What is Total Value Locked and its importance in Crypto?
- TVL is a common DeFi protocol or network health meter.
- The use of TVL increases year by year.
Total Value Locked (TVL) is a crucial metric used by traders to evaluate a system’s potential and power in the cryptocurrency world, especially in the decentralized finance (DeFi) sector.
What is Total Value Locked (TVL)?
TVL is a type of investment tracker that was introduced to the financial market with the rise of Decentralized Finance (DeFi) and its growth in 2020. Since then, many cryptocurrencies have ridden the market’s roller-coaster ride during the tumultuous time when crypto-assets started moving away from DeFi.
The value of cryptocurrency assets held within each smart contract on a DeFi network is referred to as “Total Value Locked.”
The return that these investments are expected to provide is important. It only refers to the actual present value of the assets. TVL for a project can also change as a result of customer withdrawals or new contributions.
The importance of TVL for investors
Along with the changing monetary value of all these items in the bitcoin market, it is constantly changing. Investors can use TVL to determine the fair value of a DeFi project’s native currency.
Depending on the project’s TVL, the token’s market value can be high or low. The coin may appear overpriced or discounted depending on how significant the connection is.
A healthy DeFi protocol can be identified with a strong Total Value Locked. A DeFi network has gained the trust of users who are ready to transfer their cryptocurrency funds with them when it has a larger TVL.
Increased liquidity is due to more money being available as a source of greater liquidity, which increases the platform’s appeal and ease of use for buyers.
Growth of TVL
Decentralized financial platforms performed well in 2021 alongside impressive numbers in the crypto sector and attracted significant capital inflows. The DeFi sector in 2022, though, as a result of the current crypto winter. Total TVL for the DeFi market fell by 68.3%, from $303.8 billion in December 2021 to a low of $96.3 billion in September 2022.
With a 1,200% increase in 2021, TVL in the DeFi sector grew remarkably, with Ethereum accounting for 62% value lock. The DeFi business saw the biggest increase between 2020 and 2021. The total TVL in the sector was $400 million in early 2020.
Risks associated with TVL
Investors use the crucial measure of total value locked to assess the viability of DeFi and cryptocurrency initiatives. However, one must bear in mind that TVL may not always be correct, and as a trader one must carry out their own study before engaging in a cryptocurrency project.
Furthermore, when considering a DeFi protocol’s TVL, it is crucial to consider its risk profile. DeFi networks are still in their infancy and may contain smart contract bugs or other errors that could lead to the loss of user funds. As a result, it is important to conduct thorough research and risk analysis before engaging in a DeFi protocol.
