Understanding Total Value Locked (TVL) in Crypto Asset Management

David - Cryptocurrency Specialist

As the DeFi market gained momentum in 2020, financial experts had to learn new methods to evaluate its performance. Total Value Locked (TVL) is a popular indicator used by DeFi investors to assess the overall value of crypto assets deposited in all DeFi protocols or a single DeFi project.

DeFi assets include rewards and interest from lending, staking, and liquidity pools provided in smart contracts. TVL in staking is a useful indicator for investors looking to support DeFi platforms with high rewards. A higher TVL means more capital is locked in DeFi protocols, which translates to more significant benefits for participants.

TVL in DeFi

Total Value Locked (TVL) is a critical metric that provides insight into the amount of cryptocurrency that's currently locked up in DeFi protocols. However, it's important to note that TVL is not a static figure and can fluctuate based on market conditions and changes in the value of underlying assets. For example, if the price of a particular cryptocurrency increases, the TVL of a DeFi protocol that uses that token will also rise. Essentially, TVL serves as a barometer of a DeFi platform's success and can be used to gauge investor sentiment and market demand. A high TVL is typically an indicator of a well-established, secure, and popular DeFi protocol, which is attractive to traders and investors like.

Measuring TVL

By tracking the total value locked (TVL) in DeFi protocols, we gain insights into their market share and growth trends. Analytics platforms such as DeFi Pulse and DefiLlama serve as valuable sources of information by providing detailed data on the number of crypto assets held in smart contracts. DeFi Pulse tracks Ethereum-based protocols by aggregating the total balance of Ether (ETH) and ERC-20 tokens. Meanwhile, DefiLlama calculates TVL by analysing the total balance across all DeFi chains or each individual platform separately. These platforms offer a comprehensive understanding of the DeFi ecosystem and allow for a deeper analysis of the industry's overall performance.

Calculating Crypto TVL

Establishing the exact TVL of the overall market and determining a specific DeFi platform's safety for end-users can be challenging due to new protocols emerging continuously. However, a TVL metric of $1 billion for established protocols is a secure enough prospect. A higher TVL indicates a healthy platform in high demand with a strong development team and a valuable use case, attracting more participants and investors, contributing to the project's TVL rise.

To calculate a DeFi protocol's TVL, the market cap of an asset must be found by multiplying the DeFi project's supply by the current price. Dividing the market cap by the maximum circulating supply will reveal the TVL. The TVL ratio helps determine if a DeFi asset is undervalued or overvalued. If the ratio is under 1, the asset is undervalued and more attractive to investors.

Highest TVL in Crypto

The year 2020 marked a monumental shift in the world of decentralized finance, as DeFi protocols experienced an unprecedented surge in growth. By the end of 2021, the collective total value locked (TVL) across all DeFi platforms had risen exponentially. DefiLlama reports that at the start of the year, the TVL was a modest $630 million, but in a short span of time, it skyrocketed to over $172 billion by the first quarter of 2022. MakerDAO, Curve, and Aave are just a few of the standout protocols that have made their mark in this thriving ecosystem.

Investing in Cryptocurrency

When buying Bitcoin or investing in cryptocurrency, it is essential to do thorough research to ensure investing in a trusted Bitcoin or the best cryptocurrency. Understanding TVL is crucial as it indicates the capital's impact on DeFi applications' profits and usability for traders and investors. By monitoring TVL, investors can identify DeFi protocols' market share, and identify protocols with higher TVLs indicating a healthy platform with a valuable use case, strong development team, and high demand. When protocols with low TVLs offer high yields, investors should be wary of potential scams or high-risk platforms.