Contents
- What is the Total Value Locked in DeFi?
- Why does TVL matter in DeFi?
- The difference between TVL and Market Capitalization
- How is the TVL calculated?
- Which DeFi protocol has the highest total value locked?
- Top DeFi projects by total value locked
- Summing It Up!
TVL or total value locked is one of the most common metrics used in the DeFi space. TVL is a measure of the total value of assets that are locked up in a protocol. It is an important indicator as it projects the amount of liquidity available in different DeFi platforms to conduct activities such as lending, borrowing, staking, etc. This indicator demonstrates the overall growth of the DeFi industry. A lot of DeFi projects are spread across multiple blockchain networks and each network comes with its own TVL.
What is the Total Value Locked in DeFi?
An increasing TVL is a sign of increased staked assets within the DeFi protocols and indicates a growing interest within the space. The total value locked in Decentralised Finance currently stands at $48 billion as of 6th Feb 2023. During the last crypto bull run, the total TVL within DeFi protocols surpassed the $200 billion mark.
Why does TVL matter in DeFi?
Increasing TVL indicates increasing interest and adoption of DeFi protocols.
- It is a measure of the size of the DeFi ecosystem.
- The higher the TVL within a protocol, the more is capital locked into a platform leading to benefits such as more stability, higher liquidity and potentially higher yields.
- TVL is used to evaluate the risk within the ecosystem as it provides a way for measuring the total value of risk.
- It indicates the level of activity within the space, as the more the value locked in the protocols, the more active the space is.
- TVL is also an important metric to analyse whether a project is overvalued or undervalued. For example, if the market cap of a token is low in comparison to its TVL, the native token is likely undervalued and vice versa.
However, one should note that TVL only indicates the current value of all the deposits. One must not confuse the metric to gauge how many loans are outstanding within a protocol or the yields from these deposits.
Difference between TVL and Market Capitalization
Market capitalization (or market cap) is the total dollar value of all the shares of a company’s stock — taking crypto as an example, Bitcoin, the market cap is a measure of the total value of all the bitcoins minted to date. It is calculated by multiplying the circulating supply by the current price.
Market cap = Circulating supply x Price of the token
Usually, a crypto with a larger market cap is likely to be safer and more stable as an investment than one with a smaller market cap. Market cap is used to gauge the overall health of the token and allows you to compare the value of one crypto to the other.
On the contrary, TVL is the total assets that are locked within a DeFi protocol. The DeFi TVL is calculated by multiplying the number of assets locked within an ecosystem by the current price of the assets.
How is the TVL calculated?
It is calculated by:
- Multiply the price of the token in US dollars by the number of tokens deposited within a project.
- For projects that accept deposits in multiple tokens, simply calculate the TVL of an individual token and sum them up for the total TVL of the project.
- TVL = Funds staked or deposited x price of the assets
Platforms such as DeFiLlama, and DeFi Pulse can be used to analyse and find out the DeFi protocols in terms of the TVL staked as per their ranks.
After calculating the TVL, one can also check the TVL ratio to determine whether it is a good investment or not. You can do so by calculating the project’s market cap and then dividing this value by TVL to obtain the TVL ratio.
TVL Ratio: Market Cap of the project / TVL
Which DeFi protocol has the highest total value locked?
Ethereum has the highest Total Value Locked in DeFi, accounting for more than half of the total TVL within the DeFi industry. The blockchain has over 500 DeFi projects listed within the network followed by Tron and Binance Smart Chain (BSC).
TOP 5 CHAINS BY TOTAL VALUE LOCKED
Top DeFi projects by total-value-locked
Lido, a liquid staking platform, is the largest platform in terms of TVL (28% of the total TVL of Ethereum). Lido is a liquid staking protocol for Solana, Ethereum, Kusama, Polygon and Polkadot. It provides a non-custodial service where users can benefit from liquid ETH staking features.
Top 5 DeFi Tokens by total-value-locked (TVL)
Summing it up!
TVL is touted to be one of the most important metrics for measuring the performance of a DeFi project. It is used by investors to understand the overall health of the protocol and the market at large. Market cap is used to gauge the growth of an individual token as per the total coins minted so far. But, is high TVL in DeFi good? While analysing the overall performance of a DeFi project, it is imperative that the users should not consider TVL as a solo guide and should conduct thorough research and analyse other metrics before investing in a project.
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