What Is TVL Crypto And Why Does It Matter

TVL in the cryptocurrency space measures the total USD value of digital assets staked on a blockchain through DeFi platforms or dApps.

It is an indicator of investor and developer interest in a project or network.

TVL includes all the coins deposited in all of the functions that DeFi protocols offer, including staking, lending, and liquidity pools

What Is TVL In cryptocurrency/ crypto and does it matter?
In crypto, TVL measures the total U.S. dollar value of assets locked on a blockchain via DeFi platforms or dApps.: Image Courtesy (Forbes)

What does the total value locked mean?

Post-2020 DeFi surge, financial experts delve into a fresh investment realm, considering metrics such as market cap, trading volume, and supply.

Total Value Locked (TVL) is a key indicator for DeFi investors, representing the overall value, in USD or fiat, deposited across DeFi protocols.

It encompasses rewards and interest from services like lending and staking. In 2022, global TVL hit $2 billion, a significant increase from $400 million in the prior two years.

TVL is crucial for assessing the health and investment potential of the DeFi ecosystem, considering factors like currency value and token fluctuations.

Why does TVL matter in DeFi?

TVL is crucial for DeFi platforms as it represents the capital impacting their profits and usability.

A higher TVL indicates increased liquidity, popularity, and usability, contributing to the project’s success.

DeFi Pulse and DefiLlama offer insights into market share through data on crypto assets locked in smart contracts.

DeFi Pulse tracks ETH and ERC-20 tokens on the Ethereum blockchain, while DefiLlama calculates TVL across all DeFi chains or individual platforms.

How is crypto TVL calculated?

Amidst new DeFi protocols, gauging the market’s total TVL and assessing platform safety pose challenges.

Choosing established protocols with a TVL of $1 billion is considered a secure option, indicating a healthy and in-demand platform with a robust development team.

Higher TVL attracts more participants and investors, contributing to the project’s growth.

However, exercise caution when lower TVL DeFi protocols promise high yields, as these promotions or potential scams may have limited participant trust.

Three main factors are considered to calculate a DeFi protocol’s TVL:

Factors to be considered while calculating a DeFi protoclo's TVL
Image source (Crypto.News)

Calculate crypto TVL: Multiply DeFi project supply by current price for market cap, then divide by max circulating supply.

TVL ratio is obtained by dividing total market cap of locked asset by total value locked.

A ratio under 1 suggests undervaluation, while a market cap exceeding TVL may indicate overvaluation with limited growth potential.

Also read: How To Buy crypto using a prepaid card?

Which crypto has the highest TVL?

In 2020, DeFi experienced remarkable growth, with the total value locked (TVL) across all protocols surging.

Starting at $630 million in early 2020, the TVL skyrocketed to over $172 billion by Q1 2022, led by major protocols like MakerDAO, Curve, and Aave.

MakerDAO dominates, comprising over half, while Curve boasts the highest TVL share at 9.7% and $17 billion.

Lido followed with $15.4 billion, Anchor at $12.6 billion, and MakerDAO at $11.5 billion.

Largest network by DeFi TVL

In 2022, Ethereum dominated the DeFi landscape with over 50% of the global TVL.

The Ethereum DeFi network, encompassing nearly 500 protocols, boasted a TVL of around $73 billion, holding a 64% market share.

BNB Smart Chain leads with $8.74B TVL (7.7% market share), followed by Avalanche at $5.21B (4.5%) and Solana at $4.19B (3.68%).

Analyze a DeFi TVL chart easily: USD values, 24-hour percentage change, and focus on the crypto with greater dominance.

Ethereum’s TVL remains a key metric, reflecting its leading position in the DeFi sector, though interpreting the indicator requires caution.

TVL growth indicates a positive market outlook, but factors such as market volatility can impact its reliability.

Ethereum’s price fluctuations can significantly impact TVL, potentially leading to misleading impressions of market health.

Furthermore, the decentralized nature of DeFi services enables funds to move and count multiple times, potentially distorting liquidity calculations.

Investors should consider TVL as an estimate rather than a sole determinant for strategy, acknowledging its inherent flaws and approximations.

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