Total Value Locked (TVL) Meaning
What is Total Value Locked In DeFi Protocol?
There are different metrics used in the crypto market such as market capitalization and supply, and the total value locked (TVL) is a metric used in Decentralized Finance (DeFi). It measures the total number of assets that have been locked or staked in a protocol by users. The assets are locked with smart-contracts, and alongside the initial funds staked by investors. TVL also takes into account the rewards that accrue from the protocol depending on its use case such as staking, lending, liquidity pools, and yield markets.
Traders and market analysts use TVL to measure the health and performance of a DeFi protocol. When the Total Value Locked (TVL) of a DeFi platform increases, it leads to a subsequent rise in liquidity, popularity, and usability.
A high TVL means that a protocol has a healthy liquidity pool with more capital locked in its smart-contract. This makes it popular with investors who are looking to earn incentives and rewards. On the other hand, a lower TVL signifies a reduced availability of funds, resulting in lower yields for investors.
How is TVL Calculated?
To compute TVL, first determine the combined value of all assets currently locked within the platform, encompassing collateral, staked, and borrowed assets. The value of these assets is then converted into a standardized unit, such as USD or another fiat currency. By summing up the total value of all assets, the TVL of the protocol can be determined.
Tracking TVL in DeFi is commonly done through data aggregators, which act as popular sources for acquiring this information. These platforms collect data from diverse DeFi protocols and consolidate it into a dashboard, simplifying the process of monitoring the overall expansion and adoption of the DeFi ecosystem.
In addition to the TVL, investors can also look at the TVL ratio, which determines if a DeFi asset is undervalued or overvalued. To obtain the TVL ratio of a protocol, divide the market capitalization by the TVL. If the TVL ratio of an asset is above 1, it is overvalued. A TVL ratio below 1 suggests that an asset is still undervalued.