We can analyze a cryptocurrency project from several different angles. This includes fundamental analysis, technical analysis, and on-chain analysis. In addition, fundamental analysis includes an analysis of the project’s token economy (aka token economics).
Token economics involves the analysis of a number of key metrics, such as
However, for DeFi (decentralized finance) projects, there is a more important statistic. It is called Total Value of Lock-in (TVL).
TVL is one of the key statistics used to analyze the performance of the DeFi platform. So, let’s learn more about it.
What is Total Value Lock?
TVL started gaining traction in mid-2020 during the DeFi boom. Many DeFi platforms were able to attract cryptocurrency users to deposit funds on their platforms for various reasons, such as lending, pledging, income farming, liquidity mining, etc.
Total locked-in value (TVL) can be defined as the amount of crypto assets a user has locked in on a DeFi platform.
This includes the following.
- lending – crypto assets deposited on lending platforms such as Celcius, AAVE, Compound, MakerDAO
- pledges – crypto assets pledged using the layer 1 blockchain, e.g. Ether, Polkadot, Solana, Cosmos, etc.
- Liquidity Pools – Cryptocurrency assets housed in various liquidity pools on platforms such as Uniswap
- Yield Farming – Crypto assets deposited through Yield Farming protocols (e.g. Yearn Finance, Beefy Finance, etc.).
TVL is also used in the valuation of DeFi platforms. The generally accepted ratio of market cap / TVL is 1:1.
Therefore, if a project’s market cap to TVL ratio is greater than 1:1, the project is considered overvalued and vice versa.
In addition, these DeFi platforms are built on a blockchain network. The TVL is also used as a tool to measure the performance of the Layer 1 blockchain network.
The TVL of a platform can be calculated in several ways. It can be calculated in both crypto and fiat form. However, the fiat currency valuation of TVL is commonly accepted globally.
Why is Total Value Lock (TVL) important to DeFi?
Every DeFi platform offers many services that require liquidity. Let’s understand this with a few examples.
- Decentralized exchanges such as Uniswap need liquidity for various cryptocurrency tokens. Whenever someone comes to Uniswap to trade these cryptocurrency tokens, the corresponding tokens should be available through the exchange.
Let’s say you want to buy ETH (Ether) tokens with MANA (Decentraland). Then Uniswap should have an ETH/MANA liquidity mining pool so you can successfully exchange these tokens. Users like you and me will lock their funds in these liquidity mining pools. The exchange will reward us for providing them with liquidity.
- Lending platforms like AAVE need the liquidity of cryptocurrency tokens in order to lend these tokens to users. Users deposit these tokens with AAVE, and in return, AAVE pays them interest.
Thus, TVL describes the liquidity of the DeFi platform. The more liquidity there is, the more reliable the platform will be.
As of June 6, 2022, DeFi’s portfolio TVL is as follows
DeFi – Total Value Locked DeFi – Total Value Locked Layer 1 Blockchain Network with the largest Total Value Locked (TVL) in DeFi
As mentioned earlier, the DeFi platform is built on top of a blockchain network. The combined TVL of a DeFi platform built on top of a network can be called the DeFi TVL of the network.
Therefore, the DeFi TVL of Ether is the combined TVL of all DeFi platforms built on the Ether network. As of June 6, 2022, the following are the networks with the largest DeFi TVLs.
DeFi TVL for DeFi – Total Value Locked 2 Top Level Blockchain Network
In addition, you can see the list of top protocols based on TVL.
Conclusion – What is TVL and why is it important in DeFi?
This is what TVL is all about and why it is important for the analysis, credibility and valuation of the DeFi platform. The more TVLs there are, the more reliable the project or network will be. Finally, Ethernet has long been the blockchain network with the largest number of DeFi platforms and the largest number of TVLs.
I hope you understand what TVL means and how important it is in DeFi.
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