The TVL (Total Value Locked) shows the total value of assets in a specific DeFi protocol. You can also find the TVL of the whole blockchain system by adding up the TVLs of all DeFi protocols on that blockchain.
To grasp the concept of TVL, picture this: You put $1,000 into a DeFi protocol where you can earn interest on your deposit. Your $1,000 is now secured or staked in the protocol. If ten more individuals also deposit $1,000 each into the same protocol, the Total Value Locked of the protocol increases to $11,000.
How to Calculate
Total Value Locked measures the extent of activity and acceptance in a DeFi system. To compute Total Value Locked, assess the combined value of all assets currently secured on that platform. This encompasses locked assets like collateral, staked, and borrowed assets.
Next, you need to change the assets’ value to a standard unit like USD or any other fiat currency. Lastly, sum up the total value of all assets to calculate the TVL of the DeFi protocol.
Data aggregators are widely used to monitor Total Value Locked in DeFi. These platforms gather information from different DeFi protocols and combine it into one convenient dashboard, simplifying the process of monitoring the overall expansion and acceptance of the DeFi ecosystem.
Why Does TVL Matter in DeFi?
Total Value Locked plays a crucial role in analyzing the condition of the DeFi ecosystem, enabling users to evaluate the possibilities of a specific protocol. Here are a few explanations highlighting the significance of Total Value Locked in DeFi:
- Total Value Locked (TVL) gives a glimpse into how healthy and expanding a DeFi protocol or platform is. A higher TVL usually means more people are using it and there is more activity happening in the system.
- TVL shows how much liquidity is in a DeFi system. More liquidity means easier trading, borrowing, lending, and swapping assets.
- A high Total Value Locked (TVL) can increase user interest in a DeFi platform. Platforms with a significant amount of assets locked in are seen as more reliable and secure compared to those with lower TVL, indicating higher user trust in the platform.
TVL should not be the only measure when assessing DeFi projects. It is just one aspect to consider among others in a thorough evaluation of DeFi projects.
Also, remember that the Total Value Locked can change when users add or remove assets. Make sure to check the TVL often to stay updated on the ecosystem’s current status.
Conclusion
Overall, Total Value Locked is an effective tool for evaluating the health and popularity of DeFi projects. However, it is important to consider other metrics for a thorough analysis.