Cryptocurrency Investing: Putting Your Finger on the Pulse of DeFi with TVL | by Stephen Dalton | Aug, 2022

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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

Putting Your Fin­ger on the Pulse of DeFi, Cryp­tocur­ren­cy, Fin­tech, Blockchain, and Stak­ing. Dream­stime #236745685.

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.

About the Author Pho­to by Jean Springs from Pexels.

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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