What Is TVL in Crypto and How to Calculate It

So, you want to know what TVL in crypto is, but you don’t know where to start.

We created a beginner-friendly guide that explains blockchain TVL and how it’s calculated. You’ll also learn what a good TVL ratio is and how this metric differs from the market cap. We’ll end this guide by explaining the role of the total value locked metrics in DeFi projects.

What Is Total Value Locked (TVL)?

The TVL definition can be formulated as a metric used to calculate the total value of cryptocurrencies locked in a particular DeFi platform or dApp. TVL indicates liquidity, user engagement, and the overall state of the DeFi ecosystem.

This metric helps investors assess the benefits and risks associated with investing in DeFi platforms. The more locked tokens a particular platform has, the more secure it will be. In simple terms, TVL represents the number of locked tokens that are currently staked within a specific DeFi project. Its primary use is to determine whether a certain DeFi asset is undervalued or overvalued.

TVL will often fluctuate since its amount depends on the value of its underlying asset. Moreover, some DeFi projects denominate their deposits in their native tokens.

How TVL Is Calculated

The DeFi TVL can be calculated as follows:

First, add up the total value of cryptocurrencies or stablecoins locked on a certain DeFi platform or dApp. Then, multiply these cryptocurrencies by their current market price. For example, if 2,000 tokens are locked in a specific DeFi project, and their current price is $50, their TVL will amount to $100,000.

For example, the ETH TVL currently amounts to $47.2 billion, the SOL TVL stands at $4.97 billion, and the Base TVL amounts to $1.5 billion.

Keep in mind that this figure will change often since the crypto market is very volatile. Moreover, the height of the TVL will also depend on users’ interactions, such as the frequency of their deposits and withdrawals.

TVL is usually calculated by third parties, who use web scraping to collect the necessary data.

What Is a Good TVL Ratio?

The TVL ratio can be calculated by dividing the platform’s market cap by its TVL. If the ratio is greater than 1, the asset is overvalued; if it’s less than 1, the asset is undervalued.

For example, if the market cap of a DeFi platform is $10 million and its TVL is $50 million, its TVL ratio will be 0.2. This means that this project is undervalued — its value could increase, which makes it a good investment.

On the other hand, if the DeFi platform has a market cap of $10 million and a TVL of $5 million, its TVL ratio will be 2, so it’s clear the platform is overvalued.

With that in mind, a good TVL ratio should be as close to zero as possible.

Is TVL the Same as Market Cap?

Now that you know what TVL in crypto is and how to calculate it, here’s how this metric differs from market capitalization.

Crypto or stablecoin TVL is a term that describes the total value of digital assets locked within a specific DeFi project or dApp. Market capitalization is a term that represents the value of a certain digital currency on the crypto market.

While both metrics indicate the market value of crypto projects, their focus is different. A market cap represents a company’s value based on its native token, while TVL represents its value based on its locked assets.

Market cap is usually used to evaluate a crypto project’s performance, while TVL is used to understand its usage and effectiveness.

Importance of TVL in DeFi

TVL will help investors determine whether a certain DeFi project is worth their time and investment. A higher TVL equals higher security and engagement and vice versa. When the TVL of the DeFi platform grows, so will its popularity and liquidity.

TVL is also used as a trust indicator that will show whether investors believe in the vision of DeFi projects and how much they are ready to invest in them. In addition, a high TVL will attract more investors, increasing the value of the DeFi project in question.

And finally, TVL is used as a risk indicator. A DeFi project with a high TVL will be a safer investment. A low TVL suggests that the DeFi platform is still untested or less established. However, TVL is not the only metric used to assess DeFi projects since it’s prone to frequent fluctuations.

Limitations of TVL as a Metric

Although TVL is an important metric that’s used to evaluate DeFi projects, it also comes with certain limitations. TVL will only provide insight into the total value of locked assets — it won’t show how active the platform is. For example, a certain platform may have a high TVL; however, its user-activity levels may be low. This is always a red flag.

Moreover, DeFi developers can deliberately increase their TVL to attract attention to their projects. This is why it’s vital to check their reputation before investing. As mentioned before, TVLs tend to fluctuate as they depend on various external factors, from investor sentiment to market conditions. This means that this metric will not always accurately determine whether a certain DeFi project is undervalued or overvalued.

This is why DeFi platforms frequently update their TVL data.

Conclusion

What is TVL in crypto? TVL is an abbreviation for total value locked, a metric that shows the total number of locked cryptocurrencies within a certain DeFi platform or dApp. This metric shows how popular a particular DeFi project is. TVL is measured by adding the total value of locked assets to their current market price.

TVL will also determine whether DeFi platforms are overvalued or undervalued. If the TVL ratio exceeds 1, the project is overvalued, and vice versa. TVL will often fluctuate as it will be influenced by investor sentiment and market conditions.

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