When you learn about DeFi projects in crypto, you will often come across a cryptocurrency term which is TVL (Total Value Locked), but you might not understand its meaning. So today, invest286.com will help you understand what TVL is, why Total Value Locked is important in DeFi, and how it’s calculated right here.
Contents
What is TVL in crypto?
What is TVL in coin?
TVL in DeFi is usually calculated in USD. For example, the TVL of Crypto at the time of writing is 50,781 billion USD.
How is TVL calculated?
The formula for calculating TVL in DeFi is the total of the number of tokens placed on that protocol multiplied by the current value of each token in USD, simplified as follows:
TVL = ∑ (Token locked * Current Price)
Where:
- Token locked refers to the tokens currently locked in the protocol
- Current Price is the current price of those tokens
Specific example: DeFi Protocol A has 3 tokens namely X, Y, and Z. Where X currently has 1000 tokens at 10$, Y has 2000 tokens at 20$ and Z has 3000 tokens at 30$.
What is the meaning of TVL in coin?
When looking at the TVL of a DeFi protocol in crypto, we can understand the following information:
-
The higher the TVL, the healthier the DeFi protocol appears (high liquidity), high liquidity means you can easily exchange tokens within the protocol without having to wait long.
-
A gradual increase in TVL over time (can be calculated quarterly or annually) is a good sign showing that the protocol is increasingly gaining trust from the community, hence they deposit more of their tokens, helping to increase the TVL value.
-
TVL is considered trustworthy if it has a value of at least over 1 billion USD, low TVL is for new projects or ones not receiving much trust.
-
If any DeFi project calls for investors to join with a high % profit (APY or APR), investors need to review the TVL value because they might be scamming you to deposit your cryptocurrency. Projects with low TVL advertising high profits should not be trusted.
-
A high TVL does not guarantee a high % profit from the tokens sent into the DeFi protocol, as in DeFi, stablecoins often have a higher TVL compared to more volatile coins like Bitcoin or ETH.
-
TVL is also used to compare different Liquidity Pools within the same protocol, where pools with higher TVL are often chosen more than those with low TVL.
-
The TVL of a DeFi protocol will change according to the USD value of the assets in the protocol or when users deposit more cryptocurrency or withdraw their cryptocurrency from the platform. For example, when the value of coins/tokens in the protocol increases during an uptrend market, it also causes the TVL to increase in value, or vice versa.
TOP DeFi protocols with the highest TVL 2024
According to the data summarized from https://defillama.com/ , the top 10 DeFi applications with the highest TVL at the time of writing are:
-
- Lido (LDO)
- MakerDAO (MKR)
- JustLend (JST)
- AAVE (AAVE)
- Uniswap (UNI)
- Summer.fi
- Rocket Pool
- Compound (COMP)
- stUSDT
- Instadapp
Where is TVL typically used?
You will encounter the TVL value of DeFi protocols focused in areas such as:
Decentralized Exchanges (DEX)
Decentralized Exchanges (DEX) are DeFi protocols that provide traders an easier way to execute cryptocurrency transactions. Transactions through a DEX are carried out using smart contracts.
In a DEX, the TVL value is obtained by adding all the assets deposited into the exchange. The world’s largest DEXs with high TVL include Uniswap, Curve, PancakeSwap, Balancer, etc., with TVLs in the billions of USD.
DeFi Lending Protocols
In the entire DeFi ecosystem, lending may be the most popular financial activity. Similar to traditional lending institutions, investors deposit their cryptocurrency into a protocol to earn a profit. Other users who need cryptocurrency for a short period will borrow from the fund pool, simultaneously depositing their own locked assets as collateral. This system increases flexibility in the cryptocurrency market and creates new opportunities for everyone involved.
TVL is an important measure in the world of DeFi lending. It is calculated based on the value of assets both lenders and borrowers deposit into the system.
MakerDAO is a leading DeFi lending protocol that has a significant impact on the decentralized finance market, leading all other DeFi protocols with over 7 billion USD in locked assets through lending activities.
Besides MarkerDao, other well-known decentralized lending protocols include: AAVE, Compound, InstaDApp, JustLend…
Derivatives (Decentralized Derivative Trading)
As the DeFi ecosystem grows and matures, Derivatives have increasingly become a common phenomenon. These complex products offer experienced traders ways to manage synthetic assets, create future contracts, and enhance overall profits from their complex investment portfolios. Although still unfamiliar to most new traders, derivative tools have become an essential part of the general DeFi system.
When it comes to derivative instruments, TVL is measured by the value of the assets that investors put into the associated smart contracts.
Popular Derivative protocols include dYdX with over 600 million USD in TVL, Keep3r Network with over 560 USD total locked value, Synthetix with a TVL of over 440 million USD…
Liquidity Pools
Liquidity Pools are cryptocurrency funds that have been locked into a DeFi protocol through smart contracts.
Investors typically deposit cryptocurrency assets into a protocol in exchange for returns from those assets. Whenever they make these deposits, they are increasing the value of the total assets held in the protocol. Therefore, the deposits create an increase in the TVL of the protocol. The liquidity scale of the protocol largely determines its TVL, meaning that you can often use this metric as a measure of available liquidity for traders.
Top Liquidity Pools are currently provided by DeFi protocols like Uniswap, Curve Finance, Balancer, Bancor, Kyber Network…
Staking
To participate in DeFi protocols, traders must stake a certain amount of their own cryptocurrency assets. Once these assets are staked, investors can earn profits through the returns on them. This process is known as yield farming.
Since TVL in crypto is used to measure the total value of locked assets of the protocol, staking has a clear immediate impact on this metric. Every time an investor stakes more money into the system, the TVL correspondingly increases. A higher TVL indicates that many investors have staked cryptocurrency in the protocol, thus showing that the system is functioning well.
Through this, we hope you now understand TVL – Total Value Locked and the meaning of TVL. If you have any more questions related to TVL, leave a comment to be answered within 24 hours. We wish you accurate and successful investment choices.
