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Total Value Locked Crypto – Why Do Crypto Blockchain DeFi Want it!

The growing Crypto trading volume rates should not be alarming because more DeFi projects are entering the market. To measure their performance index or better quantify their strength for investment, some investors turn to total value locked crypto numbers. But, precisely what does the TVL stand for?

What is Total Value Locked Crypto (TVL)?

The combined Total Value Locked Crypto assets refer to their sum deposited in a DeFi protocol. In other words, the TVL value represents the total number of assets being staked presently within a DeFi protocol.

The TVL is often reliant on the prices of coins deposited in the DeFi protocol. Total deposited coins could also include investments from Crypto services offered by the DeFi protocols like Staking, Landing, and Liquidity pools.

However, the TVL values don’t indicate the yield that may be earned from deposits but only the present value of the total deposits. Alongside this, TVL values may constantly change based on combined user or market activity.

Since some or all of the DeFi protocols are inevitably subjected to changes acc. market conditions, the deposits may be denominated into tokens. Based on this TVL value, investors can discern the project’s feasibility.

Naturally, the better growth of the deposits will result in a higher TVL score, even when the project’s market capitalization value may be low. A greater divide between these values, i.e., market cap and TVL, suggests that the asset tokens are undervalued or overvalued.

What isn’t Total Value Locked Crypto?

For starters, the TVL figure does not represent the pending loans but rather that a protocol secures the underlying supply. Similarly, the TVL range isn’t also suggestive of whether the asset is profitable or not.

The TVL is but a metric that serves to measure the health of any DeFi Protocol and its yielding market.

How is Total Value Locked Crypto Calculated?

Three specific factors come into play when one wants to calculate the DeFi market cap TVL ratio, and they are as follows:

1. Calculate Supply

The complete supply of the asset is taken into account for looking at how the asset is performing & circulating.

2. Maximum Supply

The peak value at which the asset’s maximum supply has reached at an nth point in time is a market for how higher the asset has been in circulation.

3. Current Price

It is the present value of the crypto asset at which it is being exchanged in the market.

Why Do DeFi Protocols Need TVL Validation?

TVL value as a metric is important for DeFi Protocols because it’s the most significant indicator of its performance. The Total Value Locked supply serves to denote the popularity of a project and evaluate its robustness in the crypto market.

1. TVL VS Market Cap

The loose formula for acquiring the Market cap value of a project is to multiply the Circulating current supply with the Native Token price. In contrast, the TVL formula demands multiplying the Funds deposited or staked with the asset price.

2. Types of TVL for Different DeFi Projects

  • DEX lets users swap or trade cryptos on AMM (Automatic Market Maker). It functions to allow the users to perform transactions with each other via a crypto token liquidity pool.

The pool already contains a requisite pair of cryptos, whose few examples include CURVE Finance (CRV), Uniswap (UNI), etc. TVL, for such projects, represents the total held within all its coin-pair tools.

  • Lending/Borrowing DeFi platforms prioritize retaining the utility of the crypto asset pool, offering lending and borrowing services to its customers from it.

The Maker (MKR) and Aave (AAVE) platforms are fine examples of offering such services. The TVL for such projects is the total value held within the lending and borrowing pool(s).

  • Yield Optimization Protocols applications utilize algorithms for optimizing investments across lending and borrowing platforms. TVL here dictates the value lent by the user to the application for optimization.

Final Words

Without having the total value locked crypto statistics for a project, an investor may invest in undervalued assets or overvalued ones. Such scenarios arise solely when the investor indulges in ApePurchasing or relies only on Market Cap data to ascertain the profitability of a crypto project.

FAQs

Q. What is TLV in crypto?

TVL in crypto serves to denote the performance of DeFi projects, and it can vary between the types of DeFi projects. Thus, users are also advised to note the project volatility aside from relying on the TBL statistics data.

Q. How to Calculate Total Value Locked Supply?

By multiplying the sum of funds locked in the ecosystem as collateral with the current asset price, one can determine the TVL ratio of a DeFi platform. Such platforms need to portray these figures to maintain transparency about how the protocol health performs.

Q. Is TVL the same as market cap?

TVL differs from Market Cap because the latter shows the project’s popularity in the market. TVL, on the other hand, denotes the properties of asset tokens being undervalued or overvalued.

Q. Why Do Cryptos Need TVL?

Crypto DeFi platforms need TVL to ascertain the health of crypto assets in the market because the Market Cap only signifies their popularity.

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