What Is Total Value Locked?

Total Value Locked (TVL) refers to the amount of asset value that has been "locked up" or staked in a DeFi protocol. TVL includes all the cryptocurrencies deposited in the DeFi protocols' functions, including staking, lending, and liquidity pools.

The Total Locked Value figure can represent all assets currently staked in a specific protocol or all assets staked across the entire DeFi market—it all depends on what is the investor is interested in analyzing.

The TVL metric is often used to measure the overall growth of the DeFi market or the viability of a specific DeFi protocol. It indicates how enthusiastic and committed investors are towards a particular protocol or the DeFi space in general.

Summary of Important Points

• Total Value Locked, or TVL, is a metric that indicates how much asset value is 'locked up' or staked in a specific DeFi protocol or the entire DeFi market.
• The TVL of a platform is the total of all cryptos invested into the various DeFi options available on that platform.
• The TVL figure for the DeFi is the total value of all assets staked across the entire DeFi system.
• The TVL ratio is calculated by dividing the market cap of a project by its TVL.
• The TVL ratio helps investors determine if a project is overvalued or undervalued.
• The TVL, along with an independent audit, can also help traders and investors determine the authenticity of a DeFi protocol.

How to Calculate the Total Value Locked

Calculating the TVL of a DeFi protocol is straightforward. It is the total of all crypto assets locked up within the protocol's decentralized finance services.

Consider this scenario:

If an investor connects their wallet to a DeFi platform and engages in the following DeFi activities:

1. Stakes $500 worth of crypto into the platform's liquidity pool to help validate transactions and earn staking rewards
2. Lends another $500 worth of crypto to earn interest rewards
3. Finally, contributes $500 worth of crypto to the platform's liquidity pool to provide liquidity for altcoin trading/swapping while earning trading commissions.

If these are the only revenue stream programs available on the DeFi protocol, its TVL will be $1,500.

What Do Total Value Locked Ratios Tell Us?

The TVL ratio is calculated by dividing the market cap of a project by its TVL. This ratio provides a metric that helps investors make better market decisions. Generally, higher TVL ratios mean the project is overvalued, while lower ratios mean the project is undervalued. The math isn't always accurate and doesn't always reflect reality, but it acts as a rule of thumb in DeFi investment.

Investors and traders are usually looking for undervalued DeFi projects to get first mover's advantage. The TVL ratio allows traders and investors to gauge the viability of a DeFi platform and find new market opportunities and early undervalued projects before they blow up.

Investors can also measure the integrity of DeFi platforms using the TVL metric. There are a plethora of DeFi platforms offering incredible yields, yet many of these platforms could be scammers waiting to rug pull greedy investors. The TVL metric can help investors separate the wheat from the chaff. DeFi projects with TVL greater than $1 billion and audited by independent blockchain security firms tend to be more trusted as viable investment platforms than their counterparts.

Understanding the TVL metric is a crucial investment strategy for those willing to capitalize on the impressive profit offerings of decentralized finance services. Before committing to any project or DeFi assets, investors must do thorough research and then utilize the TVL metrics to help decide which project is undervalued or authentic enough.