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When contemplating investing in a particular company, a serious investor always wants to know the company’s real value beforehand. There are straightforward ways of determining the company’s value in traditional finance, like multiplying stock by the unit stock price.
In Decentralized finance, good investors always want to analyze the value of a Defi project before making any decision. How can an investor know the actual value of Defi? The most popular metric used in the Defi world is determining the TVL.
What does TVL encompass? How is it determined in different Defi protocols? Are there any limitations associated with the TVL? Keep reading for answers.
Total Value Locked Explained
The term total value locked, TVL, is one that is very common in the Defi space. In actuality, TVL refers to the total value of crypto assets staked in the Decentralized finance space or an individual Defi project. It does not necessarily mean that the funds are locked but instead secured in the smart contracts in the network.
The concept of using TVL to determine the value of the Defi world was introduced by Defi pulse. Defi pulse is a platform focusing on providing analysis on the decentralized finance world. They introduced this metric as a way of helping investors get analytical information about Defi and help in decision-making.
The total TVL of the Defi world stands at $82 billion and has been rising steadily. Aave ($15 billion) is the platform with the highest total value locked, followed by Curve finance ($10.5 billion), Instadapp ($10.4 billion), Compound ($10.3 billion), and Maker ($8.8 billion)
How is The TVL Calculated in Different Defi Protocols?
The determination of the TVL often depends on the project in question. There are many types of Defi protocols: lending, staking, DEX, Derivative, Asset, and payments. Here is how to determine the TVL in the different classes of projects;
- Lending- Defi lending is the process by which Defi platforms provide loans to users based on the collateral they put in place. A user collateralizes one crypto asset and receives another crypto asset. In such platforms, you sum up the amount deposited by lenders (stake) and borrowers (collateral) to make the TVL.
- Decentralized exchange- These are platforms created to help exchange Defi assets while providing services like liquidity pools and smart contracts. The TVL, in the case of DEX, is the number of funds stored in the DEX smart contracts, including those in liquidity pools. The biggest DEX by TVL is Uniswap, followed by others like Sushiswap and Pancakeswap.
- Derivatives- These are assets that derive their value from another underlying asset, and their use in Defi has been growing very fast recently. So the TVL in the case of derivatives is the amount deposited in the smart contracts, which aids in backing the synthetic/underlying assets.
- Payment- These are tools designed to provide options for users to complete transactions efficiently and more affordably. The TVL in payment protocols is the amount that depositors put in smart contracts for payments.
- Assets- The assets, in this case, refer to the crypto coins and stablecoins tokenized in a smart contract. TVL, in this case, is the value of the assets like BTC or other assets tokenized.
Defi Lending Platforms Have Highest TVL
Although there are several different types of Defi smart contracts, lending platforms seem to perform better than all others. In the top 5 alone, lending smart contracts take four slots. Here are the Defi lending protocols with the highest TVL;
- Aave has the highest TVL in Defi, hitting $14.98 billion.
- Instadapp has the second-highest TVL of $11.47 billion.
- Compound is the third-largest lending platform and has the fourth-highest TVL of $10.07 billion.
- Maker is the fourth largest lending protocol with a TVL of $8.72 billion.
How Can Defi Investors Use TVL in Decision Making?
When considering investing in the Defi world, it’s essential to analyze the project’s activities to know the growth and popularity. Foremost, ensure you identify the type of investment you want to make, lending, DEX, etc.
After identifying the type of investment, look for platforms offering the services you need. For instance, Uniswap, Sushiswap, and several others provide DEX services. Check the TVL of each of those projects to see their popularity.
After identifying the project with a higher TVL, you must do further research to know if the project supports your needs. Therefore, although TVL will help you know if the project is popular and trusted, you must consider other aspects of the platform.
Furthermore, if you notice that the TVL is increasing, that could mean that more and more people are investing in the project; thus, the trust is rising.
The TVL as a metric for the determination of value and growth of Defi has one major limitation; it only focuses on the price aspect of the assets. This happens as follows;
- The Defi project has 10 BTC, worth a total of $460k by the current prevailing prices.
- There are no deposits to the projects in a given period; however, the value of BTC increases from $46k to $48k.
- The TVL automatically increases to $480k.
- An investor could think that people are depositing in the platform while there were no deposits in the period. Instead, the value of individual assets increased. Therefore, TVL does not consider other factors; it only considers the price of the asset.
However, Dappradar introduced its way of adjusting the TVL, called adjusted TVL. This new metric removes the price factor as such, providing a more accurate TVL. The Dappradar metric cancels out the price impact by working the fixed prices of a given 30 day or 90-day window.
They fix the price at the start of the window, recalculate TVL going forward with the prices. By doing that, you can see the real assets moving in and out without factoring price effect. This metric can help have an almost clear picture of the Defi project.
Final Words – Total Value Locked in Cryptocurrencies
The total value locked in a Defi project has for some time been an excellent metric to calculate the value of Defi. It involves checking the actual value of assets in the Defi project. Every Defi protocol has its way of calculating the TVL. However, the main thing is checking the actual value of the assets deposited in a smart contract to know the value of Defi.
TVL has a limitation in that it focuses more on the price aspect of the asset than the number of assets. Adjusted TVL can help in such cases to know if the Defi project is growing. All in all, TVL is a good metric for Defi investors to use.