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Are you familiar with the concept of Total Value Locked (TVL) in the realm of cryptocurrency? If not, get ready to dive deep into the captivating world of blockchain and digital currency’s financial ecosystem. TVL has emerged as a significant force in the crypto markets and is poised to become a metric that investors should closely monitor. In this article, we will delve into what TVL entails, why it holds importance, and how it connects to the present value proposition for cryptocurrency investments. Brace yourself for an exploration of this intriguing concept, where technical data abounds!
What is Total Value Locked (TVL) in crypto?
When it comes to decentralized finance (DeFi) platforms or distributed applications (DApps), there’s a metric called Total Value Locked (TVL). This nifty metric measures the total value of digital assets that are all locked up or staked within said platform or DApp.
Now, here’s where things get damn interesting. The higher the TVL is, the more people tend to trust and perceive the platform or DApp as being reliable and trustworthy. So, in other words, a high TVL means good vibes all around!
How is Total Value Locked calculated?
The general procedure involves aggregating the digital assets that are currently confined within a given DeFi protocol or smart contract. These assets encompass various forms such as cryptocurrencies, stablecoins, and other tokens utilized either for collateralizing loans or furnishing the platform with liquidity.
To illustrate, let’s say a DeFi platform is ascertaining its overall value locked and discovers it possesses $10 million worth of ETH, $5 million worth of USDT, and an additional $2 million worth of ERC-20 tokens entrapped in its smart contract. Consequently, the total value locked (TVL) would amount to $17 million.
Ordinarily though, investors rely on TVL computations carried out by third-party DeFi analytics platforms. These platforms employ application programming interfaces (APIs) along with web scraping techniques to procure the requisite data for conducting these calculations.
Importance of Total Value Locked
To assess the risks and possible benefits of investing in a specific DeFi ecosystem, it’s crucial to consider the Total Value Locked (TVL) metric. TVL provides users with data that can inform their decision-making process.
However, a significant challenge arises from the lack of standardization in quantifying TVL. Different analytics platforms employ different methodologies for calculating this metric. Consequently, comparing TVL values across platforms becomes a complex task.
Let’s explore three examples demonstrating diverse approaches employed by various analyst platforms to compute total value locked:
- DeFi Pulse: They calculate TVL as the cumulative value of all assets deposited within a DeFi protocol contributing to economic activity.
- DeFiLama: Their approach measures total value locked as the quantity of assets currently staked within a particular protocol.
- CoinGecko: For CoinGecko, TVL signifies either the overall sum of secured funds within a DeFi protocol or the number of assets presently staked.
Ultimately, understanding these different approaches will help users better comprehend and compare varying TVL measurements presented on different platforms.
Also Read: Emerging Trends in Crypto Lending
Limitations of the metric
When assessing the popularity and usage of a DeFi platform or project, total value locked (TVL) can be an informative metric. However, it is crucial for investors to recognize its limitations:
TVL solely focuses on the value of assets locked or staked in a platform; it neglects to consider user activity levels. Therefore, a high TVL with low user engagement should raise concerns for investors.
A platform’s high TVL does not automatically imply high quality or security. Prior to investing, users must diligently examine reputation and security policies.
Fluctuations in TVL may not accurately indicate the health or long-term potential of a specific project. External factors like market conditions, media coverage shifts, changes in investor sentiment, or new protocol and DApp introductions can heavily influence TVL values.
To keep track of TVLs, it is crucial for investors to investigate the frequency at which a third-party analytics platform updates its data. This ensures that the metric remains consistently current and relevant.
Caution must be exercised as there are instances where ill-intentioned individuals deliberately inflate the total value locked as a means to garner greater attention towards a specific platform or project. Consequently, relying solely on TVL may present challenges for investors seeking an accurate evaluation of a platform’s genuine popularity and usage.
When it comes to making investment decisions, it’s important not to rely solely on TVL as the deciding factor. A comprehensive evaluation should involve a thorough examination of various aspects. These include delving into the platform’s governance model, scrutinizing its token economics, assessing the strength and engagement levels within its community, evaluating the liquidity pool’s depth, considering yield farming policies upheld by the platform, and analyzing its security protocols and procedures.
Which crypto has the highest TVL?
The growth of DeFi in 2020 was extraordinary, resulting in a substantial increase by the end of 2021 in the combined Total Value Locked (TVL) across all DeFi protocols.
At the start of 2020, DefiLlama reported that the total TVL for DeFi platforms stood at approximately $630 million. By the first quarter of 2022, this figure exceeded an impressive $172 billion.
Out of this staggering amount, more than half was contributed by MakerDAO, one of the most prominent protocols within the DeFi space. Other notable protocols included Curve and Aave. With a market share comprising 9.7% and a TVL worth $17 billion, Curve emerged as the cryptocurrency with both highest TVL and market portion. It was followed closely by Lido with a TVL valued at $15.4 billion, Anchor at $12.6 billion, and MakerDao at $11.5 billion.
The Bottom Line
To summarize, grasping the concept of total value locked (TVL) in the world of cryptocurrencies holds immense value. It sheds light on a project’s vitality and its surrounding ecosystem. TVL serves as a concise measure of investments made using stable coins within DeFi, an area experiencing explosive growth. This metric plays a crucial role in gauging user participation and overall risk tolerance across the industry. Monitoring fluctuations in this number provides valuable clues about upcoming market trends and potential shifts in investor sentiment. Henceforth, analyzing cryptocurrency assets will undoubtedly continue to incorporate TVL as an essential component.