The increasing popularity of DeFi has made Total Value locked (TVL) an important metric for investors looking to make informed decisions. Decentralized finance (DeFi).Protocols or to determine if the DeFi platform worth investment is worthwhile. Many crypto traders use a DeFi protocol’s TVL metric to determine the overall health of the DeFi market or the strength and potential of different DeFi protocols.
What is TVL? How does it work and what are the implications for DeFi projects and the DeFi industry?
In this article, we’ll deep dive into Total Value Locked (TVL), the importance of TVL in DeFi staking, and explain how to calculate the TVL of DeFi projects you want to invest in. Once you understand what TVL means and why this critical metric is an important indicator to follow, you’ll be able to use it as a key factor in your most crucial crypto decisions.
So without further delay, let’s get right to it!
What is Total Value Locked, (TVL),?
Total Value locked (TVL), is the sum of all crypto assets held in smart contracts within a DeFi platform. This indicator shows the amount of money available on different DeFi platforms to be used for borrowing, transactional and lending purposes.
TVL is the sum of all DeFi assets that are currently held in a protocol. This determines its total supply. This supply is directly related to capital held within the system and the potential return on investment of investors who participate in the protocol.
The TVL can be used to calculate the TVL ratio, which is another crucial aspect of any protocol. It can be used to determine if an asset has fallen in value, which is crucial information for crypto investors.
TVL is important in DeFi
TVL is a crucial metric to gauge interest in crypto. It was originally created as a means of assessing decentralized protocols as well as the DeFi system. TVL gives traders a way to better understand DeFi’s overall market and makes it easier for them to make investment decisions.
TVL represents the value of all cryptocurrency assets that are deposited through DeFi protocols. DeFi platforms can be used for lending, staking and yield farming. Since a DeFi app requires liquidity or loan collateral in trading pools to function, the total value locked in a particular DeFi platform has served as the metric to show the protocol’s asset worth and popularity among users.
TVLs with higher TVLs indicate that DeFi platforms have a healthy market and are in high demand. TVL’s growth means that many investors have invested in the protocol. That in turn indicates a positive outlook on the market. TVL’s growth for a specific DeFi protocol leads to possible improvements in the platform’s usability, liquidity, and popularity, contributing to its success.
DeFi protocol that has a higher TVL will have more capital invested in it. This allows users to take advantage of many benefits, and generate a better yield. A lower TVL, on the other hand, clearly indicates a low capital level, which ultimately leads to lower yields.
A DeFi protocol’s market share can be easily determined using analytics platforms like DeFi Pulse and DefiLlamaThe following provide details about the crypto assets stored in each smart contract. DeFi Pulse, and DeFi Llama allow you to choose the DeFi protocol with the highest yield passive investor returns.
DeFi Pulse users should be aware that the site exclusively monitors protocols’ smart contract activities on the Ethereum blockchain by extracting the combined TVL of all the DeFi platforms built on the Ethereum network and the total balance of Ether (ETHERC-20 tokens and a corresponding ERC-20 token. DefiLlama calculates TVL using the total balance for all DeFi platforms or the individual ones.
Calculation TVL Ratios
A DeFi protocol with nearly $1 Billion TVL is recommended for crypto investors.
Higher TVLs are better as they indicate a strong, on-demand platform that has a skilled developer team and an attractive use case. These attract investors and more participants, which leads to a rise in TVL.
DeFi protocols offering high yields with lower TVL could indicate that they are trying to expand market shares. But it also could signal that the protocol is a scam, since few people have trust it with their assets.
When calculating a DeFi Protocol TelevisionL, there are three things you need to remember:
- The DeFi protocol’s current supply
- The DeFi protocol’s maximum circulating supply
- The DeFi protocol’s current price
TVL can also be used to determine the performance of Layer 1 Blockchain Networks. It can either use cryptocurrency or fiat currencies.
These are the three most important elements you need to remember when deriving a DeFi Protocol TelevisionL.
- The DeFi protocol’s current supply
- The DeFi protocol’s maximum circulating supply
- The DeFi protocol’s current price
To calculate crypto TVL, you must first calculate the protocol’s market cap by multiplying the supply of the DeFi project by the current price. To calculate TVL, divide market capitalization and maximum circulating supply.
The TVL ratio is calculated by subtracting the total market capitalization for a lock asset from its total value.
Market Cap
TVL Ratio = __________
TVL
TVL is a ratio that helps determine whether a DeFi asset’s value is too high or low. If the ratio falls below 1, then the asset will be less attractive to investors. Crypto is overpriced if its market valuation exceeds that of the TVL. This means there’s little or no growth.
Cryptos With The Highest TVL
DeFi Llama reports that the total TVL for all DeFi platforms at the beginning of 2020 was $630 million. It has already exceeded the $54.98 Billion mark in the first quarter 2022, according to DeFi Llama. This is undoubtedly the greatest reason to discover more about DeFi protocols that have the highest TVL in DeFi.
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Although they use different methods, and have different goals, these 5 protocols boast remarkable TVL numbers. So, they’re worth considering if you’re planning to invest in a DeFi protocol.
The Top Five Tokens Based on Total Value
| Nominee | Chain | Sector | TVL |
| MakerDAO (MKR). | Ethereum | Lending | $8.49B |
| Lido (LDO) | Ethereum | Lending | $7.61B |
| Uniswap | Ethereum | DExes | $5.30B |
| Aave (AAVE). | Ethereum | Lending | $5.02B |
| Curve | Ethereum | DEXes | $4.97B |
MakerDAO (MKR).
MakerThe protocol was pioneered in DeFi, and continued to receive assets from forward-thinking shareholders. The protocol, which is a decentralized autonomous organisation (DAO), allows traders to directly participate in decision-making. With a TVL currently at $8.49 Billion, the project remains one of the most important DeFi protocols available to investors.
Lido (LDO)
LidoThe protocol provides liquidity for assets that have been staked and has a TVL value of $7.61 million. While its overall value, indicating all the assets traders have staked in the system, has declined due to general market swings, the protocol’s future is still considered favorable.
Uniswap
UniswapIt is a DEX which has very high TVL. This protocol is an attractive alternative to cryptocurrency traders, as evidenced by its current valuation of $5.3 Billion.
Aave (AAVE).
AaveIt is a lending platform that has a TVL in excess of $5.02 trillion. The protocol’s TVL is high because a large number of investors have made deposits to it. Investors as well as lenders can predict that the system will continue to be healthy, as long as this number remains high.
Curve
CurveIt is one the most successful DEXs with a TVL of 4.97 billion as of this writing. This value has fallen from $24 billion at its peak, but it is still a top-performing protocol in the DeFi ecosystem.
The Bottom Line
Total Value Locked (TVL) is a significant measure of a DeFi protocol’s potential, health, and reliability, indicating its liquidity and usability. TVL helps you assess the total assets deposited in a system or determine whether a protocol’s tokens are undervalued through the TVL ratio.
TVL is a better indicator than the single DeFi project’s market capitalization. TVL not only tells investors the true worth of existing or newly developed DeFi protocols; it also helps to promote widespread DeFi adoption.
DeFi networks are powered by the Ethereum network, which is also the largest network for DeFi TVL. The DeFi landscape continues to change due to new solutions and protocols.
Now that you know why TVL matters in DeFi and how crypto TVL works, you’re better prepared to make your next moves in the DeFi realm.
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