What is Cryptocurrency Total Locked Value (TVL)?
Last Update: March 8th, 2022
TVL is the total value under staking in a Decentralized Finance protocol or a smart contract. The total value locked determines the yield and the usability of DeFi applications and smart contracts. A higher TVL dilutes rewards compared to a lower one.
What are the ways crypto projects can increase TVL
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.
Staking is the locking of cryptocurrency in a wallet to support the operations and security of the blockchain and receiving a reward in return. Staking increases the Total Value Locked in a protocol considering the duration before the vesting period. The use of vaults can also lead to a rise in the TVL. Vaults receive cryptocurrency like a normal wallet but prevent immediate withdrawals with additional steps. A user has to invite trusted persons to co-sign the withdrawals and approve the transactions to withdraw the funds.
A vault applies secure withdrawal procedures after its creation, and protocol cancels unapproved vault withdrawals within a day. Liquidity pools are crypto-assets locked in smart contracts to offer liquidity for decentralized exchanges.
The pools facilitate the trading of pairs, and traders do not have to wait for the matching of buyers and sellers; instead, they can leverage on a funded liquidity pool. Liquidity providers earn a return for funding the liquidity pools and contribute to the TVL.
In projects like Uniswap, where the TVL comprises the assets at the project’s liquidity pools, the value can grow exponentially during price jumps and gives false expectations of asset inflow and liquidity availability.
How can TVL Impact the Price?
A rise in the price of a digital asset increases the TVL and signifies the network’s growing popularity. The TVL metric depends on the price of Ethereum, where most smart contracts and DeFi applications are built. The drawback in TVL is that it overstates the value in a bullish market, and similarly, overstates the asset outflow when the market is facing a bearish momentum.
The adjusted Total Value Locked improves the Nominal TVL, which can be inflated based on the price movements. Adjusted TVL removes the external influence on the value of the DeFi. DappRadar’s adjusted TVL metric values the asset in a protocol based on their 90-day initial price to get the net flow of the asset and not the price changes factor.
How Significant is the TVL/Market cap ratio?
TVL/market cap ratio is significant as a measure of an asset valuation showing whether it is overvalued or undervalued. A TVL ratio of less than 1 means the underlying asset is undervalued. The current market cap is calculated by multiplying the circulating supply by the current price, while the TVL ratio is calculated by dividing the market cap by the TVL. As the TVL ratio goes up, the value of the asset drops. The market cap ratio is an important metric in determining sound DeFi providers. Investors should use protocols with a TVL value of more than $1 billion and must be an audited platform.
How to Track Crypto Projects TVL?
Crypto projects TVL can be tracked with metrics offered by third parties in the Decentralized Finance space. DeFi Pulse metric is the most popular service that tracks the DeFi providers and ranks them on their Total Value Locked. The metric tracks Ether, Dai, and Bitcoin locked in a protocol. TVL powers the DeFi indexes that calculate their weights based on the value locked in the project’s smart contracts.
DeFi Pulse counts the total assets locked in a smart contract and multiplies it by the dollar value the asset could sell for in a spot market. The metric, however, needs not double-count the assets. For a deposit that creates new cryptocurrency assets and is channeled elsewhere, the DeFi Pulse only counts the new assets, and the metric does not consider other digital assets locked.
Other platforms that track TVL include DeBank, DeFiLama, CoinGecko, and EtherScan. DeBank has a DeFi dashboard, a DeFi Wallet, and a directory. DeFiLama lists over 70 TVL DeFi projects and can be used as an alternative to DeFi Pulse. Etherscan is ideal for Ethereum and ERC-20 tokens. However, Etherscan shows a TVL of $15 billion, making it accommodate very few DeFi projects.