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.

DeFi, short for Decentralized Finance, is a rapidly growing sector in the blockchain industry that aims to provide financial services without the need for intermediaries such as banks or other centralized institutions. One of the key features of DeFi is the ability to lend, borrow, and trade digital assets in a permissionless and decentralized manner.

Total Value Locked (TVL) is a crucial metric for evaluating the health and success of DeFi protocols. It provides an indication of the level of engagement and the amount of assets being utilized within a specific protocol. TVL can be considered a measure of the confidence and trust that users have in a particular DeFi application.

Various services and platforms enable you to track TVL. These platforms aggregate data from different DeFi protocols and provide users with a comprehensive overview of the assets locked in each protocol. Some popular TVL tracking platforms include DeFi Pulse, CoinGecko, and CoinMarketCap.

When calculating the TVL ratio for decentralized financial services, three primary factors are taken into account: the supply, maximum supply, and current price. These factors help to determine the overall market capitalization of a specific asset or protocol.

The circulating supply represents the total number of tokens or assets currently available in the market. The maximum supply, on the other hand, refers to the total number of tokens that will ever be in existence. Lastly, the current price is the market value of a single token or asset.

To determine the current market capitalization, you multiply the circulating supply by the current price. The TVL ratio is obtained by dividing the market capitalization by the TVL of the service. This ratio helps to evaluate the valuation of a specific DeFi asset or protocol.

In theory, a higher TVL ratio suggests that the value of an asset can be lower. However, it is important to note that 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, while a ratio above 1 may indicate an overvaluation.

For example, let’s say there is a DeFi protocol that has a TVL of $10 million and a market capitalization of $20 million. In this scenario, the TVL ratio would be 0.5 ($20 million divided by $10 million). This suggests that the market capitalization is twice the value of the assets locked in the protocol, indicating a potential overvaluation.

On the other hand, if the TVL ratio is below 1, it may indicate that the market has not fully recognized the value of the assets locked in the protocol. This could present an opportunity for investors to identify undervalued assets within the DeFi ecosystem.

It is important to note that TVL is not the only metric to consider when evaluating the success and potential of a DeFi protocol. Other factors such as user activity, liquidity, security audits, and development progress also play a crucial role.

Overall, Total Value Locked (TVL) provides valuable insights into the level of engagement, trust, and asset utilization within the DeFi ecosystem. By tracking TVL, users can assess the popularity and potential investment opportunities in different DeFi protocols. However, it is important to conduct thorough research and analysis before making any investment decisions.