DeFi: What is Total Value Locked
Decentralized finance, or DeFi, has improved greatly since the pandemic lockdown, amassing new solution apps that have introduced myriad benefits as well as challenges. And this, in turn, has been able to add the crypto industry to the top value-based graphs in the modern financial market.
Since DeFi assets run mostly on rewards and interests by engaging in services like liquidity pools, lending, and staking, different indicators help investors discern whether it’s a lesser risk to stake their funds or assets in the supposed DeFi protocol. Among these indicators are market capitalization, trading volume, and the most important of them all: total value locked. Its importance stems from the fact that it helps investors assess the overall value of assets deposited across all DeFi protocols or a single DeFi product.
Understanding Total Value Locked (TVL)
TVL is one of the most popular and critical indicators of decentralized finance projects. In simple terms, TVL measures the total value of all assets locked into DeFi protocols. This includes all the assets deposited across all the services that DeFi products offer, such as lending, staking, and liquidity pool. TVL doesn’t in any way indicate outstanding loans or yields of deposited assets, but the current value of deposits
Having said so, it’s however paramount to acknowledge the thin-line difference between market capitalization and Total Value Locked. Because most investors and traders often confuse both indicators for one another. Whereas market capitalization indicates the summation of market value for any blockchain-based platform that offers its token, the TVL is a specific indicator for only DeFi products, and its value differs from one platform to another.
The growth of Total Value Locked (TVL) across DeFi products has been outstanding, considering the fact that TVL spiked from $400 million to an all-time high of $170 billion in the space of two years. Despite its surprising decline in September of this year, down to about $58.4 billion, there’s no debate on how far it has come over the years, having gone ahead to become an important figure watched closely by analysts who have come to understand it as also an indicator of the investor confidence in the market.
MakerDAO is one of the most popular protocols accounting for a bigger share of the total value locked across DeFi products. is MakerDAO. Other popular protocols include Aave and Curve, which have contributed tremendously to the growth in TVL for decentralized finance.
How is TVL calculated?
As a result of new products evolving in the DeFi space, it’s almost impossible to pinpoint the total value locked across the whole market and understand whether a specific DeFi protocol is a great option for its participants. However, participants are advised to go for more established protocols with higher TVL and stay miles away from those with lower TVL that offer high yields.
Calculating the TVL of a project is a simple task. First, you have to get the market cap by multiplying the number of tokens deposited in the project by its current price and then dividing the market cap by the maximum circulating supply. In cases whereby projects accept deposits in various tokens, you have added up the TVL of each token to get the total value locked in the project.
Why Does TVL Matter in DeFi?
A major highlight in the growth of the overall DeFi landscape is hinged on the importance of TVL. To function effectively, DeFi platforms require capital to be deposited as liquidity or collateral in trading pools. Hence, the total value locked in a particular DeFi platform doesn’t only indicate the value of assets in the protocol but also boosts its appeal before the public eyes.
That’s to say, a notable rise in the TVL of a DeFi space leads to an increase in liquidity and popularity which contributes to the success of the project, whereas a decline or lower TVL implies lower participation, lower availability of money, and lower yields. This way, an investor can also measure the risks of being part of the ecosystem.
Also, TVL can also be used by investors to establish where a project’s native token is valued more or less. The higher the market capitalization of a token when compared to the TVL of the project as a whole, the token is likely to be over-valued. The same is the case when the market capitalization is low relative to the TVL.
The Bullet Point
The DeFi landscape keeps evolving everyday with the establishment of new protocols and solutions. In this case, TVL can play an important role in DeFi by showcasing the potential use cases of a DeFi protocol since it’s a better indicator in comparison to the market cap of a specific DeFi protocol, thereby paving the road for easy DeFi adoption.
CrossFi is a cross-chain protocol that provides liquidity for Filecoin staking and rewards.
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