As decentralized applications (dapps) keep on changing the money world in a positive way, one measurement has become a distinctive indicator of the sector’s health and growth. It is named Total Value Locked (TVL). TVL has now turned to be an indispensable metric for gauging the dimension and taking up of dapp platforms, if either you focus on investor trust, popularity of the protocol, or the overall force of the blockchain ecosystem behind it. The question is what it really measures, and why is it so crucial
What is Total Value Locked (TVL)?
TVL in the dapp universe is already among the best measures to find out the amount of money that is going across a protocol.
The Total Value Locked (TVL) is the total worth of the entire crypto assets that the users have deposited into a dapp. These assets can either generate incomes, serve as a collateral for loans, or facilitate trading in a better way.
Your completely free resource hub designed to boost your knowledge of cryptocurrencies
Now, let’s explain it in a more straightforward way: A group of people is contributing money into a common online vault that earns them rewards. Suppose you deposit $1,000 and, in addition, ten more people do the same thing; the vault will then have $11,000. The TVL of the protocol is that sum of $11,000. The TVL increases when more funds are placed into the vault, which is an indicator that the protocol is more active and trustworthy.
Why is TVL important?
TLV is a universal term and works on numerous platforms. When the investors sum up the TVLs of applications on the blockchains such as Ethereum or Solana, they will easily determine the strength of each app as well as the whole network’s activity and popularity.
In general, TVL data comes from the sources such as CoinGecko, DeFiLlama, and DappRadar. These platforms are observing the actions within the blockchain to determine the amount of money that is being used in decentralized applications like ShibaSwap, Aave, Uniswap, and so on. Additionally, they keep updating the data very frequently so that the investors and readers can easily identify the projects that are gaining or losing their value. This situation basically gives the investor a chance to make better decisions.
One thing that should be taken into consideration is that the TVL can decrease or increase in case there is no money being put in or taken out. The value of the TVL is measured in dollars and is subject to change according to the values of the tokens that are stored on the platform.
For example, if a DeFi application holds a significant amount of ETH and at the same time, the value of ETH drops, the TVL will also reflect a decrease even though the amount of ETH is unchanged. It is important to notice that TVL is not only a function of user’s actions but also a function of market price changes.
Although TVL does not provide the complete picture, it still indicates how much crypto is being utilized, and trusted, and what the levels of investments are in dapp platforms. In a fast-paced changing industry such info bears the greatest significance.
How TVL can assist you in your investment decisions
Overall, TVL (Total Value Locked) is an excellent tool for investors that helps them to get an insight into the dapp industry. It quantifies the money locked in a certain protocol, thus making it easier to judge the market activity and trustworthiness of the protocol. When
the TVL is high, it implies that a large number of users are active on the platform, so it is indeed a good sign that they are interested in the project and the project is pretty trustworthy.
Besides TVL, there are other metrics that investors must also consider. The market cap divided by TVL (market cap/TVL) is an interesting ratio that investors may want to look at. It allows them to be in a position to determine whether or not a coin that is associated with a system is fairly priced. A huge discrepancy between the market cap and the TVL means that the coin might be overpriced or that it is heavily speculative. On the other hand, if the ratio is close to 1 or below, it might means that the coin is less valuable or not riskier at all. By taking into account both the TVL and the market cap/TVL ratio, you would be able to get a clearer perspective on the project’s stability and if it is worth investing in.
Does every cryptocurrency have a TVL?
Yet, not each and every cryptocurrency has a TVL. The worth of a dapp project can be ascertained through TVL and user trust can also be measured. Meme currencies like Dogecoin, Shiba Inu, and Pepe usually do not have one. The reason for this is that people do not keep money in smart contracts with these coins as they are not for lending, staking, or trading platforms. Therefore, their TVL is either zero or undisclosed. Rather, a different approach is employed by investors for meme currencies. A significant market cap (coin price × number of coins) is common, but it does not guarantee that the coin will be more valuable in the long run.
Analysts also value the number of people that are trading, the size of the community, and their activity on social media as well as how active they are. Even if the coin isn’t really useful, hype might make values go up. That’s why investors consider meme coins as a short-term play or online trend rather than a financial instrument that is not to be taken seriously.
The tools of TVL and the market cap/TVL ratio can aid the investors in making sound judgments as dapps get more popular. Nevertheless, these are not the only considerations. It is also vital to have knowledge of who is behind the project, what the platform is, the strength of the community and their future plans. The cryptocurrency landscape is constantly changing, so it is advisable to do your own research. What other signals do you think people should look for before investing in a cryptocurrency? Share with us in the comments, and we will try our best to elaborate on them in our next article.
