What is TVL in DeFi?

When considering the possibility of investing in a particular company, a severe investor always wants to know in advance the company’s actual value. In traditional finance, there are simple ways to determine the value of a company, such as multiplying the stock by the unit price of the store.

In decentralized financing, investors should always analyze the cost of a DeFi project before making any decision. With the help of TVL, they can find out the actual price of DeFi.

Total Value Locked.

The term “Total Value Locked” or TVL (Total Value Locked) is ubiquitous in the DeFi space. TVL refers to the total value of cryptocurrency assets hosted in a decentralized financial space or a separate DeFi project. The funds are not blocked, but smart contracts on the network securely protect them.

The concept of using TVL to determine value in DeFi was introduced by DeFi pulse. DeFi pulse is a platform focused on delivering analytics to the world of decentralized finance. The company introduced this metric to help investors gain insight into DeFi and aid in decision making.

The total volume of TVL in the DeFi world is $82 billion and is growing daily. If we look at the context of platforms, we will see Aave ($15), Curve finance ($10.5), Instadapp ($10.4), Compound ($10.3) and Maker ($8.8) – billion.

How to calculate TVL in different Defi protocols?

The definition of TVL often depends on the project in question. There are many DeFi protocols: lending, staking, DEX, derivatives, payment services, and assets.

How to define TVL in DeFi projects?

Lending – DeFi lending is the process by which DeFi platforms provide loans to users based on the collateral they provide. The user pledges one crypto asset and receives another crypto asset. On such media, you add up the amount contributed by lenders (stakes) and borrowers (collateral) to calculate TVL.

Decentralized exchanges are platforms created to exchange DeFi assets, providing liquidity pools and smart contracts. TVL for DEX is the amount of money in DEX smart contracts, including liquidity pools. TVL’s biggest DEX is Uniswap, followed by Pancakeswap.

Derivatives are assets that get their value from another underlying asset, and their use in DeFi has multiplied lately. Thus, TVL, in the case of derivatives, is the amount deposited in smart contracts that helps maintain synthetic/underlying assets.

Payment services are tools designed to allow users the ability to make transactions more efficiently and more quickly. TVL in them is the amount that contributors contribute to smart contracts for payments.

Assets – assets, in this case, refer to cryptocurrencies and stablecoins. And TVL is the value of investments.

TVL for project analysis.

When considering investing in the Defi world, it is essential to analyze its activities to learn its growth and popularity. First of all, make sure what kind of investment you want to make.

After determining the type of investment, look for platforms that offer the services you need. For example, Uniswap, Pancakeswap and some others provide DEX services. Check out the TVL of each of these projects to see their popularity.

After identifying a project with a higher TVL level, you should do further research to see if the project suits your needs.

If you notice that the TVL of the project is increasing, it may indicate an increase in the number of investors in the project and confidence in it.

TVL restrictions.

TVL as a metric for determining the value and growth of DeFi has one significant limitation; it only focuses on the pricing aspect of assets. It goes like this:

Project Defi has 10 BTC for a total of $ 460K at current prices.

During this period, there are no deposits in the projects; however, the cost of BTC increases from $ 46 thousand to $ 48 thousand.

TVL automatically increases to $ 480k.

An investor may think that people are making deposits on the platform, while there were no deposits at that time. But, instead, the value of individual assets has increased. Therefore, TVL only finds the asset’s price and does not consider other factors.

However, Dappradar introduced its way of adjusting TVL, called adjusted TVL. This new metric removes the cost factor per se, providing a more accurate TVL. In addition, the Dappradar metric eliminates the impact of price by working with fixed prices for a given 30-day or 90-day window.

Conclusion.

The total cost recorded in a DeFi project has been an excellent metric for calculating the cost of DeFi for some time. It includes checking the actual value of the assets in the DeFi project. Each DeFi protocol has its way of computing TVL. However, the main thing is to check the real value of the assets contributed to the smart contract to find out the value of DeFi.

TVL has the limitation that it focuses more on the pricing aspect of the asset than on the number of assets. However, an adjusted TVL can help in such cases to know if the DeFi project is growing. Overall, TVL is a good metric for DeFi investors to use.

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