What is total value locked (TVL)?
Before we jump into the total value locked definition, we need to brush up on the basics of cryptocurrency and decentralised finance.
Decentralised finance (DeFi) eliminates intermediaries by allowing people, merchants and businesses to conduct financial transactions with one another directly. DeFi gets rid of the third parties that are involved in traditional financial transactions, and total value locked plays a huge role in it.
The total value locked meaning in DeFi is a reference point that represents the number of assets that are currently being staked in a specific protocol. These assets can include rewards, interest, new coins and tokens, fixed income and more.
Total value locked explained
TVL can be explained as the sum of specific cryptocurrencies used for financial activities, such as ether or bitcoin. However, total value locked (TVL) should not be confused with the number of outstanding loans: rather, it is the total amount of underlying supply that is being secured by DeFi.
Total value is therefore a metric that is used to measure the overall health of the DeFi and its yielding market. As blockchain is developed on peer-to-peer networks, there is no central authority to govern, build, or improve its ecosystem. Hence the TVL metric is an important gauge of the overall DeFi market.
How to calculate total lock value
Now that we have an understanding of what total value locked means, let’s learn how to calculate TVL.
The total value locked in DeFi can be calculated by taking three main factors into consideration: supply, maximum supply and the current price. TVL includes all the coins deposited in all of the functions that DeFi protocols offer, including staking, lending and liquidity pools.
Let’s say that Claire deposits $1,000 worth of cryptocurrency into a money pool to validate transactions connecting her wallet to a DeFi platform on its native blockchain and receive rewards. To put it more simply, Claire is staking.
She then lends out an additional $1,000 in cryptocurrency for interest on the same platform, and later deposits $1,000 worth of coins in a money pool. This will provide trading liquidity for swapping between obscure altcoins, and allow her to earn trading commissions.
Now, hypothetically, let’s assume that this is the only business that the DeFi platform is getting. Then its TVL would be $3,000.
To calculate the current market cap, you need to multiply the circulating supply by the current price, and to find the TVL ratio, you need to divide that market cap number by the TVL of the service. Theoretically, the higher the TVL ratio is, the lower the value of an asset needs to be. If the TVL ratio is below one, the asset is most likely undervalued.
Currently, the largest network by DeFi TVL is Ethereum, accounting for almost half of the total volume worldwide. According to DeFi Pulse, DeFi TVL rankings put maker (MKR) coin at the top as of May 2022, followed by multichain platform aave (AAVE) and Ethereum-based curve finance (CRV).