TVL in simple terms is the total value of DeFi projects that a DeFi platform holds within its smart contracts with the help of the blockchain.
What’s DeFi?
DeFi which is decentralized finance entails activities of CeFi (centralized exchange) being rendered by the users themselves (no need for central authorities). In DeFi, liquidity is provided by the users to enable other users to carry out their trading activity. Annually or within a decade, different narratives surface in the crypto sphere. Meanwhile, for DeFi, its foundation is traceable back to the emergence of the Ethereum blockchain in 2015. Since then DeFi industry keeps growing fast.
TVL includes the coins deposited in all DeFi protocol activities which are: AMM (Automated Market Maker) for swap/trade, Lending/borrowing protocol, Staking, and Yield optimization protocol.
Importance of TVL
- TVL is an indicator of the popularity and adoption of a particular protocol or application. Furthermore, the higher the TVL, the more users are using the platform and the more assets investments.
- TVL can give insights into the overall health and growth potential of the DeFi ecosystem. It can also help investors, analysts, and developers gauge the level of interest and activity in a particular protocol or application, helping them make more informed decisions regarding investment and development.
- Investors use TVL to filter out thousands of DeFi projects as most investors target the undervalued project. Having a list of the undervalued project isn’t the only requirement for investment. But an important step before the fundamental and technical analysis, and other factors discussed in my previous post.
Market cap/TVL ratio
This is calculated by dividing the market cap of crypto by its total value locked (MC divided by TVL). This ratio is a common tool for investors to know if a project is undervalued or overvalued. A ratio less than (<) 1.0 is said to be undervalued. Ratio greater than (>) 1.0 is said to be overvalued.
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