Total locked value (TVL) has become an important metric for assessing decentralized finance (DeFi) protocols in the realm of cryptocurrencies. Many investors and traders of DeFi protocols today use this simple metric to understand a protocol’s strength and potential.
This article will explain TVL crypto meaning, 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.
TVL Crypto Meaning
Total Value Locked (TVL) is the aggregate amount of funds locked in a DeFi protocol. It has become a key metric for appraising DeFi projects because it provides a useful measure of a protocol’s general health. You could think of TVL as all the liquidity in the liquidity pools of a given money marketplace. For example, in Uniswap's case, TVL means the amount of funds deposited by liquidity providers to the protocol.
TVL can be a useful data point that gives you an idea about the overall interest in DeFi. TVL can also be effective in comparing the "market share" of different DeFi protocols. This can be especially useful for investors who are looking for undervalued DeFi projects.
What's also worth noting is how TVL can be measured using different denominations. For example, the TVL locked in ETHereum projects is typically measured in ETH or USD.
Calculating Total Value Locked
In order to really grasp the meaning of TVL, you need to understand how the metric is calculated. By learning about the specific factors that determine the total value of a protocol, you’ll better understand what the metric is actually measuring and what the numbers say about the protocol in question.
Calculating the TVL of DeFi protocols requires measuring the metric across different product categories. Each protocol or DeFi service operates according to its own particular structures, and these differences can in turn alter how TVL is calculated.
Lending-based services for example, focus on deposited assets while tokenization protocols involve minted assets. Many protocols combine these features in unique ways, requiring more in-depth analysis to arrive at the TVL. In any case, the calculation of total value locked and TVL ratio comes down to the consideration of these central DeFi components.
Decentralized Exchanges
Decentralized exchanges (DEXs) are DeFi protocols that provide traders with an easier and more accessible way to perform crypto transactions. As DeFi protocols run according to a series of smart contracts, these exchanges attract significant amounts of liquidity, often bringing serious yields for investors.
In a DEX, experts can measure the TVL by adding up all the assets deposited in the exchange. Many of the world’s largest DEXs like Curve and Uniswap, have remarkably high TVLs. This indicates the breadth and depth of the liquidity that these types of services have been able to attain.
Lending
Throughout the DeFi ecosystem, lending is the most common financial activity. Just as with traditional lending institutions, some holders deposit their funds into a protocol to earn a yield. Other users who need liquid cash in the short term then borrow from the pool of funds, while posting their own assets up to be locked as collateral. This system increases the fluidity within crypto markets and creates new opportunities for participants involved.
TVL is an important measure in the world of DeFi lending, that is calculated according to the value of the assets borrowers and lenders deposit into the protocol. MakerDAO, a DeFi protocol with significant cultural and financial clout, leads all other DeFi protocols with over $1.8 billion locked in through lending practices. This high figure demonstrates MakerDAO’s strength and probable longevity.
Derivatives
As the DeFi ecosystem grows and matures, derivatives have become an increasingly common phenomenon. These complicated products give experienced traders a way to manage synthetic assets, produce futures contracts, and boost overall yields from their complex investment portfolios. While still foreign to most beginning traders, derivatives have already become an important component of the general DeFi system.
When it comes to derivatives, TVL is measured according to the value of the assets that investors put into associated smart contracts. Synthetix, a popular DeFi protocol that’s heavily involved in derivatives, has a TVL of $529 million. The fact that so much value is locked into the protocol suggests it has the liquidity necessary to serve their investors’ needs.
Liquidity Pools
Liquidity pools are the crypto funds that have been locked into a DeFi protocol through smart contracts. They’re created through deposits, giving investors within a protocol the leeway to draw from a pool of accessible funds. Since they involve the direct and immediate locking of assets within a protocol, they’re relatively easy to measure within the parameters of crypto TVL.
Investors will often deposit crypto assets into a protocol in exchange for a return on those assets. Whenever they make these deposits, they’re increasing the value of the total assets held within the protocol. The deposits therefore produce an increase in the protocol’s TVL. The size of a protocol's liquidity largely determines its TVL, meaning you can often use the metric as a measure of the liquidity available to traders.
Staking
In order to partake in certain DeFi protocols, traders must stake an amount of their own crypto assets. Once these assets are staked, investors can earn profits through returns on them. This process, called yield farming, lies at the center of the DeFi universe.
Since crypto TVL is meant to measure the entire value of a protocol’s locked assets, staking has an obvious, immediate effect on the metric. Each time an investor stakes more funds in the protocol, the TVL will rise accordingly. A higher TVL suggests that many investors have been staking in the protocol, which in turn suggests that the protocol is in a healthy place.
How To Utilize TVL?
Once you understand the meaning of crypto TVL, you can start using the metric to make informed decisions. While TVL is far from the only data point to consider when trading in DeFi protocols, it’s certainly a metric worth taking note of.
Not all DeFi protocols are alike, and some are in much stronger positions than others. A quick glance at the TVL will help you decide where to place your hard-earned crypto assets. The TVL 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 free DeFi dashboard that countless traders have found helpful.
Closing Thoughts
TVL – the total value of the crypto assets locked in a DeFi protocol — is an important measure of a protocol’s health and vitality that is worth monitoring. WhETHer you want to assess the total assets in a system or examine the TVL ratio to determine whether a protocol’s tokens are undervalued, the metric can prove useful on a daily basis.
Now that you understand how TVL crypto meaning, you'll be better informed as you plan your next maneuvers in the world of DeFi.
