What is total value locked? It is the whole esteem of digital assets locked or staked in smart contracts in DeFi platforms or dApps. To explain things simply, let’s draw a parallel with the traditional financial system. People keep fiat money in bank deposits, using many different currencies. If we calculate the total amount of assets deposited in banks, it can serve as an analog to TVL in crypto.
This number can fluctuate for two main reasons. The first one is when people lock and stake more coins – or unlock and unstake them. The second one is asset price fluctuations. TVL is usually calculated with USD and not crypto because this value comprises the cost of many different cryptocurrencies. Let’s imagine that the amount of the staked coins doesn’t change – but the prices of some of them increase. Then, the TVL calculated in USD will increase accordingly.
Now that we’ve answered the question “What is the total value locked in DeFi?”, let’s analyze the importance of this metric.
The DeFi market functions thanks to the liquidity pool and the capital provided as collateral. TVL immediately impacts the operations of DeFi platforms and services. When this indicator is low, DeFi users can’t expect high returns and their trust in services will be undermined. A high TVL displays promising market perspectives and the potential for a decent income.
To increase their TVL, platform owners and managers can resort to various tricks. For instance, they can offer higher interest rates for their staking protocols to attract more users and funds.
The answer to this question can fluctuate over time. MakerDAO, Bend, Aave, Lido, and Curve, are among the assets that regularly demonstrate excellent results. The undisputed leader among the platforms is Ethereum, thanks to its huge user base and an extensive ecosystem of dApps developed on the basis of its blockchain. Solana tends to be the runner-up among the blockchain networks.
You can rely on two sources of information about TVL:
Official information provided by the DeFi platforms. We’re talking about the platforms that let their users lock and stake tokens. The key drawback is that their teams might manipulate data to attract a wider audience and convince the market of their efficiency.
Analytics made by third-party platforms. In this case, we mean websites that don’t provide financial services. They leverage APIs and computing algorithms to evaluate the TVL of assets and service providers.
Sometimes, different sources of information can deliver different results when assessing the TVL of the same platform or asset. This can happen for two main reasons. The first one is the difference in the methods and algorithms used. The second one is the volatile nature of the market.
TVL is a handy metric for assessing the overall appeal of a DeFi project. However, you shouldn’t rely on it exclusively. Consider other important metrics too.
TVL locked can’t tell you anything about user activity on the platform. If the activity is low, it’s a bad sign.
The platform’s governance model and tokenomics are crucial as well. Invest time in exploring them and reading the documentation.
The team behind the platform largely determines its success. Find out about their previous experience in the crypto sector.
Hopefully, now you understand the TVL meaning crypto and its significance for the industry!
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