When you buy a car, it’s not just the price tag that matters. You need to pay attention to your total value locked (TVL). The TVL is the amount of money you’ll spend on interest, fees, and other expenses related to buying your new car.
If you plan on financing your vehicle purchase, you need to understand TVL to stay aware of the situation. A similar concept exists in decentralized finance (DeFi).
What is TVL?
The total value locked (TVL) metric refers to the amount of money locked into a DeFi protocol. It represents an important principle: when people lock their assets into a protocol, they commit not just their money but also their trust.
In other words, it’s not just about how many coins are currently held by investors—it’s also about how much they’re willing to invest in future growth.
Total Value Locked is different from market cap. It does reflect some of the same information. Namely, what traders think will happen with a given asset in terms of price appreciation or depreciation over time.
Why does TVL matter?
TVL is an essential investor metric, representing the total value locked up in a DeFi protocol. So if you’re an investor who wants to know how much liquidity you can unlock from a given protocol, TVL is the number you want to look at.
The term “total value locked” may sound like a mouthful, but it’s not too hard to understand if we break it down into its two constituent parts: “total” and “value.”
Let’s take a look at what exactly we mean by “total” because there are several different interpretations of this word that could be relevant here. One possibility would be that we’re referring simply to the combined amount of ETH stored as collateral within all contracts on this particular protocol.
That would make sense since TVL indicates liquidity within that system. Another possibility would be that we’re summing over all users across all contracts (i.e., adding up everyone’s holdings).
How to calculate TVL?
To calculate Total Value Locked:
- Take the total value locked in a DeFi protocol and divide it by the total circulating supply of that protocol.
- That gives you a dollar value of how much is locked up in this protocol as a percentage of its circulating supply.
- The resulting number is expressed in USD and represents an average price per unit of liquidity.
TVL is a valuable metric for measuring the value of a company. It’s an important indicator because it helps investors understand whether their shares are worth more or less than they initially paid.
Total Value Locked also gives investors insight into what is happening with their investments over time and how much money they are losing or gaining on their investments.
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