What Is Total Value Locked or TVL in DeFi?

If you have been using DeFi tracking sites, the chances are high that you have run into total value locked as a reference point.

To put it simply, TVL is a formula that calculates the combined value of all crypto assets that have been locked up or staked in a DeFi protocol [ Decentralized Finance ]

TVL is frequently used to measure the overall health of the DeFi protocol — when a TVL rises, it usually implies a rise in liquidity, popularity and usability — factors that contribute to the success of the protocol, and typically results in higher yields for protocol users.

This quantity is normally expressed in USD, while other protocols express it in total ETH or BTC value.

The total value locked in a DeFi protocol can be calculated by multiplying the total number of tokens staked on that protocol by the current price of each token.

Of course not all of these DeFi protocols are the same. In addition to different levels of TVL, the yields as well as the token price can vary dramatically.

So in order to know if a DeFi protocol is worth investing in it's necessary to calculate the market cap TVL ratio.

This is done by calculating three numbers: the supply, the maximum supply, and the current price.

To calculate the token’s current market cap, multiply the circulating supply by the current price.

Then to get the TVL ratio, take that market cap figure and divide it by the TVL.

Once you’ve crunched those numbers, you’ll have a ratio that corresponds to whether the DeFi protocol is under or over valued. It’s only a rule of thumb, but if the ratio is less than one, there’s a good chance the project is still undervalued.

That being said, one of the most common objections leveled against TVL is that it frequently overstates the fundamental health and activity of a particular DeFi protocol.

As a result, while TVL is a useful indicator, it should be evaluated and paired with other criteria when deciding whether to invest or stake in a specific platform.

Thanks for watching, this has been your host Andrew and good luck! (or something like that)

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