What Is Total Value Locked (TVL)?
It represents users’ total value of assets committed and staked within a particular DeFi application.
Gauging DeFi Protocol Health
The TVL metric provides insights into the overall health and popularity of a DeFi protocol, as it indicates the level of user participation and the amount of capital being utilized within the ecosystem.
It demonstrates users’ trust and confidence in the protocol, as they are willing to commit their assets for various purposes such as providing liquidity, lending, borrowing, or participating in yield farming.
Beyond Financial Metrics
The calculation of TVL typically considers the total value of assets in terms of their underlying supply rather than focusing on outstanding loans or specific financial metrics.
It gives a holistic view of the assets secured by a specific DeFi application.
It is often used as a benchmark for comparing different platforms or tracking the growth and adoption of the DeFi space.
One way to calculate the TVL ratio is by comparing the market capitalization (market cap) of a DeFi asset to its TVL.
The market cap is derived by multiplying the circulating supply of the asset by its current price.
Dividing the market cap by the TVL provides a ratio that can help assess whether a DeFi asset is undervalued or overvalued.
A TVL ratio below 1 may indicate that the asset is undervalued relative to its market cap.
Navigating DeFi Growth
Monitoring TVL is essential for investors, developers, and analysts in the DeFi ecosystem as it provides valuable insights into different protocols’ growth, adoption, and overall attractiveness.
It can help identify trends, assess the success of various DeFi projects, and inform investment decisions in this rapidly evolving sector.