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WHAT EXACTLY IS “TOTAL VALUE LOCKED” SO IMPORTANT?
- August 15, 2022
- Posted by: Jacob Emmanuel
- Category: blog post
WHAT EXACTLY IS "TOTAL VALUE LOCKED" SO IMPORTANT?
Since the emergence of decentralized finance (DeFi) in 2020, financial market specialists have dealt with a new sort of investing and sought ways to assess its performance.
Aside from market capitalization, trading volume, and total and circulating supply, total value locked (TVL) is a prominent crypto indicator used by DeFi investors to analyze the overall worth of assets deposited across all DeFi protocols or in a single DeFi project in US dollars or other fiat currency.
DeFi assets comprise prizes and interest derived from traditional services such as lending, staking, and liquidity pools, which are delivered via smart contracts. For investors wishing to support the DeFi platforms with the biggest payouts, TVL in staking, for example, is a very important indication. It indicates the amount of assets submitted by the liquidity providers and is the total value locked in the DeFi staking algorithms.
TVL has reached $75.79 billion in market cap, up from $400 million in the preceding two years. With the growing popularity and value of DeFi in the cryptocurrency industry, TVL has become an important statistic for investors looking to determine whether the entire ecosystem or a single protocol is healthy and worthwhile to invest in.
TVL DEFINED
TVL is the total amount of crypto assets locked in a smart contract on a defi protocol, these are underlying conditions that are used in gauging how much adoption a project has gained from the crypto community.
TVL incorporates all coins put in each of the DeFi protocols’ available features, such as: Staking, Lending and Liquidity pool.
The TVL of a project can change for a variety of reasons, not just when users add funds or remove assets. As the dollar worth of all those assets in the cryptocurrency market fluctuates, it also changes with time. Deposits made via a DeFi protocol may be made using some or even all of its native token. The protocol’s TVL increases along with the native token’s value.
WHY IS TVL SIGNIFICANT IN DEFI?
DeFi platforms need money deposited as collateral for loans or in liquidity pools in order to run. TVL is significant because it shows how capital affects the revenue and usefulness of DeFi applications for traders and investors.
Increased TVL on a DeFi platform indicates an increase in liquidity, popularity, and usability of a DEFI project. The success of the project is influenced by these elements. A higher TVL indicates that more money is invested in DeFi protocols, and participants receive greater benefits and profits as a result. Reduced yields are the outcome of lower TVL, which suggests less money is available.
Analytics businesses’ systems like DeFi Pulse and DefiLlama, which provide information on the quantity of crypto assets locked in each smart contract, can be used to quickly determine the market share of DeFi protocols.
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