Why TVL Matters in DeFi: Total Value Locked Explained


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

The whole value of crypto assets placed in a decentralized finance (DeFi) system, or in DeFi protocols in general, is known as total value locked (TVL). It has become a crucial statistic for assessing interest in that specific area of the cryptocurrency market.

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What does the total value locked mean?

Financial industry professionals have adjusted to a new sort of investing since decentralized finance (DeFi) took off in 2020 and have looked at ways to gauge its performance.

Total value locked (TVL) is a crypto indicator that is well-liked by DeFi investors to evaluate the overall value of assets - in US dollars or any fiat currency - deposited across all DeFi protocols or in a single DeFi project, aside from market capitalization, trading volume, and total and circulating supply.

DeFi assets are compensation and interest earned through conventional services like lending, staking, and liquidity pools that are delivered via smart contracts. A very helpful indication for investors wishing to support the DeFi systems with the biggest payouts is TVL in staking, for instance. It indicates the amount of assets submitted by the liquidity providers and is the entire value locked in the DeFi staking procedures.

TVL increased from $400 million in the preceding two years to approximately $2 billion in the global market in 2022. TVL has developed into a crucial indicator for investors who want to determine if the entire ecosystem or a specific protocol is strong and deserving of their investment dollars as a result of DeFi's rising popularity and value in the cryptocurrency industry.

While the total value of cryptocurrencies locked in a smart contract (TVL) is the only definition given, there are underlying factors that may influence the value of DeFi projects.

In addition to deposits, withdrawals, and the amount a person really holds, other factors also contribute to the value of TVL. The value of the native token or fiat money affects the TVL as well. Some protocols' deposits could be made in the native token of the project, hence the protocol's TVL fluctuates with that token's value. The protocol's TVL also increases as the value of a particular token does.

Why does TVL matter in DeFi?

DeFi platforms need money placed as loan collateral or liquidity in trading pools in order to run. TVL is significant because it shows how capital affects the revenue and usefulness of DeFi apps for traders and investors.

Rising TVL on a DeFi platform is accompanied by rising liquidity, popularity, and usefulness. The success of the project is influenced by these elements. A larger TVL indicates that more money is invested in DeFi protocols, and participants receive more benefits and profits as a result. Reduced yields are the outcome of lower TVL, which suggests less money is available.

Analytics companies' systems like DeFi Pulse and DefiLlama, which give information on the quantity of cryptocurrency assets locked in each smart contract, make it simple to determine the market share of DeFi protocols.

DeFi users who locate TVL on DeFi Pulse must be aware that the platform only keeps track of the total amount of ether (ETH) and ERC-20 tokens in order to monitor protocol smart contract activity on the Ethereum blockchain. On the other hand, DefiLlama determines the TVL by taking the overall balance of all DeFi chains or the balance of each platform independently.

How is crypto TVL calculated?

It may be difficult to establish the precise TVL of the total market and assess if a certain DeFi platform is a secure choice for end users due to the constant emergence of new protocols in the DeFi arena.

However, given a TVL measure of $1 billion, players can choose more well-established methods, which should be a secure enough option. A higher TVL is preferable since it should signify a robust platform with a strong developer team and an important use case that is in high demand. All of which ought to draw additional investors and players, assisting in the project's growth of the TVL.

On the other side, when DeFi protocols with lower TVL are providing high yields, a red flag should be raised. These might be advertisements, for instance, for new platforms looking to increase their market share, but they could also be frauds as few or no participants have confidence in them with their assets.

The TVL of a DeFi protocol is determined by taking into account three primary factors:

The crypto TVL may be calculated with ease. The supply of a DeFi project must first be multiplied by the current price in order to determine an asset's market capitalization. The TVL is then calculated by dividing the market cap by the maximum supply that can circulate.

The TVL ratio is calculated by dividing the total market capitalization of a locked asset by the entire value locked. The TVL ratio can be used to assess the under or overvaluation of a DeFi asset. An asset is often cheap and more appealing to investors if the ratio is less than 1. The asset may be overpriced and have little to no opportunity for growth if the market valuation surpasses the TVL in cryptocurrency.

Which crypto has the highest TVL?

The aggregate TVL of all DeFi protocols expanded quickly and significantly by the end of 2021 as a result of the outstanding expansion of DeFi in 2020.

According to DefiLlama, the total TVL across all DeFi platforms was roughly $630 million at the start of 2020. Its valuation has already surpassed $172 billion in the first quarter of 2022.

More than half of that was in just one protocol, MakerDAO, which, together with Curve and Aave, continued to be one of the most well-known protocols. With 9.7 percent of the market and a $17 billion TVL, Curve has the biggest market share and TVL of any cryptocurrency. Lido is next with a $15.4 billion TVL, followed by Anchor with a $12.6 billion TVL, and MakerDao with a $11.5 billion TVL.

Largest network by DeFi TVL

By DeFi TVL in 2022, Ethereum was the largest network, representing more than half of all DeFi volume globally.

Just about 500 protocols are present in the Ethereum DeFi network, for context. It has a TVL of roughly $73 billion and commands a market share of 64%, compared to BNB Smart Chain, which has the second-highest TVL at $8.74 billion in value and 7.7% of the market, Avalanche, which has a TVL of $5.21 billion and a market share of 4.5 percent, and Solana, which has a TVL of $4.19 billion and 3.68 percent.

A TVL crypto chart is pretty simple to understand. It displays the TVL for the whole DeFi market in USD, along with the percentage change over the previous day and the cryptocurrency.

It is abundantly evident from the total value locked statistic for all chains that Ethereum is the network with the greatest TVL. In essence, TVL is perhaps the most widely used indicator to determine the state and future direction of the DeFi domain of cryptocurrencies. Although TVL growth indicates a bright picture for the market, it is important to use caution when interpreting the indicator because it is difficult to analyze the data precisely.

One of the primary factors that has the potential to significantly impact the value of locked assets is market volatility, beginning with the price of ETH, on whose platform the majority of assets are stored. The TVL of DeFi was undoubtedly impacted by the significant increase in the price of ETH starting in 2020, however this implies that the total value locked can climb without any more users or funds entering DeFi.

In addition, the structure of DeFi services makes it simple for money to travel around and be counted more than once, miscalculating the liquidity capacity of protocols. TVL, like any other indicator, is merely a rough assessment of the state of the market, and because of its limitations and approximation, an investor's strategy shouldn't be based on it.

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