In the crypto and DeFi world, there are many metrics that you can employ to see how well a platform is faring in the market. These metrics are often referred to as “DeFi metrics”. By analyzing these metrics, users can easily compare different protocols and make informed decisions on where to invest their money for more gains, making them vital for traders.
This article will explore one such metric, the TVL. Furthermore, we will also look into its importance in defi space and what you should be wary of when using the TVL to make investment decisions.
What is TVL?
The TVL or Total Value Locked is a metric in cryptocurrency and decentralized finance (DeFi) used to represent the total value of assets locked in a specific blockchain platform. This is found using various DeFi protocols or decentralized applications (dApps). It indicates a platform’s liquidity, user engagement, and overall health.
How is TVL Calculated?
The TVL is calculated by summing the current market value of all digital assets locked by smart contracts on a blockchain platform. This includes cryptocurrencies, stablecoins, and tokens used for staking or lending.
TVL = Total Value of Assets Locked x Number of Assets Locked
Importance of TVL
In the crypto space, TVL is one of the crucial metrics that can help you figure out how many assets are deposited and locked in a specific DeFi protocol. Apart from this, the TVL can also be used to assess several other factors mentioned below.
- Assessing Platform Health: A high TVL value indicates strong user sentiment and a robust environment, meaning users constantly use the platform for lending, staking, or providing liquidity.
- Liquidity Evaluation: Higher TVL implies ample liquidity within the platform’s ecosystem, which is needed for smooth and efficient trading.
- Market Sentiment: A growing TVL can signal positive market sentiment and investor confidence, and drive market adoption to greater levels.
- Comparison Tool: By comparing the TVL value across different DeFi platforms, investors can easily identify the most potential and in-demand projects.
- Investment Decisions: When deciding to invest in a project, TVL is a crucial factor to consider and can help choose the right investment with strong liquidity and user base.
- Algorithmic Trading Insights: For algorithmic traders, shifts in TVM can mean a shift in market sentiment. For instance, increasing trading might attract more trades, while a decrease could indicate potential sellings.
Other Metrics to Take Into Account While Using TVL
While TVK is an important metric for evaluating a blockchain platform’s health and other key factors, it would be better to use it alongside other key metrics for better and more accurate insight into that platform. Here are some other indicators that can be alongside TVL.
- Market Cap
- TVL Ratio
- Active Users
- Liquidity Risks
Potential Risks
While the TVL can tell you how much a platform is currently holding, which can be crucial for making informed decisions, it also has drawbacks and limitations. Here are some important ones you need to consider while using TVL to measure a platform’s market performance and health.
- Manipulation: A platform might incentivize users to temporarily lock their assets to artificially inflate its TVL to attract more users, not reflecting true long-term commitment.
- No Profitability Insight: A high TVL doesn’t show the profitability of a platform, it only shows the amount of assets locked. So, a losing project might have a higher TVL in some cases.
- Inactive Users: A high TVL could also be driven by a small group of large deposits and not a clear indication of the active user count.
- Centralization Concerns: If a large portion of the total value is locked on a single crypto platform, it can create a centralized failure point.
- Liquidity Risk: If a platform with high TVL suddenly experiences a large number of withdrawals, it might face serious liquidity issues.
- Security Concerns: A platform with a very high TVL can be an attractive target for hackers, leading to significant losses in case of a successful attack.
Top 10 Cryptos By TVL
| Rank | Chain | TVL |
|---|---|---|
| 1 | Ethereum | $ 63.54 Billion |
| 2 | Solana | $ 11.844 Billion |
| 3 | Tron | $ 7.45 Billion |
| 4 | Bitcoin | $ 7.2 Billion |
| 5 | BNB | $ 5.53 Billion |
| 6 | Base | $ 3.7 Billion |
| 7 | Arbitrum | $ 3.05 Billion |
| 8 | Sui | $ 1.78 Billion |
| 9 | Avalanche | $ 1.47 Billion |
| 10 | Hyperliquid | $ 1.31 Billion |
Final Remarks
TVL is one of the top metrics in the crypto world used by investors worldwide to help define risks and benefits associated with a particular crypto platform. For instance, if a platform has a large amount of assets locked in it, it conveys the impression of trustworthiness to its potential investors. In short, it can help assess the popularity and the various activities surrounding a crypto platform.
So properly knowing how to utilize it can help you make improved trading decisions, yielding you more profit. However, you should always be cautious as the TVM of a platform can be easily manipulated, and make sure the locking time aligns with your goals. For gaining further valuable insights and other key metrics in the crypto industry, stay tuned.
