFi protocols are spread over multiple networks, each network will have its own independent TVL. The largest network by TVL is currently Ethereum, with over 500 projects onboard and accounting for almost half of the total TVL in the DeFi industry.
What Is the Significance of TVL?
The growth of TVL is a key indicator of the increasing interest and adoption of DeFi protocols. There are a number of reasons why TVL is an important metric to track.
- It provides a way to measure the size of the DeFi ecosystem.
- TVL is a good indicator of the level of activity in the space. The higher the TVL, the more active the space is. The more value locked into protocols, the more active the space is.
- It can be used to assess the riskiness of the ecosystem, as it provides a way to measure the total value at risk.
A higher TVL on a DeFi protocol indicates that there is more capital locked into the platform, resulting in many benefits for users, including better yields. On the other hand, a lower TVL implies less capital is available, which ultimately leads to lower yields for users.
TVL can also be used by investors to determine if a project’s native token is overvalued or undervalued. If the market capitalization of a token is high relative to the TVL of the project as a whole, the token is likely overvalued. Similarly, the token is likely undervalued if the market capitalization is low relative to the TVL.
How Do You Find the TVL of a Protocol?
To calculate the TVL of a project, multiply the number of tokens deposited in the project by its current price in US dollars. If a project accepts deposits in multiple tokens, you will need to calculate the TVL for each token and add them up to get the TVL of the project.
The TVL for a specific DeFi protocol can also be found on DeFi Pulse, where you can find analysis and rankings of decentralized finance protocols. For example, you can use DeFi Pulse to identify the DeFi protocols with the highest volume of crypto assets staked. The platform tracks the TVL and displays it in USD, which makes it easy to understand. It’s a great tool for those looking to navigate the decentralized finance world or beginners who want to learn more about the various projects within the ecosystem.
Is TVL Accurate?
While TVL does provide some valuable insights, it is important to remember that it is not always 100% accurate. In addition, it is important to do your own research before investing in any project. By inquiring and studying projects using different tools, you can gain a better understanding of which protocols are more popular and which ones are seeing more activity. TVL is important, but it is not the only metric that you should consider when deciding whether to invest in a token.