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What is Total Value Locked (TVL), and Why Does it Matter in DeFi? 

Crypto investments have earned great returns for investors in recent times. But even with high returns, there are several performance limitations to the crypto market. When people look for the performance indicators related to a crypto asset, Total Value Locked is one of the most accurate indicators. TVL in crypto is a key indicator that can help investors understand whether the asset has potential or not. TVL stands for Total Value Locked, which is the evaluation metric for DeFi platforms.

According to a figure, the DeFi market accounts for around $126 billion, out of which the top 125 apps hold $80 billion of the TVL. As a beginner, it is always suggested that you look for detailed fundamental analysis for any cryptocurrency you are looking to invest in. TVL is one of them. Let’s get started, then.

What Does Total Value Locked Mean?

Every asset has a certain value that suggests its worth in the market. Similarly, there are multiple assets and projects under one platform, such as Uniswap and MakerDAO under the Ethereum blockchain, which combine in the value and constitute a part of the TVL or the Total Value Locked for that particular platform. 

TVL in crypto is roughly the total value of all the projects and investments under the banner of that platform. In particular to the crypto market, TVL denotes the worth of a blockchain network. TVL is generally in USD but can be converted to other fiat currencies. DeFi protocols tackle all the problems that centralized finance portrayed, and thus a crypto asset generally has projects tackling one or other problems. The real-time combined value of all these projects, excluding the outstanding loans and yield, is called TVL in crypto.

Why is Total Value Locked (TVL) Important for DeFi?

  • TVL projects the faith that investors have in a DeFi project. If the TVL blockchain indicator shows a rapid increase, it certainly means that people trust the DeFi protocols, and thus the asset has good potential for returns.
  • TVL is important for DeFi because it indicates higher liquidity which thus means more investments for the projects.
  • TVL is also an important indicator for investors to determine whether the asset is undervalued or overvalued. It depends on whether the TVL is higher than the asset’s market cap or lower. Dividing the asset’s market cap with its TVL to get the TVL ratio. TVL ratio of less than one means the project is still undervalued.  
  • Lower TVL also means that the project lacks money for the projects and thus needs investors.

How is Crypto TVL Calculated? 

How is Crypto TVL Calculated
Source: Lucky Trader / How TVL is calculated

Calculating the TVL in crypto is pretty simple. You can do it on your own with just some research about native tokens of the project, stats of all the tokens deposited in the project, and their current price. Multiply them together, and you arrive at the asset’s total value locked. You can do this in USD or any other currency in which you want to calculate it. 

Post calculating the TVL; you can also check the TVL ratio to determine whether it’s good for investing or not. First, calculate the project’s market cap by multiplying the number of all the tokens in circulation with their current price. Then divide this value by TVL to obtain the TVL ratio. This ratio being around one means that the project has enough funding, while a ratio less than one means it requires investment.

Formula to calculate TVL: 

Number of tokens deposited in a project x Current price of the tokens (in the currency that you want the TVL to be in).

TVL Ratio: Market Cap of the project / TVL 

Which Crypto has the Highest TVL?

In 2022, the overall TVL of all the DeFi projects, including crypto assets on various blockchains, has seen a dip in the early quarters but currently stands considerably higher. In July alone, there was a 19% rise in the TVL of the projects in just 24 days. In such a huge spike, the biggest contribution was made by MakerDAO along with AAVE and Curve. Curve currently takes up around 9.7% of the market share and $17 billion of TVL. Various crypto projects have seen investors rushing in as the market showed a bear run. Investments in crypto projects were large to tackle the centralized finance issues.

Which is the Largest Network by DeFi TVL? 

Largest Network by DeFi TVL
Source: Coin Shark / Top DeFi Projects by TVL

The TVL of all the crypto networks keeps changing as they announce different projects and successful ventures. As per the current scenario, on the macro level, Ethereum projects have the highest TVL in the market. The star performer has a TVL of $73 billion, with the TVL having the highest contributions from Curve, InstadApp, and AAve. ETH projects have performed significantly well recently, with Curve rising by 22%, Lido Finance by 45%, and even Uniswap rising by 24%. A lot of liquidity was poured into the projects, thus promoting the TVL blockchain to the first position.

Significance of Total Value Locked: TVL vs. Market Cap

TVL in crypto is a crucial indicator to determine whether investing in the projects is worth it. The TVL of a DeFi network is the combined value of all the tokens and projects under it. It suggests how much money has been accumulated under the network ecosystem. TVL suggests the faith of investors in the projects, and thus the TVL ratio serves as an important factor in deciding whether to invest money in it or not. On the other hand, the market cap shows the total value of tokens circulating in the market. The crypto market cap can be gimmicky if the asset is running on a hoax, but the TVL suggests the true potential of the asset.

Types of DeFi Projects and TVL for Each Type

  • Decentralized exchanges: The users can trade or swap crypto pairs through an automated market maker. The liquidity pool allows the transaction to occur as it holds the requisite crypto pair balance in the form of tokens. Calculating TVL here is pretty easy as it is the total value held in coin pair pools within the platform. Uniswap and Curve Finance are great examples of DEXs.
  • Lending and Borrowing: These protocols provide utility to borrow funds from the liquidity pools and lend funds to the pools. The TVL is calculated by calculating the total value held in lending and borrowing pools.
  • Yield Optimization Protocols: These platforms allocate user funds to the pools with higher return expectations. The automated algorithm of such platforms helps earn a good yield on investments. TVL here is the value lent by the users to the platform.

Top 5 Tokens by Total Value Locked

The Ethereum network itself is the home to the top 5 tokens by TVL as the user trust in ETH projects is significantly high. Curve comes at the top of all the tokens with its $17 billion in TVL. Lido Finance follows the list at $15.4 billion, Anchor at $12.6 billion, and MakerDAO at $11.5 billion. AAVE and Uniswap take up the next places with $8.98 billion and $7.04billion of TVL, respectively.

Conclusion 

TVL in crypto can be the true indicator of the DeFi projects’ potential. It helps the users gain faith in the crypto asset, resulting in higher investments. TVL can never be a gimmick as it suggests the overall value of the protocols combined and how they are performing in the market. So, to start investing in DeFi projects, starting your research with TVL is necessary and fundamental. We hope that you now understand what is total value locked and its significance. It is time for you to take the baton and start the crypto investing journey.

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