With the increasing popularity of the DeFi space, Total Value Locked (TVL) has emerged as an essential metric for investors who want to evaluate decentralized finance (DeFi) protocols or assess if a specific DeFi platform is worth investing in. 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.
So what is TVL, what does it suggest, and why is TVL important for the DeFi industry and specific DeFi projects?
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.
What Is Total Value Locked?
Total Value Locked (TVL) is the total value of all the crypto assets staked in the smart contracts of a DeFi platform. It serves as an indication of the funds available on various DeFi platforms for transactional, borrowing, and lending purposes.
TVL determines the total supply underlying a protocol by adding all the DeFi assets currently staked in that protocol. This supply directly represents the possible returns on investment for investors from participation in the protocol and correlates to the capital locked within the system.
You can also use the TVL to calculate another important aspect of a protocol, the TVL ratio. This can reveal if an asset is now undervalued, which is critical information for any crypto investor.
Importance of TVL in DeFi
TVL has emerged as a key metric for gauging interest in the crypto industry and has been developed primarily as a way to assess decentralized protocols and the DeFi system as a whole. TVL provides traders with a new way to understand the DeFi overall market and make important investment decisions.
TVL includes the overall value of crypto assets deposited in DeFi protocols. These digital assets are locked in DeFi platforms for lending, staking, yield farming, and liquidity pools. 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.
A higher TVL suggests that a DeFi platform is healthy and in high demand. TVL growth signals that many investors have locked assets in the protocol, which in turn signals a positive outlook for 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.
A DeFi protocol with a higher TVL has more capital locked in the platform. As a result, users can capitalize on a wide range of benefits and get a higher yield. On the other hand, a lower TVL clearly denotes a lack of capital, which eventually translates to lower yields for users.
A DeFi protocol's market share can be easily determined using analytics platforms like DeFi Pulse and DefiLlama, which provide information on the volume of crypto assets locked in their respective smart contracts. Although calculating the total TVL of all DeFi projects is virtually impossible, DeFi Pulse and DeFi Llama display the TVL of specific DeFi protocols, enabling you to select the DeFi protocol that generates more yield for passive investors.
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 (ETH) and ERC-20 tokens. On the other hand, DefiLlama computes the TVL by calculating the combined balance of all DeFi chains or each platform individually.
Calculation of TVL Ratios
Crypto investors are advised to select a DeFi protocol with nearly $1 billion TVL.
A higher TVL is preferable since it indicates a robust, on-demand platform with a competent developer team and a valuable use case. All of these attract more participants and investors, leading to the rise of TVL.
On the other side, when DeFi protocols with lower TVL offer high yields, it could mean that new platforms want to gain market shares, but it could also be scams, as few or no participants have trusted the protocol with their assets.
Three important elements to consider while calculating a DeFi Protocol TVL:
- The DeFi protocol's current supply
- The DeFi protocol's maximum circulating supply
- The DeFi protocol's current price
TVL is also used to measure the performance of a Layer 1 Blockchain Network and can either be calculated in the form of cryptocurrency or fiat currency.
Three essential elements to consider while calculating a DeFi Protocol TVL:
- 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. The TVL is then derived by dividing the market capitalization by the maximum circulating supply.
We get the TVL ratio by dividing the total market capitalization of a locked asset by the total value locked.
Market Cap
TVL Ratio = __________
TVL
The TVL ratio assists in determining if a DeFi asset is undervalued or overvalued. When the ratio is less than 1, the asset is undervalued and more appealing to investors. However, if the market valuation of crypto surpasses the TVL, the asset is considered overpriced, leaving little to no possibility for growth.
Cryptos With the Highest TVL
According to DeFi Llama, the cumulative TVL across all DeFi platforms was around $630 million at the start of 2020, and it already surpassed the $54.98 billion mark in the second quarter of 2022. This is undoubtedly one of the most compelling reasons to learn more about the best DeFi protocols with the highest TVL in the DeFi landscape to invest in.
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While employing various methods and pursuing different aims, the 5 protocols described below boast impressive TVL figures. So, they're worth considering if you're planning to invest in a DeFi protocol.
Top 5 Tokens by Total Value Locked
| Name | Chain | Sector | TVL |
| MakerDAO (MKR) | Ethereum | Lending | $8.49B |
| Lido (LDO) | Ethereum | Lending | $7.61B |
| Uniswap (UNI) | Ethereum | DExes | $5.30B |
| Aave (AAVE) | Ethereum | Lending | $5.02B |
| Curve (CRV) | Ethereum | DEXes | $4.97B |
MakerDAO (MKR)
Maker was an early pioneer in the DeFi realm, continuing to draw assets from forward-thinking investors. As a decentralized autonomous organization (DAO), the protocol allows traders to participate directly in decision-making. The project is still one of the most valuable DeFi protocols accessible to investors, with a current TVL of $8.49 billion.
Lido (LDO)
Lido is a DeFi protocol designed to offer liquidity for staked assets, with a TVL of $7.61 billion. 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 (UNI)
Uniswap is a DEX with a very high TVL. The current value of $5.3 billion shows that the protocol will remain an appealing alternative for cryptocurrency traders.
Aave (AAVE)
Aave is a lending platform with a TVL of $5.02 billion. Its high TVL indicates that a significant number of investors have deposited funds into the protocol. Investors and lenders can anticipate the system to stay healthy as long as this figure remains high.
Curve (CRV)
Curve is one of the best DEXs, with a high TVL of $4.97 billion at the time of writing. While this value is down from a peak of $24 billion, it still positions the protocol among the top achievers in the DeFi ecosystem.
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 turns out to be a more accurate indicator than the market capitalization of a single DeFi project. It not only informs investors of the true value of new or current DeFi protocols but also opens the way for more widespread DeFi adoption.
The Ethereum network is the driving force behind DeFi apps and the most extensive network in terms of DeFi TVL. Nevertheless, the DeFi landscape is continuously changing due to the emergence of new protocols and solutions.
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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