Theoretically, the higher the TVL ratio, the lower the asset’s value must be. One of the simplest applications of the TVL ratio is to assess whether a DeFi asset is undervalued or overvalued . He holds certifications from Duke University in decentralized finance and blockchain technology.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice.
Nonetheless, potential investors should endeavor to select DeFi projects with a TVL of at least $1 billion, as that would be a fair enough safety net. In addition to opting for a protocol with a higher TVL which is a good indicator of a healthy platform, it’s also advisable to consider a platform with a strong team of developers. These are among the parameters that attract investors and participants , leading to a healthier TVL for the project.
Other popular DeFi protocols with a high TVL estimate include Lido and Anchor. Lido has a TVL estimate of $15.4 billion, while Anchor sits with a $12.6 billion TVL. Total value locked in DeFi for finding out the robustness of a project. Total Value Locked AAVEIn theory, the higher the TVL can help quickly see if an asset tends to be over or undervalued. In reality, the whole story is a bit more complicated.Hereis an excellent article at Messario around the topic. There are different aspects and values to consider when evaluating Cryptocurrency and finding out if a protocol is undervalued or overvalued.
For example, such instances might be promotional scams where new DeFi platforms want to gain trust and market shares. It is difficult for aspiring users to figure out the exact estimate of total value locked for the overall market. You can also face difficulties in determining which DeFi protocol would be a safe choice right now. For starters, users can look for the popular protocols with TVL amounting to almost $1 billion.
A better TVL is an obvious indicator of effective usability for investors and traders. The growth in TVL for a particular DeFi protocol brings about plausible improvements in usability, liquidity, and popularity for the platform. All of these factors can result in credible chances for success of the DeFi project. TVL in DeFi amounts to almost $172 billion throughout different DeFi applications worldwide.
Uniswap: TVL and Market Cap
It’s easy for someone to create thousands of addresses and distribute funds across them, thus giving the impression of widespread use. As with any metric in fundamental analysis, you should contrast unique address count with other factors. Wondering how you can measure the “intrinsic” value of DeFi assets?
It not only guides investors regarding the actual value of new or existing DeFi protocols but also paves the road to easier DeFi adoption. Learn more about TVL and how it plays out in the broader decentralized finance landscape. The market cap to TVL ratio allows investors and traders to quickly filter thousands of DeFi protocols and networks to find those that are most undervalued. Before we can dive deeper into the subject and find out how you can calculate a DeFi project’s TVL, we must take note of the current state of TVL in the entire DeFi industry. The year 2021 showed tremendous metrics for the whole crypto industry, and decentralized finance platforms were not left behind as they attracted significant capital streams. Let’s say an investor connects their wallet to a DeFi platform and deposits $1,000 worth of crypto into a money pool to validate transactions on its native blockchain and receive rewards.
How to Calculate the Total Value Locked in a Project
Of course, this is just an overview, and we are just scratching the surface here. Beginners often only look at the price of a coin, which is a big mistake. At least it would be best to consider the circulating supply, the total supply, and the market cap.
However, according to a report by crypto market data analytics firmCryptoRank, tables turned on the DeFi industry in 2022 due to the ongoing crypto winter. Specifically, the TVL of the entire DeFi market dropped 68.3% from $303.8 billion in December 2021 to at least $96.3 billion in September 2022. If you’ve set your sights on becoming a successful crypto investor, you must become aware of what TVL means in the world of cryptocurrencies.
The market capitalization of a DeFi project shows how much support a protocol has between active and passive investors. Usually, some passive investors place their funds within a platform in anticipation of a good return on investment at a later stage. TVL, on the other hand, showcases a project’s performance within the DeFi space. The emergence of Decentralized Finance and its boom in 2020 disrupted the financial market with a new form of investment vehicle. Since then, numerous cryptocurrencies had found themselves on the market’s roller-coaster ride amidst that volatile period when crypto assets started experiencing a pull-out from DeFi. The Total Value Locked refers to the Value of crypto funds held within all the smart contracts of a DeFi platform.
The total value locked in this protocol refers to the amount of cryptocurrency stored in its liquidity pools which are stored on smart contracts. The process begins by identifying the market capitalization of the DeFi project by multiplying the supply of the DeFi project with its existing price. In the next step, you must divide the market capitalization by the maximum circulating supply of the protocol for finding out the TVL. Division of the total market capitalization of a locked asset by the TVL estimate can provide a clear impression of the TVL ratio. Can you ignore the market capitalization of DeFi projects as an indicator of their value?
Token pairs such as wBTC/ETH lock up users’ funds, making them into liquidity providers . When other traders want to exchange a token, either wBTC or ETH, they would tap into that pool to withdraw its liquidity. Each liquidity pool has its own TVL, showing how much crypto funds people deposited, denominated in USD. The significance of Total Value Locked in crypto is primarily clear in showing the immediate status of a DeFi project. Investors should consider it an important indicator but not the solo guide when interrogating the value of existing or new crypto projects besides paving the road to increased crypto adoption. Continually learning more about Total Value Locked and its role in the decentralized landscape remains essential for all aspiring investors.
Liquidity Pools
With Amberdata, you’ll access granular, real-time, and historical data for over 75 protocols, providing a unique view into the DeFi ecosystem. Our platform enables users to view flows in and out of protocols, active users, transactions within and across protocols and pools, and more. She then lends out an additional $1,000 in cryptocurrency for interest on the same platform, and later deposits $1,000 worth of coins in a money pool. This will provide trading liquidity for swapping between obscure altcoins, and allow her to earn trading commissions. Let’s say that Claire deposits $1,000 worth of cryptocurrency into a money pool to validate transactions connecting her wallet to a DeFi platform on its native blockchain and receive rewards. TVL, market cap, and TVL ratio are all important things to consider before investing or interacting with a protocol.
Market Capitalization
Depending on the project, TVL can be indicative of the total amount of digital assets borrowed/lent, crypto staked, or the net amount of crypto residing in the liquidity pools of a decentralized exchange . In decentralized finance , total value locked is one of the most important metrics investors look at before interacting or investing in a protocol.. The TVL in cryptocurrencies is the sum of all assets that are locked up somehow. While smart contracts enable the development of decentralized finance , it’s TVL that measures the amount of crypto funds bound by these programs. As a result, TVL is the primary indicator showing the public’s interest in a certain protocol, commonly known as decentralized application .
To calculate the current market cap, you need to multiply the circulating supply by the current price, and to find the TVL ratio, you need to divide that market cap number by the TVL of the service. Theoretically, the higher the TVL ratio is, the lower the value of an asset needs to be. If the TVL ratio is below one, the asset is most likely undervalued. Importance of TVL in DeFi becomes clear on the grounds of its role in showcasing the immediate potential of a DeFi protocol. As a result, it turns out to be a better indicator than the market cap of a specific DeFi project.
Crypto projects can increase TVL by adding more liquidity pools to incentivize users to deposit and lock more tokens into the platform. TVL can also be increased by setting the borrowing rates at an optimum to encourage yield farmers to produce more tokens. An increase in TVL shows the popularity, usability, and value of a project. We cannot say that MCap / TVL is a crucial parameter to assess the value of a coin but it is always better to keep some statistical data before taking an investment action.