What is the total value locked (TVL) of a cryptocurrency and why is it important?

1.What does Total Value Locked mean?

Since the boom of decentralized finance (DeFi) in 2020, financial market experts have adapted to a new type of investment and have been looking for ways to measure its performance.

In addition to market capitalization, volume and total liquidity, Total Value Locked (TVL) is a common metric used by investors to assess the overall value of crypto assets - across all DeFi protocols or individual DeFi projects - in -in U.S. dollars or any fiat currency.

DeFi's assets include returns and interest from typical services offered in the form of smart contracts, such as loans, pledges and liquidity pools. For example, TVL is a particularly useful metric in terms of pledges for investors looking to back the DeFi platform with the highest returns. It is the total value locked into a DeFi pledge agreement and represents the amount of assets deposited by the liquidity provider.

By 2022, TVL has grown to nearly $2 billion globally from $400 million in the previous two years. With the growing popularity and value of DeFi in the cryptocurrency space, TVL has become an essential metric for investors who want to assess whether an entire ecosystem or a single protocol is healthy and worth investing in.

While TVL is simply defined as the total value of the cryptocurrency locked in a smart contract, there are a number of potential conditions that could affect the value of a DeFi project.

There are multiple factors that affect TVL beyond deposits, withdrawals and the amount actually held by the agreement. TVL also varies with the value of fiat currency or local tokens. Deposits to some agreements may be denominated in the project's native token, so their TVL varies with their value. If the value of a particular token grows, then the TVL of the protocol will also grow.

2.Why is TVL important in DeFi?

In order for DeFi platforms to work, they require capital to be deposited into the trading pool in the form of loan collateral or liquidity. TVL is important because it indicates the impact of capital on the profitability and availability of DeFi applications for traders and investors.

When a DeFi platform's TVL rises, it is followed by increased liquidity, popularity and availability. These factors contribute to the success of the program. A higher TVL means more capital is locked into the DeFi agreement and participants can enjoy more substantial benefits and revenues. Lower TVLs mean lower available capital, resulting in lower returns.

The market share of DeFi protocols can be easily determined by analyzing companies' platforms such as DeFi Pulse and DefiLlama. These platforms provide data on the number of crypto assets locked in smart contracts.

The DeFi Pulse platform monitors the protocol's smart contract movement on the ethereum blockchain by extracting only the total balance of ETH and ERC-20 tokens. On the other hand, DefiLlama calculates TVL by extracting the total balance of all combined DeFi chains or individually for each platform.

3.How is the cryptocurrency TVL calculated?

As new protocols continue to emerge in the DeFi space, establishing the exact TVL for the entire market and determining whether a particular DeFi platform is safe for end users can be extremely challenging.

However, participants can choose more mature protocols and use a $1 billion TVL metric, which should be a safe enough value. A higher TVL would be better because it would represent a healthier platform with a stronger development team and more valuable use cases. All of these will attract more participants and investors to contribute to the rise of TVL projects.

On the other hand, one should be wary when DeFi protocols with lower TVLs offer high revenue. This may be to promote a new platform hoping to gain market share, but it is also likely to be a scam because few or no participants trust their assets.

There are three main factors to consider when calculating the TVL of a DeFi protocol.

Calculating the TVL of a cryptocurrency is simple. First, the total market value of the asset is calculated by multiplying the supply of DeFi items by the current price. Then, divide the total market value by the maximum circulating supply to get the TVL.

Using the total market value of the locked-in asset divided by the total locked-in value (TVL) yields the TVL ratio. the TVL ratio can help determine if a DeFi asset is undervalued or overvalued. If the ratio is below 1, the asset is usually undervalued and more attractive to investors. If it is greater than 1, that is, when the market capitalization of a cryptocurrency exceeds the TVL, the asset is probably overvalued and has little room for growth.

4. Which cryptocurrency has the highest TVL?

Due to the extraordinary growth of DeFi in 2020, the combined TVL of all DeFi protocols grew substantially and rapidly by the end of 2021.

According to DefiLlama, the total TVL of all DeFi platforms is about $630 million at the beginning of 2020. In the first quarter of 2022, it was already worth more than $172 billion.

More than half of that figure is contributed by the MakerDAO protocol. makerDAO is currently the top protocol along with Curve and Aave. Curve is currently the cryptocurrency with the highest TVL and market share with 9.7% market share and $17 billion TVL, followed by Lido with $15.4 billion TVL, Anchor with 12.6 billion USD, and MakerDao at 11.5 billion USD.

5. DeFi TVL is the largest network

In 2022, Ether becomes the largest network in DeFi TVL, accounting for more than half of the total global DeFi.

The Ethernet DeFi network includes less than 500 protocols. The Ethernet DeFi network TVL is approximately $73 billion and holds 64% of the market share. In comparison, the Coin Smartchain has a TVL of $8.74 billion, or 7.7% of the market, Avalanche has $5.21 billion, or 4.5% of the market, and Solana has $4.19 billion, or 3.68% of the market.

Viewing the TVL chart is simple. The chart shows the TVL of the entire DeFi market in USD terms, the percentage of movement in the last 24 hours and the cryptocurrencies with a higher dominant position.

The TVL metrics across all chains clearly show that Ether is the network with the highest TVL. Essentially, TVL is a good metric for the cryptocurrency DeFi space and is probably the most appropriate metric to use to assess market health and growth. While the growth in TVL signals an optimistic outlook for the market, its reliability must be treated with caution as it is nearly impossible to interpret this metric with precision.

Market volatility is one of the main variables that can seriously affect the value of locked-in assets. The first is the price of ETH, where most assets are located on the ETH platform. The significant increase in the price of ETH since 2020 has inevitably impacted DeFi's TVL. this means that the TVL can increase without any new users or money coming into DeFi.

Furthermore, due to the nature of DeFi's service, funds can easily move and be counted multiple times, thus misjudging the liquidity capacity of the protocol. As with all metrics, TVL is only an estimate of market conditions and has obvious flaws as it is only an approximation and investors cannot make decisions based on TVL alone.