1.What does total locked value mean?
Since the boom in decentralized finance (DeFi) in 2020, financial market experts have adapted to a new type of investment and have been finding ways to measure its performance.
In addition to market capitalization, trading volume, and total circulation, Total Value Locked (TVL) is also a commonly used indicator for investors to evaluate the overall value of encrypted assets – in all DeFi protocols or a single DeFi project – in us dollars or any Total locked value in fiat currency.
DeFi assets include returns and interest from typical services provided in the form of smart contracts, such as lending, staking, and liquidity pools. For example, TVL is a particularly useful metric in terms of staking for investors looking to support DeFi platforms with the highest returns. It is the total value locked in DeFi staking protocols and represents the amount of assets deposited by liquidity providers.
By 2022, TVL’s global scale has grown from $400 million in the previous two years to nearly $2 billion. With the growing popularity and value of DeFi in the cryptocurrency space, TVL has become an essential metric for investors who want to assess whether an entire ecosystem or a single protocol is healthy and worth investing in.
While TVL is simply defined as the total value of cryptocurrencies locked in smart contracts, there are some underlying conditions that could affect the value of DeFi projects.
In addition to deposits, withdrawals, and the amount actually held by the agreement, there are a variety of factors that affect TVL. TVL also varies with the value of fiat currencies or native tokens. Deposits for some protocols may be denominated in the project’s native token, so their TVL varies with their value. If the value of a particular token grows, so does the TVL of the protocol.
2.Why is TVL important in DeFi?
For DeFi platforms to work, they require funds to be deposited into trading pools in the form of loan collateral or liquidity. TVL is important because it shows the impact of capital on the profitability and usability of DeFi applications for traders and investors.
When a DeFi platform’s TVL goes up, it comes with an increase in liquidity, popularity, and usability. These factors contribute to the success of the project. A higher TVL means that more capital is locked in the DeFi protocol, and participants can enjoy more considerable benefits and benefits. Lower TVL means lower available funds, resulting in lower returns.
DeFi protocols’ market share can be easily determined by analyzing the company’s platforms such as DeFi Pulse and DefiLlama. These platforms provide data on the amount of crypto assets locked in smart contracts.
The DeFi Pulse platform monitors the smart contract movement of the protocol on the Ethereum blockchain simply by withdrawing the total balance of ETH and ERC-20 tokens. On the other hand, DefiLlama calculates TVL by taking the total balance of all combined DeFi chains or each platform individually.
3.How is the cryptocurrency TVL calculated?
Due to the constant emergence of new protocols in the DeFi space, establishing the exact TVL of the entire market and determining whether a particular DeFi platform is safe for end users can be extremely challenging.
However, participants can choose a more mature protocol, using a TVL metric of $1 billion, which should be a safe enough value. A higher TVL would be better as that would represent a healthier platform with a stronger development team and more valuable use cases. All of these will attract more participants and investors, contributing to the rise of TVL projects.
On the other hand, caution should be exercised when DeFi protocols with lower TVLs offer high yields. This could be to promote a new platform looking to gain market share, but it could also be a scam as few or no participants trust their assets.
There are three main factors to consider when calculating the TVL of a DeFi protocol:
Computing the TVL of a cryptocurrency is simple. First, the total market capitalization of the asset is calculated by multiplying the supply of the DeFi project by the current price. Then, divide the total market capitalization by the maximum circulating supply to get the TVL.
The TVL ratio is calculated by dividing the total market capitalization of assets locked by the total value locked (TVL). The TVL ratio can help determine whether a DeFi asset is undervalued or overvalued. If the ratio is below 1, the asset is generally undervalued and more attractive to investors. If it is greater than 1, i.e. when the market capitalization of the cryptocurrency exceeds the TVL, the asset may be overvalued with little room for growth.
4.Which cryptocurrency has the highest TVL?
Due to the extraordinary growth of DeFi in 2020, by the end of 2021, the combined TVL of all DeFi protocols will grow significantly and rapidly.
At the beginning of 2020, the total TVL of all DeFi platforms was around $630 million, according to DefiLlama. In the first quarter of 2022, it was already worth more than $172 billion.
More than half of this data is contributed by the MakerDAO protocol. MakerDAO is currently the best protocol along with Curve and Aave. Curve is currently the cryptocurrency with the highest TVL and market share, with a market share of 9.7% and a TVL scale of $17 billion, followed by Lido with a TVL scale of $15.4 billion, Anchor with $12.6 billion, and MakerDao with $11.5 billion.
5.DeFi TVL’s largest network
In 2022, Ethereum will become the largest network of DeFi TVLs, accounting for more than half of the global DeFi total.
The Ethereum DeFi network includes less than 500 protocols. The Ethereum DeFi network TVL is about $73 billion and has a 64% market share. By comparison, Binance Smart Chain’s TVL is worth $8.74 billion and has a 7.7% market share. Avalanche was $5.21 billion and had a 4.5% market share. Solana was $4.19 billion, accounting for 3.68% of the market.
Viewing TVL charts is simple. Chart showing TVL in USD for the entire DeFi market, percentage movement over the past 24 hours and cryptocurrencies with higher dominance.
The TVL metrics on all chains clearly show that Ethereum is the network with the highest TVL. Essentially, TVL is a good metric in the crypto DeFi space, and probably the best metric to use to assess the health and growth of the market. While the growth of TVL bodes well for the market, its reliability must be treated with caution, as it is nearly impossible to interpret this metric with precision.
Market volatility is one of the main variables that can significantly affect the value of locked assets. The first is the price of ETH, where most assets reside on the ETH platform. The surge in the price of ETH has inevitably impacted DeFi’s TVL since 2020. This means that TVL can increase without any new users or funds entering DeFi.
Furthermore, due to the nature of DeFi services, funds can easily flow and be counted multiple times, misjudging the liquidity capabilities of the protocol. Like all indicators, TVL is only an estimate of market conditions, and since it is only an approximation with obvious flaws, investors cannot make decisions based on TVL alone.