Why TVL Matters in DeFi: Total Value Locked Explained

Then you deposit $5000 worth of crypto in a liquidity pool to earn commission on swaps. If you were the only user of the Defi platform, then DeFi TVL is $15000. MakerDAO is the leader in this category, presiding over $1.8B in locked assets that account for 2.39% of the total ETH in circulation and 14% of the total minted WBTC. Borrowers first deposit these assets in order to borrow the DAI stablecoin from the protocol. DeFi Pulse popularized the metric during the 2019 bear market when there weren’t quite as many eyes fixated on DeFi as there are today. During this period, there was less than $400M locked, and more than 90% of that was concentrated in a single application — MakerDAO.

• Many of the world’s largest DEXs, like Curve and Uniswap, have remarkably high TVLs.
• On the other hand, DeFi projects with lower TVL must come under scrutiny if they offer higher yields.
• Many protocols combine these features in unique ways, requiring more in-depth analysis to arrive at the TVL.
• A higher TVL on a DeFi protocol indicates that there is more capital locked into the platform, resulting in many benefits for users, including better yields.

A project’s TVL doesn’t only change when users make new deposits or withdraw their assets. It is constantly changing in line with the fluctuating dollar value of all those assets in the cryptocurrency market. Some or even all of a DeFi protocol’s deposits may be denominated in its native token.

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On the other hand, market capitalization is an indicator of market value for any blockchain-based platform issuing its own tokens. Most important of all, the TVL value in DeFi differs from one platform to the other. The TVL for a specific DeFi protocol can also be found on DeFi Pulse, where you can find analysis and rankings of decentralized finance protocols.

• As DeFi protocols run according to a series of smart contracts, these exchanges attract significant amounts of liquidity, often bringing serious yields for investors.
• This article will explain what TVL is, how it relates to the DeFi ecosystem, and how it’s calculated.
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• TVL matters because it indicates the capital’s impact on DeFi applications’ profits and usability for traders and investors.
• The TVL ratio, or the current value measured against the protocol’s market cap, is also a useful metric.

Total locked value has become an important metric for assessing decentralized finance protocols. Many of today’s traders use this simple measure to understand a system’s strength and potential. This article will explain what TVL is, how it relates to the DeFi ecosystem, and how it’s calculated. Once you understand what this essential metric says about a protocol, you’ll be able to make it a key factor in your most important crypto decisions.

Value locked

DeFi assets include rewards and interest, coming from typical services such as lending, staking and liquidity pools, provided in the form of smart contracts. TVL in staking, for example, is a particularly useful indicator for investors looking to support the DeFi platforms with the highest rewards. It is the total value locked in the DeFi staking protocols and represents the amount of assets deposited by the liquidity providers. TVL in derivative protocols is measured by the value of assets deposited into the smart contracts, which provide the backing to synthetic assets and financial contracts. In options trading applications, users can deposit USDC to earn interest when traders buy the spreads in order to hold a position open. You can easily identify the DeFi protocols with the highest volume of crypto assets staked in the platforms.

The cryptocurrency the complete beginners guide ratio, or the current value measured against the protocol’s market cap, is also a useful metric. You can find it for most DeFi protocols by using DefiLlama, a DeFi dashboard that countless traders have found helpful. Importance of TVL in DeFi becomes clear on the grounds of its role in showcasing the immediate potential of a DeFi protocol.

Total value locked (TVL)

The TVL is a measure of the funds deposited in smart contracts, and this figure is closely watched by analysts as an indicator of investor confidence in the market. When dividing the total market cap of a locked asset by the total value locked, we obtain the TVL ratio. The TVL ratio can help determine if a DeFi asset is undervalued or overvalued.

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• Total value locked in DeFi would draw references to the rise of NFTs, DeFi, and other decentralized solutions.
• It not only guides investors regarding the actual value of new or existing DeFi protocols but also paves the road to easier DeFi adoption.
• Stablecoins can be derived from “yield protocols” that allow depositors to receive an equal representation of their deposited tokens.

Any verification that provides evidence of a real, living software developer who created a cryptocurrency, … In 2022, Ethereum appeared as the largest network by DeFi japan’s cryptocurrency exchanges to form new self, accounting for over half of the total DeFi volume worldwide. Due to the exceptional growth of DeFi in 2020, the combined TVL of all DeFi protocols increased fast and considerably by the end of 2021. Postcode address look-up functionality for guest and registered payments.

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A higher TVL on a DeFi protocol indicates that there is more capital locked into the platform, resulting in many benefits for users, including better yields. On the other hand, a lower TVL implies less capital is available, which ultimately leads to lower yields for users. It can be used to assess the riskiness of the ecosystem, as it provides a way to measure the total value at risk.

For example, you can use DeFi Pulse to identify the DeFi protocols with the highest volume of crypto assets staked. The platform tracks the https://crypto-trading.info/ and displays it in USD, which makes it easy to understand. It’s a great tool for those looking to navigate the decentralized finance world or beginners who want to learn more about the various projects within the ecosystem. The process begins by identifying the market capitalization of the DeFi project by multiplying the supply of the DeFi project with its existing price. In the next step, you must divide the market capitalization by the maximum circulating supply of the protocol for finding out the TVL.

Multi Research focuses on bringing relevant information about various components of the decentralized economy for those that do not have time to stay on top of it all the time. TVL is an inherent quality of a camera or monitor, influenced by the visual bandwidth of the transmission system used. It should not be confused with the number of horizontal scanning lines of such systems, which e.g. 625 lines for the PAL system, 525 lines for the NTSC system. L2BEAT is an analytics and research website about Ethereum layer two scaling.