The importance of TVL for DeFi
Total value locked (TVL) is one crypto indicator that is popular among DeFi investors to assess the overall value of assets — in United States dollar or any fiat currency — deposited across all DeFi protocols or in a single DeFi project.
In 2022 to date, TVL has reached nearly $2 billion globally, growing from $400 million over the previous two years. With the increasing popularity and value of DeFi in the cryptocurrency space, TVL has become an essential metric for investors who want to assess if the whole ecosystem or a single protocol is healthy and worth investing in.
Why is TVL important?
For DeFi platforms to function, they require capital to be deposited as loan collateral or liquidity in trading pools. TVL matters because it indicates the capital’s impact on DeFi applications’ profits and usability for traders and investors.
When the TVL of a DeFi platform rises, it is followed by an increase of liquidity, popularity and usability. These factors contribute to the project’s success. A higher TVL means more capital is locked in DeFi protocols, with participants enjoying more considerable benefits and proceeds. A lower TVL implies lower availability of money, resulting in lower yields.
How to calculate TVL
It is straightforward to calculate the crypto TVL. First, the market cap of an asset has to be found by multiplying the DeFi project’s supply by the current price. Then, dividing the market cap by the maximum circulating supply, the TVL is revealed.
When dividing the total market cap of a locked asset by the total value locked, we obtain the TVL ratio. The TVL ratio can help determine if a DeFi asset is undervalued or overvalued. If the ratio is under 1, the asset is usually undervalued and more attractive to investors. When the market cap exceeds the TVL in crypto, the asset might be overvalued, leaving little to no room for growth.