What is Total Value Locked and its Importance in Crypto?

TVL is a common DeFi protocol or network health gauge.
The use of TVL is increasing year by year.

Total Value Locked (TVL) is a crucial measure used by dealers to evaluate a system’s potential and power in the cryptocurrency world, particularly in the decentralized finance (DeFi) sector.

What is Total Value Locked (TVL)?

TVL is a type of investment tracker introduced to the financial market with the rise of Decentralized Finance (DeFi) and its growth in 2020. Since then, a lot of cryptocurrencies have been riding the market’s roller-coaster during that tumultuous time when crypto assets started moving away from DeFi.

The value of cryptocurrency assets kept within each smart contract on a DeFi network is referred to as the “Total Value Locked.”

The return that these investments are anticipated to make is important. It merely refers to the assets’ actual present worth. The TVL of a project can also alter as a result of customer withdrawals or new contributions.

Importance of TVL for investors

Along with the shifting monetary worth of all those commodities in the bitcoin market, it is continuously altering. Investors can use TVL to determine the fair worth of a DeFi project’s native currency.

Depending on the project’s TVL, the token’s market value may be large or low. The coin may appear overpriced or discounted depending on how significant the connection is.

A healthy DeFi protocol can be identified by a strong Total Value Locked. A DeFi network has earned the confidence of users who are ready to transfer their cryptocurrency funds with them when it has a greater TVL.

Increased liquidity results from more money being accessible as a source of greater liquidity, which increases the platform’s appeal and usability for buyers.

Growth of TVL

Decentralized finance platforms performed well in 2021 alongside posted impressive numbers in the crypto sector and drew sizable capital inflows. DeFi sector in 2022, though, as a result of the current crypto winter. The total TVL of the DeFi market fell by 68.3%, from $303.8 billion in December 2021 to a low of $96.3 billion in September 2022.

With a 1,200% increase in 2021, TVL in the DeFi sector grew remarkably, with Ethereum accounting for 62% value locked. The DeFi business saw the most considerable increase between 2020 and 2021. The total TVL in the sector was $400 million in early 2020.

Risks Associated with TVL

Investors use the crucial measure of total value locked to assess the viability of DeFi and cryptocurrency initiatives. However, one must keep in mind that TVL may not always be correct, and as a trader, one must conduct his/her own study before engaging in a cryptocurrency project.

Furthermore, when assessing a DeFi protocol’s TVL, it’s crucial to take into account its risk profile. DeFi networks are still in their infancy and may contain smart contract errors or other flaws that could lead to the loss of user funds. As a result, it’s important to conduct thorough research and risk analysis before engaging in a DeFi protocol.