Understanding TVL (Total Value Locked) in crypto is critical if you want to become a successful crypto investor and make the most out of your cryptocurrency investment. TVL stands for Total Value Locked and refers to your crypto assets locked in DeFi protocols, such as liquidity pools, lending protocols, and staking.
What does Total Value Locked actually mean?
Total value locked (TVL) means crypto locked up in a smart contract for any project, in a liquidity pool for lending, or staked in a blockchain node for mining crypto that uses a proof-of-stake (PoS) consensus method.
A DeFi platform’s TVL is essentially the entire value of the assets staked in the smart contracts of that platform. It measures the total amount of money that may be transacted, borrowed, or lent across all DeFi networks. The TVL for the DeFi sector can be estimated by adding up the value of all the DeFi applications currently in use and is a good indicator of how well the app attracts monthly active users for a wide range of transactions.
Why is TVL So Important?
For a DeFi platform to be successful, it must have a substantial total value locked. When the total value locked (TVL) of the DeFi platform grows, it indicates that more users have faith in the network and are ready to deposit their crypto assets there. Investors will find it easier on the platform due to the increased liquidity made possible by the influx of new capital.
When and how do you test TVL? The total value locked (TVL) of DeFi projects and their distribution can be seen on marketplaces. Once you have calculated the TVL, you can utilize the TVL ratio in your financial choices. Despite the importance of tokenomics, some individuals use this data to determine whether or not the native token of a DeFi network is undervalued. Not all platforms with high TVL will have successful token sales, even if the platform itself is successful.
How to Calculate the TVL Ratio?
The next most important thing to know is how to calculate the TLV. If a protocol lets users stake different types of tokens, including stablecoins, the TVL of each token must be calculated separately. Then the TVL of all token types is added to get the system’s Total Value Locked. To determine how much total value is locked in a particular DeFi protocol, multiply the total number of tokens staked on that protocol by their current value.
If a protocol allows three different token types to be staked, for example, the total number of Token A staked would be multiplied by the current value of a single Token A. The same steps would be taken for Token B and Token C, and the combined TVL for the whole protocol would be calculated by adding the three sets of results.
Benefits of TVL
The expansion of TVL is a crucial indication of the growing interest in and acceptance of decentralized networking protocols. TVL is an important parameter to keep an eye on for several reasons, some of which are listed below.
It enables a comparative measurement of the DeFi community.
TVL is a reliable measure of the area’s bustle. The greater the TVL, the more occupied the place is at any time. More people would be in the space if there were more money in protocols.
It shows how to determine the total value at risk, which we use to determine how risky an ecosystem is.
A larger TVL on a DeFi protocol suggests that more money is locked into the platform, resulting in a wide range of user advantages, including an improvement in their returns or passive income. On the other hand, if there is less money accessible, as is the case with a smaller TVL, then consumers will see less of a passive income or return.
Always keep an eye on the overall system health, and one way to do so is by looking at the total value of the crypto assets in a DeFi protocol. Every day, this statistic can be used for various purposes, such as evaluating the total assets in a system or checking the TVL ratio to see whether the tokens of a protocol are undervalued. When it comes to planning your future moves in the realm of DeFi, you will be more educated now that you have an understanding of how crypto TVL operates.
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