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What is Total Value Locked (TVL) in Crypto: 5 Important Points to Consider
Total Value Locked (TVL) is a key metric in the cryptocurrency market that reflects the amount of money invested in a particular cryptocurrency.
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1. What does the total locked value mean?
Experts in the financial markets have had to adjust to a new sort of investment and find ways to gauge its success since the advent of decentralised finance (DeFi) in 2020.
Total value locked (TVL) is a cryptographic indicator often used by DeFi investors to evaluate the aggregate value of assets deposited across all DeFi protocols or in a single DeFi project in United States dollars or any fiat currency.
DeFi assets consist of dividends and interest earned on conventional services rendered via smart contracts, such as lending, staking, and liquidity pools. For example, the TVL in staking is a useful indicator for investors who want to back the DeFi systems that offer the largest rewards. What is staked in DeFi is the aggregate value of all assets deposited by liquidity providers.
In 2022, TVL will have approximately $2 billion in revenue around the world, up from $400 million in 2020 and 2021. With DeFi's rising profile and significance in the cryptocurrency industry, TVL has emerged as a crucial statistic for traders looking to determine whether or not an ecosystem or individual protocol is viable and, hence, worth investing in.
DeFi projects' worth may be affected by factors other than the TVL itself, which is just the sum of all cryptocurrencies locked in a smart contract.
Excluding deposits, withdrawals, and the amount a protocol actually holds, there are a number of factors that all agree on TVL's value. In addition to fluctuating with the value of the native token or the fiat currency, the TVL is subject to other market forces. The TVL of a protocol may fluctuate based on the value of its native token, which is used to make deposits. An increase in the value of a token correlates with a rise in the TVL of the corresponding protocol.
2. Why does TVL matter in DeFi?
Decentralized ecosystems rely on users depositing funds for use as loan collateral or trading pool liquidity. When it comes to the profitability and usefulness of DeFi applications for traders and investors, TVL is important since it displays the impact of the money.
A DeFi platform's liquidity, popularity, and usability all improve in tandem with its TVL. The project would not have been successful without these elements. With a higher TVL, participants in DeFi protocols are assured of a greater share of the protocol's benefits and proceeds. If there is less money available, as indicated by a smaller TVL, then returns will be lower.
Analytics company platforms like DeFi Pulse and DefiLlama reveal the percentage of the market held by individual DeFi protocols by revealing the total quantity of crypto assets locked in each smart contract.
DeFi users looking for TVL on DeFi Pulse should be aware that the service only keeps tabs on the ebb and flow of ETH and ERC-20 tokens on the Ethereum blockchain in order to track the activity of smart contracts belonging to various DeFi protocols. In contrast, DefiLlama determines the TVL by extrapolating the combined or individual platform balances from all of the DeFi chains.
3. How is crypto TVL calculated?
The constant emergence of new protocols in the DeFi arena makes it difficult to pin down the precise TVL of the market and ascertain whether or not a given DeFi platform is a secure choice for end-users.
More experienced participants, however, can choose to use more tried and true processes with a TVL metric of $1 billion, which should be a safe bet. A higher TVL is preferable because it shows that the platform is robust, popular, and well-supported by its development community and users. All of which ought to entice additional players and investors, ultimately raising the TVL.
However, a warning sign needs to be displayed when low-TVL DeFi methods provide large returns. These may be advertisements for new platforms hoping to increase their market share, but they may also be hoaxes if few users have put their faith in them.
When determining a DeFi protocol's TVL, three primary factors are taken into account:
The cryptographic TVL can be easily determined. Initial steps toward determining an asset's market cap involve multiplying the current price by the total supply available in the DeFi project. The TVL is then calculated by dividing the market value by the total possible distribution.
To calculate the TVL ratio, we divide the asset's total market capitalization by its total value locked. The TVL ratio is useful for judging whether or not a DeFi asset is priced appropriately. An undervalued asset, which is more appealing to investors, has a ratio below 1. If a cryptocurrency's market cap is higher than its theoretical maximum lifetime (TVL), the asset may be overvalued.
4. Which crypto has the highest TVL?
This rapid and substantial increase in total DeFi protocol TVL by the end of 2021 is directly attributable to the outstanding growth of DeFi in 2020.
DefiLlama estimates that by the beginning of 2020, the total TVL on all DeFi platforms will have reached $630 million. Its valuation in the first quarter of 2022 was approximately $172 billion.
MakerDAO, together with Curve and Aave, remained among the three most prominent protocols, accounting for more than half of the total. Token Market Capitalization (TVL) and market share leader Curve is the most valuable cryptocurrency with $17 billion, followed by Lido with $15.4 billion, Anchor with $12.6 billion, and MakerDao with $11.5 billion.
5. Largest network by DeFi TVL
According to DeFi TVL, Ethereum was the most popular network in 2022, processing more than half of all DeFi transactions.
To put things in perspective, there are about 490 protocols in use on the Ethereum DeFi network. It has a TVL of over $73 billion and controls 64 percent of the industry, ahead of BNB Smart Chain (second highest TVL, $8.74 billion, 7.7 percent of the market), Avalanche ($5.21 billion, 4.5 percent), and Solana ($4.19 billion, 3.68% of the market).
A TVL crypto chart can be read with little to no training. All of the DeFi market's TVL is reflected in USD here, along with the 24-hour percentage change and leading cryptocurrency.
Ethereum has the highest TVL among all networks, as measured by the sum of all values locked across all chains. In short, TVL is the most popular metric for gauging the strength and development of the cryptocurrency market in the DeFi sector. Increasing TVLs is a good sign for the market, but you should proceed with caution when relying on this indicator because of how difficult it is to understand.
The price of ETH, the platform upon which the vast majority of locked assets rest, is particularly sensitive to market fluctuations. The total value locked (TVL) of DeFi will expand from 2020 onwards because of the dramatic rise in the value of ETH; however, this will occur without the need for additional investors or users.
Further, due to the fluid and re-countable nature of DeFi services, it is easy to overestimate the liquidity capacity of protocols when calculating their transaction volume. Investors shouldn't base their decisions on TVL or any other indication because they are merely estimates of the market's state and have their own inherent limitations.
Conclusion
To sum up, in the cryptocurrency world, the value of all cryptocurrencies held in decentralized finance (DeFi) protocols is measured as "Total Value Locked" (TVL). It's a useful indicator for gauging DeFi's overall appeal and progress. Key factors to think about while analyzing TVL include the locked assets' nature, the liquidity of those assets, the number of users engaging in the DeFi operation, and the level of risk.
FAQs
How do we define "total value locked" (TVL) in the context of cryptocurrency, and what role does it play?
TVL is an effective indicator of the state of the DeFi network. The higher the TVL, the more trust people have in DeFi since it reflects how much value they are ready to lock up in contracts. To add to this, the more capital that is invested in DeFi, the more opportunities for development will arise.
Which crypto has the best TVL ratio?
In finance, an inflated protocol or network has a market cap-to-TVL ratio of more than 1. Possible future price drops or corrections When the ratio of market capitalization to total network value (TVL) is less than 1, the protocol or network is undervalued.
How much is TVL, or total value locked?
The amount of money users have locked up in a decentralised finance (DeFi) protocol is known as the "total value locked" (TVL). These monies could be used for a variety of purposes inside the project, including but not limited to staking, liquidity pools, and lending.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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