What Is Total Value Locked (TVL)?
The cryptocurrency investment world is complicated, filled with terms like DeFi, NFT, and futures, just to name a few. So what is TVL, and should you consider it if you are looking to invest in cryptocurrency?
TVL stands for total value locked and is one way for professionals to gauge the value of a cryptocurrency project. If you are looking to invest in DeFi projects, you should definitely consider it when making your investment decisions. Read on to learn everything you need to know about Total Value Locked or TVL.
What Does TVL Indicate?
TVL indicates the total underlying value in any particular asset. Think of it this way: when you apply to rent an apartment, they often ask for pay stubs proving your solvency, or ability to rent the apartment. TVL works in a similar way, but because many DeFi projects don’t have income in their early stages, professionals have to look at something else to gauge their solvency.
TVL is the sum of all of the assets locked within a blockchain. While this can often be cash, it can also be other assets, such as technology, hardware, like servers, and more. In general, TVL is a roundabout way of valuing a blockchain.
How is TVL Measured?
TVL is typically measured in currency, with any non-currency assets being valued prior to their addition to the balance sheet. In general, TVL is presented in USD, though EUR and GBP are becoming increasingly popular as the blockchain technology world continues to expand.
What All Counts Toward TVL?
As we mentioned above, TVL is generally accepted as the measurement of any and all assets in a blockchain. That being said, what is included in a TVL measurement can vary widely from DeFi project to DeFi project. Here is a list of everything that may (and can) be considered part of a blockchain’s TVL:
· Tokens locked in staking
· Tokens in liquidity pools
· Hardware servers or nodes
· Technological algorithms created for/belonging to the blockchain
· Yield farming activities
· Tokens currently locked in protocol
· Funds currently being lent to individuals via DeFi protocols
Sky is the limit when it comes to measurements of TVL, so don’t allow yourself to be restricted by this list. If you have questions about the TVL of your blockchain, it might be a good idea to ask for a valuation by an industry professional.
How is TVL Calculated?
TVL of tokens is calculated by taking the number of tokens locked up in protocols and the platform and multiplying it by the current price per token. Hardware asset TVL is calculated by taking the purchase price of each piece of equipment and subtracting the maximum devaluation per year it has been owned. For yield farming activities, a general snapshot is taken of the yield at that time, and compared against the last few months. The average yield farm percentage over the course of several months is what is considered for the TVL valuation.
Why is TVL Important?
TVL is important in cryptocurrency because, although it’s been almost two decades since the inception of cryptocurrency, it is still, technically speaking, in its infancy. This means that there are still many new investors, as well as individuals who want to invest but don’t understand the industry, and thus they need a way to gauge the solvency of a project in layman’s terms.
Not only that, but TVL can be a great way for non-investors to track the growth of a company, including those who are in marketing, in charge of growth, or future expansion. TVL is also a way they can compare their blockchain to others, ensuring they are a truly competitive product in the industry.
What is a Good TVL?
As you can imagine, because TVL is an indicator of value, higher value is better, and there is no simpler way to explain it than that. Of course, if you are an angel investor considering a DeFi project for more than a simple investment (such as a regular donor), then TVL is not enough to gauge the solvency of a product, because too much equity locked up is also bad for a new blockchain.
But if you are a simpler investor wondering which DeFi project is the best choice to add to your portfolio, then bigger TVL is better.
What is the Difference Between TVL and Market Capacity (Market Cap)?
Market capacity is the measure of the value of a projects token, and their token alone. It is calculated by taking the total number of tokens currently created and multiplying it by the current token value.
TVL, on the other hand, considers other monetary aspects of a blockchain in its valuation. In simpler terms, market capacity, or market cap, is a calculation of the value of a platform's token only, while TVL is more of an evaluation of the platform as a whole.
What Factors Influence TVL?
TVL is influenced by many of the same factors as market capacity, such as the economy and market conditions. However, only TVL is impacted by yield opportunities, protocol features, and token incentives—all things which generally are associated with unrealized tokens.
Can TVL Be Misleading?
Unfortunately, the TVL of a platform can be misleading, as some of the calculations, by nature, can double-count certain aspects of a token. For example, stablecoins can be counted once as assets, and again in the yield farming or liquidity protocol they are currently locked up in.
While there are ways to prevent this, we still recommend caution when you are gauging a potential investment based on TVL alone. We recommend gauging other factors, such as market capacity, future expansion plans, and security plans as well.
Overall, TVL is one way to gauge the value of a DeFi platform you may be unfamiliar with and can help give you an idea as to whether or not you should invest. But, like anything else in this world, it cannot be relied on alone, and should be considered alongside other factors before putting any of your hard-earned money on the line.
