What does Total Locked Value mean?

Since decentralized finance (DeFi) boomed in 2020, financial market experts have adapted to a new type of investment and have been looking for 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 crypto assets - in all DeFi protocols or individual DeFi projects - in US dollars or any The total locked value in fiat currency. DeFi’s assets include returns and interest derived from typical services provided in the form of smart contracts, such as loans, staking, and liquidity pools. For example, TVL is a particularly useful metric when it comes to staking for investors looking to support DeFi platforms with the highest returns. It is the total value locked in the DeFi staking protocol and represents the amount of assets deposited by liquidity providers. By 2022, TVL’s global scale has grown from US$400 million in the previous two years to nearly US$2 billion. As DeFi grows in popularity and value in the cryptocurrency space, TVL has become an essential metric for investors who want to evaluate 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 may affect the value of a DeFi project. There are multiple factors that affect TVL in addition to deposits, withdrawals and the amount actually held by the protocol. TVL also changes 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 changes with their value. If the value of a particular token grows, then the TVL of the protocol will also grow. Why is TVL important in DeFi? In order 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 profits and availability of DeFi applications for traders and investors. When a DeFi platform’s TVL rises, an increase in liquidity, popularity, and usability ensues. These factors contribute to the success of the project. A higher TVL means more capital is locked in the DeFi protocol, and participants can enjoy more substantial benefits and gains.Lower TVL means lower available funds, resulting in lower returns. DeFi protocols’ market share can be easily determined by analyzing a 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 protocol’s smart contract movements on the Ethereum blockchain only by withdrawing the total balance of ETH and ERC-20 tokens. DefiLlama, on the other hand, calculates TVL by pulling the total balance of all DeFi chains combined or each platform individually. How is cryptocurrency TVL calculated? As new protocols continue to emerge in the DeFi space, establishing the exact TVL of the entire market and determining whether a specific DeFi platform is safe for end users can be extremely challenging. However, participants can choose a more mature protocol and use the TVL indicator of $1 billion, which should be a safe enough value. A higher TVL is better because it represents a healthier platform with a stronger development team and more valuable use cases. All of these will attract more participants and investors and contribute to the rise of TVL projects. On the other hand, one should be wary when DeFi protocols with lower TVL offer high yields. This could be an attempt to promote a new platform hoping to gain market share, but it is also likely 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: 📷Calculating the TVL of a cryptocurrency is simple. First, the asset’s total market capitalization is calculated by multiplying the DeFi project’s supply by its current price. Then, divide the total market capitalization by the maximum circulating supply to find the TVL. The TVL ratio is calculated by dividing the total market value 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, that is, when the market capitalization of a cryptocurrency exceeds TVL, the asset may be overvalued with little room for growth. Which cryptocurrency has the highest TVL? Due to the extraordinary growth of DeFi in 2020, the combined TVL of all DeFi protocols increased significantly and rapidly by the end of 2021. According to data from DefiLlama, at the beginning of 2020, the total TVL of all DeFi platforms was approximately 6.$300 million. In the first quarter of 2022, its value has exceeded $172 billion. More than half of the data is contributed by the MakerDAO protocol. MakerDAO, Curve and Aave are currently the best protocols. Curve is currently the cryptocurrency with the highest TVL and market share, with a market share of 9.7% and a TVL scale of US$17 billion, followed by Lido with a TVL scale of US$15.4 billion, Anchor with a TVL of US$12.6 billion, and MakerDao with a TVL of US$11.5 billion. DeFi TVL’s largest network In 2022, Ethereum became the largest DeFi TVL network, accounting for more than half of the global DeFi total. The Ethereum DeFi network includes less than 500 protocols. The TVL of the Ethereum DeFi network is approximately $73 billion, with a 64% market share. In comparison, Binance Smart Chain’s TVL is worth $8.74 billion, accounting for 7.7% of the market share. Avalanche was $5.21 billion, accounting for 4.5% of the market. Solana is $4.19 billion, accounting for 3.68% of the market share. Viewing a TVL chart is simple. The chart shows the overall DeFi market’s TVL in USD terms, the percentage of movement over the past 24 hours and the cryptocurrencies with higher dominance. TVL metrics across all chains clearly show that Ethereum is the network with the highest TVL. Essentially, TVL is a great metric for the cryptocurrency DeFi space and is probably the most suitable metric to use to assess market health and growth. While growth in TVL bodes well for the market, its reliability must be treated with caution as it is almost impossible to interpret this metric with precision. Market volatility is one of the major variables that can significantly affect the value of locked assets. The first is the price of ETH, where most assets are located on the ETH platform. The sharp rise in ETH prices since 2020 has inevitably affected DeFi’s TVL. This means that TVL can increase without any new users or funds entering DeFi. Additionally, due to the nature of DeFi services, funds can easily move and be counted multiple times, thereby misjudging the liquidity capabilities of the protocol. Like all indicators, TVL is only an estimate of market conditions. Since it is only an approximation and has obvious flaws, investors cannot make decisions based on TVL alone.