Total Value Locked (TVL) is the total amount of crypto that have been deposited in a DeFi ecosystem. The value is necessary for analyzing the interest in a crypto platform over the years. Usually, this covers every coin that has been deposited into different features that are available in a platform like lending, staking, yield farming, and so on.
It is important to note that Total Value Locked does not encompass the rewards that will be earned from making these deposits but cover the current value of the deposits themselves solely.
TVL linked to a protocol may change for different reasons, such as the level of deposits or withdrawals made. Secondly, it could be based on the changing dollar value of the assets deposited in a protocol.
Investors use this as an essential metric to determine if the current value of a token is the real value. Sometimes, the native token of a decentralized finance protocol may be overvalued or undervalued, and investors may need this to determine the appropriate value.
Why Should You Look At Total Value Locked Before Investing
Total Value Locked discloses the level of health that a DeFi protocol has and if it is worth using or buying its native tokens. Usually, it encompasses the spot value of every asset that is being staked in a platform and denominated in USD. The assets that have been staked in a DeFi platform maybe those staked to earn an interest rate. This may take the form of a savings account.
Also higher Total Value Locked means that there is sufficient liquidity which gives you the freedom to hold the assets without worrying whether you could be able to sell them in future.
Why People Lock Money into Protocols
People lock their money into various protocols to gain some extra income. However there are other reasons too for locking their money.
- The First is to earn a passive income from DeFi protocols or liquidity pools.
- Secondly, it could be deposited as collateral for loans on lending protocols.
- Thirdly, it could be deposited in a platform as collateral for a futures contract.
- Fourthly, it could be deposited in the liquidity pools by Automated Market Makers.