What Does TVL Stand For In Crypto?

When we build crypto dApps, TVL is a metric our users will automatically look into. This is an overview of what TVL stands for and more about TVL in crypto in general - a basic overview for beginners.

What Does TVL Mean?

When we talk about crypto, TVL stands for Total Value Locked. TVL is a metric that crypto participants use to measure the total value of assets currently locked in a DeFi protocol.

TVL helps average users gain insights into the overall adoption and popularity of a DeFi protocol. The logic is that more money flowing into the protocol = more people interested in and using the product.

DeFi protocols work by allowing users to lock digital assets into smart contracts to execute various financial activities, including borrowing, lending, farming rewards, and trading on exchanges.

TVL is calculated by adding up the current value of all assets locked in a protocol. You can look at TVL in terms of USD value or in terms of the number of tokens locked in the protocol.

Projects that can attract large amounts of TVL will find it easier to grow their protocols. DeFi protocols can use their current TVL as leverage to demonstrate growth and attract potential investors with more money to add to the protocol. Regular users see increases in TVL as a sign of confidence which inspires a network effect of new people signing up. TVL accumulation is a common metric people in crypto look for when looking at new projects.

At the same time, TVL isn't an end all be all. TVL can fluctuate drastically within a regular day. Anytime a person decides to withdraw their money from the protocol, the TVL will change. TVL also doesn't tell you anything about the sustainability of the project or the quality of the assets in the protocol. TVL is a small piece of the puzzle you can use when assessing DeFi protocols.

There are a lot of DeFi protocols that generate income by charging fees or earning interest on the assets locked inside the protocol. With this model, the higher the TVL goes, the more money the protocol can generate. It's important to ensure the revenue model is run in a safe way to ensure it doesn't implode on itself. If you're being paid to lock money into a protocol, ask yourself where the revenue is coming from.

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If you see two projects working toward the same goal, TVL can act as a useful metric to determine which project has more momentum. Projects with higher TVL indicate that they offer a better user interface, more attractive features, or more lucrative opportunities for their users. TVL can be useful in determining which Liquid Staking Providers will capture the most market share. Even though LIDO is currently in the lead, the other competitors are fighting for a highly valuable second place.

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What is the market capitalization to TVL ratio?

Another way to use TVL in your analysis is to consider the market capitalization to TVL ratio. By Dividing the TVL of a project by its current market cap, you can get the market cap to TVL ratio.

When the ratio is higher than 1, it implies that the value of the assets locked in the project is higher than its current market capitalization. This is something you'll see when you're early to projects that have gained traction within crypto communities, but the tokens haven't appreciated in price yet. A market cap to TVL ratio higher than 1 implies that the project is undervalued

When the ratio is less than 1, it infers that the value of assets locked in the project is lower than its current market capitalization. This implies that the project is currently overvalued. When a project has a token that appreciates significantly in price, people will begin to withdraw and turn their gains into stablecoins. Projects with a TVL to market cap ratio of less than 1 imply a significant loss of momentum or a catalyst to cause people to withdraw their funds from the protocol. With a ratio less than 1, it implies the project is overvalued.

This is dubious logic. TVL is a small piece of crypto analysis. Many factors can cause TVL to fluctuate. TVL may not even be important for a crypto protocol to succeed. Looking at TVL is a small piece of the puzzle you can use to understand a crypto protocol on a deeper level. By understanding these concepts, you'll find it easier to find undervalued projects.