Total Value Locked (TVL) And Its Importance For Cryptocurrencies

Total Value Locked (TVL) – The cryptocurrency business has expanded more than ever, despite shortcomings, especially in non-fungible tokens and decentralized finance (DeFi) (NFTs). Smart investors are continually searching for indicators that might tell them how profitable different crypto products are because the cryptosphere is constantly evolving.

Some of the metrics used to assess the performance of the cryptocurrency market include trading volume, market capitalization, and total value locked (TVL). When evaluating the total fiat value of assets placed in a single project or across all DeFi protocols, TVL has grown in popularity among DeFi investors. But let’s first talk about what TVL is before we analyze its importance in cryptocurrency.

Total Value Locked: What Does It Mean?

The total value of digital assets that are staked or locked in a DeFi protocol’s smart contract is known as TVL. It represents the total amount of money that can be transferred, lent, or borrowed via a specific DeFi platform. TVL also makes clear to market watchers and potential investors how much attention, activity, and value the DeFi protocol now has.

TVL is calculated by multiplying the total number of crypto tokens staked in a specific DeFi project by the token’s current dollar value. The total value locked of each coin is determined independently on platforms that let users stake several cryptocurrencies before adding all of the results to determine the platform’s TVL.

The three primary categories of DeFi protocols are decentralized exchanges, platforms for lending and borrowing, and apps for yield optimization. Because of this, each type of DeFi defines TVL in accordance with its unique basic nature. Decentralized exchanges, for instance, allow users to trade inside a liquidity pool that contains the cryptocurrency pairs they want to purchase or sell. The entire value held across all crypto-pair pools on these sites is referred to as TVL. TVL is the total value held in a platform’s lending and borrowing pools when it comes to lending and borrowing.

Finally, TVL is defined as the total amount investors have lent to the yield optimization program. Yield optimization protocols are essentially automated asset managers that employ sophisticated algorithms to optimize investments across various lending and borrowing platforms.

Total Value Locked’s Leading Protocols

The combined TVL of all DeFi platforms at the beginning of 2020 was approximately $630 million, according to the crypto analytics company DefiLlama. This amount increased to almost $172 billion in the first quarter of 2022. MakerDAO, one of the most significant DeFi protocols together with Curve and Aave, accounted for more than half of that growth.

Curve has a TVL of $17 billion and holds 9.7% of the market. Following it are MakerDAO with a TVL of $11.5 billion, Lido with a TVL of $15.4 billion, and Anchor with a TVL of $12.6 billion. In terms of DeFi TVL, Ethereum is now the network with the highest value, accounting for more than half of all DeFi transactions worldwide. The network consists of around 500 DeFi projects and controls 64% of the market as a whole.

BNB Smart Chain has the second-highest TVL with a 7.7 percent market share. It is followed by Avalanche, with a market share of 4.5 percent, and Solana, with a market share of 3.68 percent.

What is the significance of TVL of crypto?

The tokens used to power DeFi systems can be used as trading pool liquidity or as security for loans. TVL is important because it provides the clearest picture of how a token affects a DeFi platform’s revenue and usability for investors, traders, and everyday users.

A DeFi project’s TVL often increases along with the token’s acceptance, liquidity, usability, and value. A greater TVL indicates that more money is being bet in the form of crypto tokens on a DeFi platform. This translates to improved returns for traders and investors on their digital assets. However, a low TVL indicates there will be fewer money available, which will result in investors receiving lower returns on their investments.

The TVL level also indicates how many users are engaged on a DeFi platform and how well-liked a project is. Many cryptocurrency specialists think TVL is a great indicator of the viability of a cryptocurrency and the project it supports. You need to look at a DeFi project’s market cap to predict how it will perform in the future. However, the easiest approach to determine how a project is progressing right now is to look at the TVL.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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