What is the total value locked (TVL) and why is it significant in Defi?
Financial industry professionals have adjusted to a new sort of investing since decentralized finance (DeFi) took off in 2020 and have looked at ways to gauge its performance.
Total value locked (TVL) is a crypto indicator that is well-liked by DeFi investors to evaluate the overall value of assets — in US dollars or any fiat currency — deposited across all DeFi protocols or in a single DeFi project, aside from market capitalization, trading volume, and total and circulating supply.
DeFi assets are income from incentives and interest from common services like lending, staking, and liquidity pools that are offered through smart contracts. For investors wishing to support the DeFi platforms with the biggest payouts, TVL in staking, for instance, is a very helpful indicator. It indicates the number of assets that the liquidity providers have deposited and is the total value that has been locked in the DeFi staking procedures.
TVL increased from $400 million in the preceding two years to approximately $2 billion in the global market in 2022. TVL has developed into a crucial metric for investors who want to determine whether the entire ecosystem or a specific protocol is strong and deserving of their investment dollars as a result of DeFi’s rising popularity and value in the cryptocurrency industry.
There are underlying factors that could influence the value of DeFi projects, even though TVL is merely the sum of money locked in a smart contract.
A protocol’s actual holdings, withdrawals, and other factors are just a few of the factors that agree with TVL’s value. The value of the native token or fiat currency affects the TVL as well. Some protocols’ deposits might be made in the native token of the project, hence the protocol’s TVL varies with that token’s value. The protocol’s TVL also increases as the value of a particular token does.
DeFi platforms need money deposited as loan collateral or liquidity in trading pools to run. TVL is significant because it shows how capital affects the revenue and usefulness of DeFi applications for traders and investors.
Rising TVL on a DeFi platform is accompanied by rising liquidity, popularity, and usability. The success of the project is influenced by these elements. A higher TVL indicates that more money is invested in DeFi protocols, and participants receive greater benefits and profits as a result. Reduced yields are the outcome of lower TVL, which suggests less money is available.
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