What is TVL (Total Value Locked) and why is it useful?

There are several terms to know in decentralized finance (DeFi). Some refer to simple expressions used in written conversations. We wrote a little dictionary of people if you want to know these terms and expressions ;).

Other times, these are not just expressions to be taken lightly. This is typically the case of the TVL which refers to the Total Value Locked. This can be translated as the Total Locked Value.

We will see here what it is precisely about. You will also see how TVL is calculated and how it can help us invest better.

What is TVL?

TVL is a cryptographic indicator that shows the Total Value Locked in a protocol or in a single DeFi project. The TVL is generally indicated in FIAT currency (usually US dollars). We can thus know the total amount of money deposited on a given protocol, locked in a smart contract.

This gives us an estimate of the popularity and engagement of a protocol. We can also compare them to each other using the TVL.

Just like market capitalization, transaction volume or even the total circulating supply, TVL is therefore a performance indicator.

We can consider the TVL in what we call “ tokenomics » of a project. This remains an essential indicator when we want to make a fundamental analysis also.

Tokenomics refers to the economics of a token or cryptocurrency. Under this term, we find all the economic indicators of cryptocurrency.

How is TVL useful for investors?

There are thousands of different protocols. It was important to have a “reliable” indicator to compare protocols.

The TVL has naturally become the essential measurement for investors in DeFi.

This allows you to know if a protocol is healthy (that it has enough liquidity) and if it is interesting for an investment.

The higher a TVL, the more capital locked in the protocols will generate more returns for the protocol. This then makes it more profitable and more interesting from the investor's point of view.

When a platform's TVL increases, it means there is even more liquidity. In a virtuous circle, this helps create more popularity among investors.

How to read TVL?

There is no precise reading to be made for the TVL.

That said, participants can choose established protocols with a TVL of over $1 billion. This means that the protocol is “serious” and that it is one of the most followed protocols. Thus, this necessarily implies that the platform has a team of solid developers, a serious project and an engaged community.

Conversely, a DeFi protocol with a lower TVL may then be riskier.

Worse still, if the TVL is low and the reported returns are high, this can be a negative signal.

This simply means that the project cannot convince substantial investors to deposit their capital in this protocol. We should perhaps be wary and choose other protocols.

Why is TVL so important in DeFi?

A serious protocol must have enough capital deposited to be functional. There must be liquidity. Thus, the TVL clearly indicates, through the amounts deposited, the level of confidence granted by investors.

This also shows the weight that one protocol can have over another.

In fact, it is quite easy to classify protocols according to TVL.

Thus, we have a table on which we can see the classification of protocols on a network or of all networks at once.

We can also, on a broader horizon, calculate the overall TVL of all DeFi protocols to measure the popularity of decentralized finance.

Where can we see TVLs?

There are different analysis sites that classify protocols and applications according to TVL.

There are three widely used sites: DeFi Pulse, DeFiLlama and StatesofDapp for example.

top apps with the most TVL — As you can see in the screenshot of the DeFiLlama website, we can see the variations of the TVL per day. We can also see the protocols with the most TVL.

The site is also a reference when it comes to finding interesting applications. It is a prime site for invest in cryptocurrencies. Likewise, that the sites to know the best returns on DeFi, it remains a very useful site.

—> Read the article: The best sites to find the highest returns on DeFi.

How is crypto TVL calculated?

There are three main factors that are considered in calculating the TVL of a DeFi protocol.

First, the market capitalization of the token must be calculated or given. Typically, sites like Coinmarketcap give us the market capitalization of tokens.

Next, divide the market capitalization by the maximum circulating supply.

This is how TVL is calculated.

So, by dividing the total market capitalization of a locked asset by the total value locked, we then have the TVL ratio.

The TVL ratio makes it possible to determine whether an asset is undervalued or overvalued on the contrary.

In fact, if the ratio is less than 1, then the asset is generally undervalued. It is therefore particularly attractive and interesting for investors.

Likewise, the market capitalization exceeds the TVL, then the asset would be overvalued. It would then have little possibility of growing further.

What is the project with the highest TVL?

More than half of that was in a protocol, MakerDAO, which has remained one of the most important protocols along with Curve, Aave and Uniswap in the top 4.

Which blockchains have the largest TVLs? The largest network by DeFi TVL is Ethereum. It represents more than half of the total volume of DeFi.

This is also partly explained because the vast majority of protocols are built on the Ethereum network.

There are in fact more than 500 protocols created and hosted on Ethereum. Thus, it has more than 60% of the market share.

Next, we find the BNB Smart Chain, then Avalanche (crypto AVAX) and finally Solana with the crypto SOL.

Is TVL a reliable indicator?

In absolute terms, TVL is a very good indicator for DeFi. It is also one of the most used metrics to evaluate the health and especially the growth of the crypto market.

However, its reliability is not guaranteed. In fact, it cannot be interpreted with 100% accuracy. Besides, it's the same thing for most cryptographic metrics.

Market volatility can affect the value of locked assets. For example, since most protocols are on Ethereum, when the price of ETH falls, it also causes the overall TVL to fall.

And conversely if the price of ETH goes up, the TVL will increase. However, this is possible even if no person has deposited additional capital.

In short, understand that like all indicators, TVL is only an estimate. There are approximations and this should not be the only indicator to take into account if you want to invest in cryptocurrencies.

Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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