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.
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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