Cryptocurrency Investing: Putting Your Finger on the Pulse of DeFi with TVL | by Stephen Dalton | Aug, 2022
FINTECH|DEFI|CRYPTOCURRENCY
An essential metric to focus on when investing in crypto decentralized finance (DeFi) tokens is total value locked (TVL). It is an indication of how much money is being held in a DeFi protocol
TVL is a metric for an investor to assess how the cryptocurrency market is faring or if a particular DeFi token within a particular protocol is worthy of investment.
“Total Value Locked or TVL is a formula that shows the total value of all crypto assets locked up (or staked) in a Defi (decentralized finance) protocol. TVL is often used to represent the total activity, interest and even value of a Defi protocol for potential investors.” — Crypto Wallet.
However, you can find the TVL of a protocol simply by checking DeFiLlama, DeFiPulse, or DeBank and searching for the DeFi protocol.
This is ineffective for non-DeFi coins and tokens like Decentraland (Mana) because it is a Metaverse or play-to-earn (P2E) platform.
TVL is a lot like it sounds when you consider locked staking. Many exchanges allow coin holders to “lock” crypto for a specific period so that the exchange can use it for loans, much like a certificate of deposit.
This is known as “staking.”
“For a lot of traders and investors, knowing that staking is a way of earning rewards for holding certain cryptocurrencies is the key takeaway. But even if you’re just looking to earn some staking rewards, it’s useful to understand at least a little bit about how and why it works the way it does.” — Coinbase.
When a particular protocol’s value grows, the TVL for that coin’s protocol does, too. Like the price-to-book (PB) ratio for stocks, it can be used to assess a token’s prospects.
However, it’s essential to know that, like everything else in the crypto industry, whales can obscure the TVL of a specific protocol when they hold a large percentage of tokens in that protocol.
Therefore, TVL should be used with other metrics to determine the feasibility of investing in a specific platform or DeFi token.
What is TVL in the Cryptocurrency Market?
It is a measure of the amount of money that is currently invested in the cryptocurrency market or a specific altcoin protocol.
It is calculated by taking the current market price of the currency and multiplying it by the total number of outstanding units. The higher the TVL, the more money invested in the currency.
This is an excellent, straightforward analysis of TVL; though there is no formula given in this video, I found it helpful to help me understand how it’s used. This was uploaded by the Defi Desk at New York University, so tell them if you have a problem with it.
What Is Total Value Locked TVL in Crypto?
Hahaha, just kidding, you can always give your Point-of-View (POV) in the comments. But, NO SPAM, please. I will report you, block you, and never interact with you again. And that would suck, wouldn’t it?
OK, so if you didn’t like or “get” that short explanation, here is another definition:
What is TVL (Total Value Locked) and How to Use it?
“Total value locked is one of the best tools that can tell you whether the coin or token is under or overvalued. You need to understand what it is, how it works, and where to use it. Total value locked is the sum of all assets deposited in decentralized finance (DeFi). People can earn rewards, interest, new coins, and tokens by depositing money in DeFi.” — Crypto Uni.
How Does TVL Work?
TVL is a metric that calculates the value of cryptocurrency locked in DeFi protocols.
To calculate TVL:
“It is straightforward to calculate the crypto TVL. First, the market cap of an asset has to be found by multiplying the DeFi project’s supply by the current price. Then, dividing the market cap by the maximum circulating supply, the TVL is revealed.” — Cointelegraph.
Therefore, the protocol is undersold when the outcome is less than one. When it is higher than one, it is oversold.
“Most DeFi platforms like Aave, PancakeSwap, and Uniswap issue namesake tokens so users can perform the aforementioned services. Hence, we can deduce whether or not these tokens are undervalued or overvalued by using the TVL as a gauge of fundamental value and then taking its market cap and dividing it by the TVL, similar to the price-to-book (P/B) ratio for stocks.” — The Motley Fool.
How Does TVL Affect DeFi?
It is an excellent way to measure the growth of the DeFi industry because it shows how much money is being invested in these protocols.
This metric is also helpful for comparing different protocols because it gives you an idea of how much money is locked in each one.
What is often referred to as DeFi, is a rapidly growing sector in the cryptocurrency industry that refers to developing financial applications built on Ethereum or others that are non-custodial and permissionless.
TVL is a metric that tracks the value of assets locked in DeFi protocols. It allows users to see how much liquidity is available in the ecosystem and can be used to track the growth of the DeFi sector.
When it increases, it typically indicates that more people are using DeFi protocols, and trust in the ecosystem is growing.
Final Thoughts on TVL & DeFi
The current inflationary economy created primarily by the pandemic and efforts to keep the economy afloat by printing more fiat currency to pay citizens stimulus bonuses has led to a decrease in trust in traditional financial systems and an increase in interest in decentralized alternatives like crypto.
This has resulted in a significant rise in cryptocurrency purchases with fiat. Thus, the TVL, which had dipped from its November 2021 all-time high, is seeing a renewed interest with the upcoming (in September) ETH Merge. This trend will likely continue as more people become aware of DeFi and its benefits.
“Companies’ market cap can exceed their book value the same way that the market cap for cryptos can exceed their TVL. The same philosophy for valuation applies here; the lower, the better. For example, Aave has a market cap-to-TVL ratio of 0.29, while that number stands at 2.40 for Uniswap and 0.85 for PancakeSwap. So, by this gauge, Aave tokens are the cheapest out of the three.” — The Motley Fool.
Remember, TVL is only an indicator, not a guarantee of future results. There are no guarantees in investing, or else everyone would be doing it!
Do your own research (DYOR), never invest money you can’t afford to lose, be particularly careful if using margins (money borrowed against holdings) because of the extreme volatility in the crypto market, and “don’t believe the hype.”
DISCLAIMER: This article is for entertainment and informational purposes only. It should not be considered financial or legal advice. Not all information will be accurate. I am not a financial adviser, and you should consider anything I write as informational and friendly banter to show you what is possible if you invest your money in these vehicles. However, there are no guarantees. Consult a financial professional before making any significant financial decisions.
Note: This post contains affiliate links. Read my disclosure statement for additional information.
Stephen Dalton is a retired US Army First Sergeant with a degree in journalism from the University of Maryland and a Certified US English Chicago Manual of Style Editor. Also, a Top Writer in Nutrition, Investing, Travel, Fiction, Transportation, VR, NFL, Design, Creativity, and Short Story.
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