Why Total Value Locked (TVL) Matters in DeFi
TVL is one of the key indicators that guide how we evaluate the success of DeFi projects and plays an important role in the DeFi world.
As the influence of DeFi products and services continues to grow, so does the importance of understanding all the industry’s ins and outs. TVL is an important metric that can help you assess the health of a DeFi ecosystem. It’s used to indicate how much value crypto owners are willing to lock up within the protocol. So the higher TVL is, the better the protocol. And the more money people are willing to lock up in DeFi contracts, the more potential the ecosystem has to sustain growth.
What is TVL?
Total Value Locked, or TVL is the value of assets locked up in a DeFi protocol. It includes all the coins circulating and deposited across every function, including lending, staking, and liquidity pools.
But TVL doesn’t include the value that users get from these DeFi activities. It just presents the initially deposited value. TVL can rise and fall depending on the changes in the price of a protocol’s native token. If an asset were to rise, the TVL would rise respectively.
TVL is specific to DeFi projects, while market cap refers to any blockchain-based platform that issues its own tokens.
Why does TVL matter in DeFi?
TVL is a key metric for every crypto enthusiast, including traders, borrowers, and investors. For people looking to swapping and trade, TVL is used to indicate a protocol’s liquidity. The higher the TVL, the less chance of slippage (the difference between the expected price of a trade and the price at which the trade is executed) and more stability in their evaluations.
For crypto owners who want to lend their coins, TVL can help gauge activity within a protocol. The greater the protocol activity is, the higher the TVL will be. Higher TVL also means higher returns for lenders since yields are based on trading activities. At the same time, a red flag should be raised if a DeFi protocol with low TVL is offering higher yields. These can include promotions for new platforms looking to quickly capture a share of the market, but may also be scams.
In the long run, TVL acts as an effective barometer for the health of a DeFi protocol. If a TVL is on the rise, it’s a reliable indicator that the project is stable, provides relevant use cases, meets the needs of the market, and has sufficient financial backing.
Some crypto enthusiasts use a token’s market cap to judge the well-being of a protocol. However, this is somewhat of an inaccurate way of looking at a protocol’s health since people may just keep the token for trading or swapping without any further interaction with the protocol. Against this backdrop, TVL provides a complete picture of the level of interest in a protocol.
How to calculate the Total Value Locked in decentralized finance?
To estimate the total value locked in a DeFi protocol, simply take the total number of tokens circulating within the protocol and multiply that number by the current price of each token in USD.
Suppose users are staking a range of different tokens within the protocol. In that case, you should calculate the TVL of each token separately and then add them together to get the protocol’s TVL.
For example, the protocol allows for staking four different tokens (token A, token B, token C, and token D). Thus, you will need to take the total number of token A staked within the protocol and multiply it by its current value in USD. Then, you should repeat the process with tokens B, C, and D. Once you are done with the calculations, simply add up the results to get the TVL for the protocol.
Where can I find the total value locked for a DeFi protocol?
Instead of making all those calculations and figuring out the TVL for a protocol by yourself, you can use DeFi tracking platforms like DefiLlama, DeFi Pulse, or DeBank to search for the TVL of major DeFi protocols. These sites allow you to easily check which protocol has the highest or the lowest TVL.
Final thoughts
- TVL presents the total value of crypto assets locked in a protocol
- TVL is a barometer that measures the health of a DeFi project and its entire DeFi ecosystem
- TVL isn’t always 100% accurate
TVL is one of the key metrics used to not only evaluate the strength of a protocol but its crypto assets as well. The stronger the TVL, the more reliable the protocol is. Though it’s an important metric, TVL is not the one and only metric to consider when evaluating the health of a protocol. It’s best to combine TVL with other metrics when considering whether or not to trust your crypto assets.
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