Understanding Total Value Locked (TVL)
If you have been using DeFi tracking sites, you may have encountered the term “Total Value Locked (TVL)” as a point of reference. In simple terms, TVL represents the total amount of assets currently staked in a specific protocol. It is important to note that TVL does not indicate the number of outstanding loans, but rather the total value of underlying supply secured by a particular DeFi application.
Total value locked acts as a metric to evaluate the overall health of the DeFi and yielding market. Various services enable you to track TVL.
When calculating the TVL ratio for decentralized financial services, three primary factors are taken into account: the supply, maximum supply, and current price.
To determine the current market cap, you multiply the circulating supply by the current price. The TVL ratio is obtained by dividing the market cap by the TVL of the service.
In theory, a higher TVL ratio suggests that the value of an asset can be lower. However, this is not always the case in reality. The TVL ratio can be utilized to assess whether a DeFi asset is undervalued or overvalued. If the ratio is below 1, it is often considered undervalued.
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