What is TVL in Defi? How to Calculate it?

Total Value Locked (TVL) is a crucial metric in decentralised finance (DeFi) that measures the total value of crypto assets staked or locked within a DeFi protocol. This metric provides valuable insights into the health and activity of DeFi protocols.

This article will cover what is TVL, how to calculate it, and why it matters to investors.

Understanding Total Value Locked (TVL)

TVL represents the total value of all assets locked in a DeFi protocol, such as tokens staked in liquidity pools or deposited in lending markets. The metric is typically measured in US dollars or in crypto asset quantity.

A higher TVL indicates more confidence in the DeFi ecosystem and potential for growth. It also provides a way to measure the size of the DeFi ecosystem, the level of activity in the space, and the total value at risk. This serves as a trust indicator of investor interest.

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How to Calculate TVL?

To measure TVL in a DeFi protocol, you need to consider the combined value of all locked assets, including:

Assets that are staked or loaned
The maximum circulating supply of the DeFi protocol
The current price of the DeFi protocol

You can calculate the TVL of a protocol by multiplying the total number of tokens staked in the protocol by the current value of each token in USD.

You can calculate this via DeFiLlama, DeBank, DeFi Pulse, and others.

Example of TVL Calculation

Consider a hypothetical DeFi protocol where users have staked 10,000 tokens, each valued at $100. You can calculate the TVL of this protocol as follows:

TVL = Total number of tokens staked * Current value of each token in USD

TVL = 10,000 tokens * $100 = $1,000,000

This example demonstrates how you can calculate the TVL of a DeFi protocol based on the total number of tokens staked and their current market value.

Why TVL Matters For Investors and Traders?

Risk Assessment: TVL provides investors with a measure of the total value at stake in a DeFi protocol, helping them assess the potential risks associated with investing in a particular platform. A higher TVL may indicate a more established and safer protocol, while a lower TVL may signify a riskier investment.
Protocol Growth: Investors can use TVL to indicate the growth and adoption of a DeFi protocol. A consistently rising TVL may signal positive growth and attract more users, potentially increasing investors’ value.
Market Sentiment: TVL can reflect the overall market sentiment towards a specific DeFi protocol. A growing TVL may indicate increasing confidence and interest from the broader market, influencing investment decisions.
Trading Volume: TVL can impact trading volume in DeFi protocols. A higher TVL often correlates with increased trading activity, providing traders opportunities for increased liquidity and potential trading profits.

Conclusion

Total Value Locked in DeFi is a critical metric that offers valuable insights for investors and traders. It measures the total value at stake in DeFi protocols and offers a gauge of market sentiment.

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