The Total Value Locked (TVL) quantifies the aggregate value of assets deposited in a specific decentralized finance (DeFi) protocol. Furthermore, one can determine the TVL of the entire blockchain ecosystem by summing up the TVLs of all distinct DeFi protocols operating on that particular blockchain.
To gain a clearer comprehension of TVL, consider a scenario where you place $1,000 into a DeFi protocol that allows you to accrue interest on your deposit. This $1,000 is now secured or staked within the protocol. If an additional ten individuals each deposit $1,000 into the identical protocol, the protocol’s TVL escalates to $11,000.
How to Calculate TVL
TVL is a metric used to measure the degree of activity and adoption in a DeFi ecosystem. The calculation of TVL involves summing up the total value of all assets presently secured on the platform. This encompasses all secured assets, including collateral, staked, and borrowed.
Next, translate the asset value into a conventional currency unit, like USD or any other fiat currency. Lastly, sum up the total value of all assets to ascertain the Total Value Locked (TVL) in the DeFi protocol.
Data aggregators are commonly utilized for monitoring TVL in DeFi. These systems gather data from multiple DeFi protocols and consolidate it into a unified dashboard, simplifying the process of observing the overall expansion and acceptance of the DeFi ecosystem.
How is TVL important in the DeFi sector?
TVL serves as a crucial indicator for comprehending the condition of the DeFi ecosystem, as it enables users to evaluate the prospects of a specific protocol. Here are some of the justifications for the significance of TVL in DeFi:
- TVL offers a perspective on the comprehensive wellbeing and expansion of a DeFi protocol or platform. An increased TVL typically signifies broader acceptance and engagement within the ecosystem.
- TVL serves as an indicator of the available liquidity in a specific DeFi ecosystem. A higher level of liquidity facilitates users in conducting transactions such as trading, borrowing, lending, or swapping assets.
- A substantial Total Value Locked (TVL) can enhance the appeal of a DeFi platform to its users. A platform with a significant volume of secured assets could be perceived as more reliable and steady than a platform with a lesser TVL. This indicates a larger number of users who are comfortable depositing their assets on the platform.
Nonetheless, one should not rely solely on TVL as the only measure for assessing DeFi projects. It is merely one of numerous elements that ought to be taken into account in a thorough analysis of DeFi projects.
Furthermore, it should be highlighted that the Total Value Locked (TVL) can vary as participants deposit and withdraw assets. Therefore, it is crucial to monitor the TVL consistently to obtain a precise understanding of the ecosystem’s present condition.
