Before we get into the definition of total locked value, we need to brush up on the basics of cryptocurrency and decentralized finance.
Decentralized finance (DeFi) eliminates middlemen by allowing people, merchants, and businesses to transact directly with each other.
DeFi gets rid of third parties who are involved in traditional financial transactions, and the total amount locked plays a big role in this. To find more content about DeFi you can enter the BC Game website to have access to valuable content about Crypto and betting.
What Is Total Value Locked (TVL)?
TVL is the value of all the assets contained within a DeFi protocol. It has become a key metric for appraising DeFi projects because it provides a useful measure of a protocol’s general health.
By counting all the coins currently staked within a protocol, TVL reveals the total supply underlying the system. This supply corresponds to the capital locked within the system, and it directly reflects the potential proceeds available for investors from involvement in the protocol.
You can also use the TVL to determine another key factor about a protocol, the TVL ratio. This can show you whether an asset is currently being undervalued, a vital piece of information for any crypto investor.
Significance of Total Value Locked: TVL Vs MARKET CAP
TVL is important because it is the most significant DeFi indicator. It denotes the popularity of a project with the number of active users. It is a good measure to evaluate the robustness of a project.
Although the market cap provides the indication of the appreciation received by a protocol from active as well as passive investors but TVL is the most obvious indicator for the DeFi sector. Passive investors are those investors who invest in the protocol expecting the token to grow and succeed.
However, they might not be using that protocol in itself. They buy the token of these protocols in the hope of price appreciation, and this leads to the increment of market cap. TVL, on the other hand, reflects the usability of a platform by its active players. The investors who actually transact using the platform. TVL can be thought of as an important alternative for market cap.
If someone wishes to gauge the future potential of a DeFi project, then one needs to have a look at its market cap. However, if someone wishes to gauge the current scenario of a project, the TVL is the best indicator.
How to calculate the total lock value
You can calculate the total value locked in a Defi protocol by taking the total number of tokens staked on that protocol and multiplying that total by the current value of each token in USD.
If a protocol allows users to stake many different types of tokens (which is usually the case), the TVL of each individual token type should be calculated separately and then added up together to arrive at the protocol’s total value locked.
For example, if a protocol allows users to stake three different token types (Token A, Token B, and Token C), one would need to take the total number of Token A staked and multiply that by the current value of each individual Token A in USD. They would then repeat that process for Token B and Token C and add up the results of all three token types to arrive at the TVL (in USD) for the entire protocol.
Rather than figuring out the total value locked on a protocol by yourself, you can often use Defi tracking sites, such as Defi Pulse, DeBank, or DefiLlama, to search for the TVL of most major Defi protocols.
Why does it matter?
TVL indicates the overall health of the DeFi market. The TVL of individual projects denotes the amount of investor faith in the protocol. A rapid increase in TVL shows that investors value the project, and more money is flowing through its network. It helps investors determine if a protocol is healthy and worth investing in.
A high TVL means high liquidity, high popularity, and high usability — the factors that define the success of a DeFi protocol. An increasing TVL also benefits its investors as they enjoy considerably higher liquidity and returns.
However, a lower TVL translates into lesser availability of money, which means the investors will not get enough rewards if they choose to stake the token of this protocol.
Investors can also use TVL to figure out if the native token of a particular protocol is undervalued or overvalued. A token can be overvalued or undervalued if its market cap is high or low relative to the TVL of the entire project/protocol.
Currently, the total value locked in the DeFi industry is a little less than $50 billion, with the MakerDAO protocol leading the table, as per data from DeFi Pulse.
The combined TVL of DeFi protocols has surged over the last couple of years. At the beginning of 2020, the combined value was USD 630 million, with more than half of the shares owned by MakerDAO. At the time of writing, the total value of MakerDAO is nearly USD 10 billion.
Is TVL accurate?
If looking at the TVL as measured by the market cap of the total circulating supply, then theoretically, the lower the TVL ratio, the better since, the more saturated the staking pool, the lower the ROI (return on investment) per token. Thus higher the TVL ratio, the lower the value of an asset should be.
Obviously, with the creativity of Defi, not every token is the same, and more factors impact a token’s price than just the TVL. For example, the utility of the token matters, if staking the token doesn’t generate yield, then a TVL metric is almost worthless. Tokens that have governance properties may request a premium.
Even though it isn’t an all-encompassing metric for determining the value of a token, it’s still widely used and a great point of reference for investors like the Price to Equity ratio into equities. In fact, a Defi index by Defi pulse (the populariser of the TVL metric) exists to balance its weights across the incorporated tokens via the TVL metric.