While it only represented $600 million in the first quarter of 2020, Total Value Locked was around $285 billion at the end of the first quarter of 2022.
During Bitcoin’s all-time highs in the last quarter of 2021, TVL topped $314 billion. At the time of writing (end of June 2022), TVL has fallen to $89 billion!
Source defillama.com (evolution of the TVL for three years)
What is it about ?
The TVL for ” total value locked can be defined as is the sum of all cryptocurrencies staked, lent, deposited in a pool, or used for other financial actions across DeFi.
Along with market capitalization, the total supply of tokens in circulation or even the volume of transactions, the TVL is a metric particularly used by DeFi investors. In effect, this allows to assess the overall value of the assets deposited in all DeFi protocols or in a particular DeFi project.
Namely, the TVL evolves regularly with the value of the native token. Therefore, if a specific token increases in value, the TVL of the protocol will mechanically increase.
This tool has become an essential indicator for investors to assess the relevance and solidity of a crypto project.
Above, the ranking of TVL “all chains” as of June 2022:
- Ethereum = $55.37 billion for 504 protocols (represents 62.44% of the market)
- Binance SmartChain = $7.38 billion for 406 protocols (8.32%)
- Avalanche = $5.58 billion for 220 protocols (6.29%)
- tron = $3.95 billion for 9 protocols (4.46%)
- Solana = $2.72 billion for 72 protocols (3.07%)
- follow polygon, waves, Chronos, Phantom and Arbitration
Note that with the exception of Waves, the top 10 TVLs fell by 30-40% in June 2022 with the fall in cryptocurrencies.
How does TVL work?
To fully understand this concept, it is necessary to understand how the TVL is calculated. To get done, on will multiply the total number of locked tokens by the price of the asset. The value of the TVL depends not only on the popularity of the token, but also on the underlying crypto.
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A high TVL can indicate that the ecosystem, project, and developer team are strong. What attract more participants and investors, thus contributing to the development of the project. Conversely, when a DeFi protocol has a fairly low TVL while offering high returns, it may be promotions, but more generally scams.
Another notion is important, it is the ” Market Cap/TVL ratio “. In this case, we take into account the market capitalization of the cryptocurrency (price of tokens, supply in circulation and quantity of tokens locked) then we divide by the total number of tokens locked.
Thereby, when the ratio is close to “1”, we can say that there is an undervaluation of the assettherefore a more attractive potential for investors. If the market capitalization exceeds the TVL, then the asset may be considered overvaluedleaving little or no room for short-term growth.
Source defillama.com (as of June 29, 2022)
What is TVL used for?
The TVL makes it possible to value a token and in particular its market share. Some use it as an indicator of the “notoriety” of a cryptocurrency project by weighing up different projects to study their competitiveness..
Several specialized websites allow in-depth study of projects using TVL data. We can cite in particular DeFi Pulse or DefLlama. The first only takes into account tokens that are available on the Ethereum blockchain. The other is more global with the consideration of 80 different blockchains.
Conclusion: an indicator to watch closely
An essential indicator for any investor in the crypto ecosystem to determine the level of interest and the health of a protocol, it should however be kept in mind that the decentralized finance sector is very volatile and that the encrypted data of TVL DeFi are likely to vary greatly in a few hours, days onlyt.