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Understanding the technical terms and jargon holds a big place in the successful functioning of an individual in their respective areas. We cannot properly engage in that arena without knowing the basic terminologies of it. The cryptocurrency ecosystem has so many difficult terminologies and jargon. Understanding them might be a complex task, but you may not be able to perform well and reap rewards if you don’t know the basic terms of it.
Total Value Locked(TVL) is an important term in the cryptocurrency and decentralized finance(DeFi) arena. If we define it simply, Total Value Locked is a metric that is used to measure the total value of digital assets locked in a decentralized finance protocol or platform. We will be looking at the concept of TVL comprehensively in the following segments.
Total Value Locked (TVL) – an understanding
Total Value Locked(TVL) is an important metric in both the cryptocurrency ecosystem and decentralized finance (DeFi). This is one of the important factors that can affect investor interest, platform security, network activity, and investment decisions of a cryptocurrency project or network. Total Value Locked indicates the total number of digital assets that are being staked in a certain network or DeFi protocol.
This metric can indicate the total amount of assets locked in a platform and its user engagement. Apart from these two, TVL can show the liquidity and overall capability or health of the platform. The Total Value Locked(TVL) is calculated by summing up the value of all assets locked in a particular decentralized platform. Cryptocurrencies, toke4ns, and stablecoins are classified under the title of digital assets in the DeFi network.
How to calculate the TVL of a platform?
Finding out the total amount of assets locked in a particular asset is the value of the total value locked. You need to consider all the assets in the platform to calculate the TVL. All the assets like locked assets, staked assets, borrowed assets, and collateral need to be considered while calculating the TVL.
After taking the details of assets, you need to convert the asset value into a standard measurable unit. The value can be either converted into USD or any other fiat currency. After converting the value, find out the total sum of all assets to measure the total value locked. Then you can assess the value and able to reach appropriate conclusions based on it.
TVL’s role as an indicator
TVL is an indicator in the decentralized finance. It can indicate so many components in a network. People who have a comprehensive knowledge of TVL can tell many things if we analyze its value. A higher TVL indicates one thing and a lower TVL indicates another. Generally, a higher TVL means that the network has higher popularity and user engagement.
Networks with higher TVL would be the most preferred decentralized network in the community. More people and investors will be ready to make investments based on the higher TVL. By coming more and more investments, the network become popular and a safe place to invest. Higher TVL brings trust to the network and becomes one of the most prominent ones in the sphere.
Lower TVL could indicate a lack of trust and decreased user engagement of the platform. It could lead to concerns related to the viability of the platform and investor attraction. Platforms with lower TVL will have fewer investors compared to the platforms with higher TVL. The security of the network can be determined by the user activity. Investors may think like this, If so many users are not ready to rely on a particular platform, then it must be not secure and unreliable, so a platform with lower TVL might face a hard time in sustaining in the sphere.
What is the TVL Ratio?
The total value locked ratio is an associated term with TVL, and it is too used to determine the value of the project and platform. TVL ratio is a metric that is used to assess whether the project is undervalued or overvalued. Investors can find out the verdict and significance of the project by analyzing its TVL ratio. To find out the TVL ratio, you need to be familiar with another term in the cryptocurrency ecosystem.
Understanding the concept of market capitalization is an inevitable process in finding out the TVL ratio. Capitalization is the common metric that is used to determine the total value of the cryptocurrency. We will get the market capitalization of a particular cryptocurrency by multiplying the total circulating supply of the coin and its current market price.
To find out the TVL ratio, you need to use this formula.
TVL Ratio = Market Capitalization / TVL
The lower TVL ratio shows that the project is undervalued and has a chance for potential growth. A higher TVL ratio means that the project is overvalued and this could show the potential market saturation or an inflated valuation.
The Bottom Line
The cryptocurrency ecosystem consists of numerous terminologies and studying the terms properly is the best possible thing we can do when we enter into the arena of cryptocurrency. This article is to show you the path to the cryptocurrency ecosystem by equipping you with basic knowledge.
Total Value Locked(TVL) is the central concept of this article, it is an important component of the cryptocurrency system, and those who are interested in investing in crypto projects need to evaluate the TVL before making any decisions regarding the investment. Combine all the factors with TVL to make the investment decision.
