Your investment should always be backed up by thorough research and understanding. Before you can divert your hard-earned money to your assets, you need to look at all the possible indicators. These include price-earnings ratios, historical returns, chart patterns and more.
A deep understanding of these indicators will help you identify the current value and future potential of your asset. Locked totals or TVL are also such indicators. Knowing and understanding whether an investor wants to succeed in the decentralized financial sector is an important factor.
What is Total Valued Locked (TVL)?
Locked Total Value (TVL) is the amount of user funds deposited in the Decentralized Finance (DeFi) protocol. These funds may be granted to the project for several functions such as staking, liquidity pool, or lending.
The DeFi protocol is a special, autonomous program designed to address problems within the traditional financial industry. An example of the DeFi protocol is Uniswap. This is the leading decentralized exchange that allows investors to trade cryptocurrencies without central oversight.
TVL does not show the number of outstanding loans or the yields these deposits will earn. It simply reflects the current value of the deposit. Therefore, when an investor withdraws or deposits money into a project, the locked-up total changes. In addition, it constantly changes as the value of the US dollar changes.
The DeFi protocol can operate on a single network or be distributed across different networks. If they are spread across multiple networks, each network will have an independent TVL. So far, the largest network by TVL is Ethereum, with more than 500 projects currently participating, according to a CoinDesk report. It accounts for almost half of the TVL in the DeFi industry.
Why is it important?
TVL shows the overall health of the DeFi market. The TVL of an individual project shows the amount of investor confidence in the protocol. The rapid increase in TVL shows that investors are evaluating the project and more money is flowing through its network. This helps investors determine if the protocol is sound and worth the investment.
High TVL means high liquidity, popularity, and ease of use. This is the defining factor for the success of the DeFi protocol. The increase in TVL will also benefit investors as they will enjoy fairly high liquidity and returns.
However, if the TVL is low, the availability of funds will be low. That is, if the investor chooses to bet tokens on this protocol, the investor will not be fully rewarded.
Investors can also use TVL to determine if native tokens for a particular protocol are undervalued or overvalued. Tokens can be overvalued or undervalued if their market capitalization is high or low compared to the TVL of the entire project / protocol.
Currently, the total locked value in the DeFi industry is just under $ 50 billion, with the MakerDAO protocol at the forefront, according to DeFi Pulse data.
The combination of TVLs with the DeFi protocol has skyrocketed over the last two years. At the beginning of 2020, the total value was US $ 630 million and more than half of the shares were owned by MakerDAO. As of this writing, MakerDAO totals nearly US $ 10 billion.
How do you calculate TVL?
Calculating the TVL of a project is easy. Multiply the number of tokens deposited in the project by the current price in US dollars to reach the TVL of the project. If your project accepts deposits for multiple tokens, you need to calculate the TVL for each token and add them up to get the TVL for your project.
Then, to see if the project’s native tokens are undervalued or overvalued, you need to calculate the TVL ratio for your project. To do this, you need to divide the market capitalization by the token TVL. Market capitalization is nothing more than the total number of tokens in circulation multiplied by the current price. If the TVL ratio is less than 1 or vice versa, the asset is undervalued.
Is TVL accurate?
Like all other metrics, TVL is not perfect. It may present an unbalanced image of the health and activity of a particular DeFi protocol. This is because the DeFi protocol often has a large investor called a whale that can influence the TVL of a project with a single deposit or withdrawal. This will give investors a misunderstanding of the project.
At times, whales are motivated to hype the project by making large investments. This can provide potential investors with an inaccurate reading of the project. Therefore, TVL is important, but investors need to consider some other indicators to determine if a token is investable.
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