A question that frequently comes up in the crypto space is, What’s the total value locked (TVL) in crypto? This question, which relies on complex metrics like liquidity and prices, can be difficult to answer. Fortunately, TVL gives us an easy way to see just how much cryptocurrency has been locked into place by investors and traders — and it can also give us insight into crypto markets overall. Let’s dig deeper into what TVL is and how it helps you better evaluate your cryptocurrency holdings.
What does the total value locked mean?
The total value locked, or TVL, is the total value of assets locked into Ethereum smart contracts. The vast majority of these assets are locked into decentralized finance protocols, which use Ethereum as their underlying blockchain. The total value locked matters because it represents the amount of money that is being used to power the decentralized finance ecosystem. By locking up funds in smart contracts, users are able to earn interest on their assets, trade with leverage, and participate in a variety of other financial activities.
The term total value locked refers to a concept called total addressable market, or TAM. In financial analysis, TAM refers to a company’s ability to profitably serve a particular industry. For example, if you own a bakery, your total addressable market is everyone that eats food. This is also known as your target audience or niche. In general, businesses like yours have multiple competitors within their markets—for example, other bakeries that sell cupcakes. Competition determines how much of your market you can capture while still remaining profitable. The same applies to decentralized finance protocols: since these protocols are vying for users and therefore profitability from smart contracts on Ethereum’s blockchain platform, they compete with each other for shares of Ethereum’s growing overall TVL totals.
Why does TVL matter in DeFi?
Understanding TVL is important for a few reasons: first, it helps give you a sense of the overall health of the DeFi ecosystem. If TVL is growing, that means more people are using DeFi protocols and applications, which could be a good sign for the future of the space. Second, TVL can be used as a rough estimate of how much money is actually being put to use in DeFi applications. If TVL is high, that means there’s a lot of value being locked up in these protocols, which could mean that they’re being used heavily and could be more valuable. Finally, TVL can help you assess risk in the DeFi space. The higher the TVL, the more at risk users are if something goes wrong with one of the protocols.
TVL also gives you a view into how well some of these protocols are performing. Some metrics can be used to estimate what would happen if a protocol fails. If someone held $1 billion dollars worth of bonds, that’d put a lot of demand on that protocol, but there’s really not much value at risk if it fails because it’s just cash. On the other hand, when calculating TVL we only consider value at risk from tokens, not cash — so when trying to understand which protocols are most vulnerable to failure you should look at TVL instead of overall holdings.
How is crypto TVL calculated?
Crypto TVL is calculated by taking the total value of all tokens locked up in smart contracts on a blockchain. This includes both locked up tokens that are being used as collateral, as well as those that are being staked for governance or other purposes. In Ethereum, for example, it’s currently estimated that over $2 billion worth of ETH is locked up in this way. In NEO there’s an additional $2 billion USD worth of NEO GAS currently under lock-up agreements – which provides a stable economic floor to the entire ecosystem.
The current market value can be calculated by multiplying the supply of DeFi’s token by the token’s current market price. A market cap-to-circulating supply ratio can be calculated by dividing the total supply by the maximum circulation. Divide the current market cap by the value locked up. If the ratio is under 1, the asset is usually undervalued and therefore more attractive to investors. Crypto assets may be overvalued when their market cap exceeds their total value.
Which crypto has the highest TVL?
Bitcoin currently has the highest TVL of any cryptocurrency, at over $1 trillion. TVL measures the value of all assets locked up in a given cryptocurrency, which gives us an idea of how much faith investors have in that particular asset. Since bitcoin is such a large percentage of the total crypto market cap, it can be seen as having a greater TVL than smaller currencies like Litecoin or Ethereum. A higher TVL means there are more people holding onto their coins rather than selling them off.
If someone feels confident enough to hold onto their coins despite the recent dips in price, then this means they are bullish on that currency’s future prospects for gains and want to capitalize on any potential upside moves. The opposite can also be true if someone sells off their coins because they believe the currency will not gain back its losses and may actually lose more ground due to further declines. Therefore, knowing what proportion of TVL the coin has could give you an indication of where the person sees things going in the future.
Largest network by DeFi TVL
Ethereum still dominates the market for DeFi applications, with a TVL of over $13 billion. This is largely due to the fact that Ethereum is the most accessible platform for developers and users alike. However, there are a few other platforms that are gaining traction, including Polkadot, Cardano, and Solana. Each of these platforms has its own strengths and weaknesses, but all three are worth keeping an eye on as the DeFi space continues to grow.
The question of which network will come out on top really depends on what kind of users you’re talking about. For example, it’s pretty clear that Ethereum is currently geared more towards developers. Although there are other DeFi platforms out there, they haven’t developed a solid user base as of yet. Meanwhile, Ethereum already has some traction with both users and developers—most notably, with projects like Augur building their infrastructure on Ethereum. This makes it likely that most DeFi applications will continue to rely heavily on Ethereum for their TVL needs at least in the near future.