>What is Total Value Locked?Why is it important for DeFi to have TVL?Which blockchain network has DeFi’s highest TVL?
There are many perspectives that can be used to analyze a crypto project. These include On-Chain Analysis, Technical Analysis and Fundamental analysis. The Fundamental Analysis also includes an analysis on the Token Economy of the project (a.k.a. Tokenomics).
Tokenomics is the analysis of key metrics such as:
Market Cap,Token Total Supply and Token Circulating Supply. Fullly Diluted Value.
There is an additional stat that is important for DeFi (Decentralized Financing) projects. It is called Total Value Locked, or TVL.
TVL is one key statistic used to analyze the platform’s performance. Let’s learn more.
What is Total Value Locked and How Does It Work?
TVL was first noticed in the middle of 2020 during the DeFi boom. Many DeFi platforms were able attract crypto users to deposit funds on their platforms for various reasons, such as Lending and Staking, Yield Farming or Liquidity Mining.
The total value of all crypto assets that users have locked down on a DeFi platform is called the Total Value Locked (TVL).
The following are included:
1. Lending – Crypto assets that are deposited on a lending platform like Celcius, AAVE or Compound.
2. Staking – Crypto assets that are staked using a Layer 1 Blockchain such as Ethereum or Polkadot.
3. Liquidity Pools – Crypto assets deposited with different liquidity pools across platforms like Uniswap.
4. Yield Farming: Crypto assets that are deposited using Yield Farming protocols like Beefy Finance or Yearn Finance.
TVL can also be used to value a DeFi platform. The ratio Market Cap to TVL is generally 1:1.
If the market cap to TVL ratio for a project exceeds 1:1, the project will be perceived as overvalued.
These DeFi platforms are also built on a Blockchain network. TVL can also be used to measure the performance of Layer 1 Blockchain Networks.
There are many ways to calculate TVL for a platform. You can calculate it in cryptocurrency or Fiat currency. The TVL’s Fiat currency valuation is universally accepted.
DeFi: Why is Total Value Locked (TVL), important?
Each DeFi platform offers a variety of services that require liquidity. Let’s look at some examples to illustrate this concept:
1. A Decentralized Exchange like Uniswap requires liquidity in various crypto tokens. The tokens that are needed to exchange these crypto tokens must be readily available to anyone who visits Uniswap.
Let’s say you want to buy ETH tokens (Ethereum), with MANA (Decentraland). Uniswap must have an ETH/MANA liquidity Pool in order to allow you to successfully exchange these tokens. These Liquidity Pools would be used by users like you and me to lock your funds. We would be rewarded by the exchange for providing liquidity.
2. A lending and borrowing platform such as AAVE would require the liquidity of crypto tokens to be able to lend these tokens. These tokens would be deposited with AAVE and AAVE would pay interest.
TVL is a measure of how liquid a DeFi Platform’s liquidity. Platforms that have more liquidity are more reliable.
The combined TVL of DeFi was as follows, 6 June 2022
DeFi – Total value locked
Layer-1 Blockchain Networks have the highest Total Value Locked in DeFi
DeFi platforms are built using blockchain networks, as we have already mentioned. The network’s combined TVL can be called the DeFi TVL.
DeFi TVL Ethereum is the total TVL from all DeFi platforms that are built on the Ethereum network. The following networks have the largest DeFi TVL as of June 20, 2022.
DeFi TVL Top Layer-1 Blockchain Networks
You can also view a list of Top Protocols based on TVL.
Conclusion – What’s TVL and why is it important in DeFi?
This is TVL and it is why it is so important for DeFi platforms’ valuation, credibility, analysis, and valuation. A project or network is more reliable if it has a higher TVL. For a long time Ethereum was the blockchain network that had the most DeFi platforms, and therefore the highest amount of TVL.
I trust you understood the meaning of TVL as well as its importance in DeFi.
We welcome your feedback and comments in the comments section.
This post does not contain any financial advice. Before making any financial decisions, please consult your financial advisor.
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