Total Value Locked as an Indicator of Cryptocurrency Value
“If you have dealt with the DeFi space, you might have come across the term TVL or Total Value Locked. It actually represents the number of assets that are currently being staked in a public protocol. The TVL can be used as an indicator to determine whether the cryptocurrency is overvalued or undervalued”.
Total Value Locked: Basics
If you have dealt with the DeFi Space you might have encountered the term TVL as a reference point. This TVL or Total Value Locked in the context of cryptocurrency represents the sum of all assets deposited in decentralized finance (DeFi) protocols earning rewards, interest, new coins and tokens, fixed income, etc. The total value locked depicts the total amount of underlying supply that is being secured by a specific application by DeFi completely.
How is TVL Calculated?
Total Value Locked is nothing but the total amount of tokens that have been locked on a DeFi protocol platform. These tokens can be locked by staking in order to receive staking rewards, by lending for interest and by providing liquidity for swaps on a protocol. In Short it is the sum of all the amount of tokens invested and locked on a DeFi platform.
Benefits of Using TVL
To Determine Value of an Asset
The Market cap to TVL ratio is a ratio that is obtained by dividing the market cap of a DeFi protocol by its TVL. The ratio obtained determines whether the price of the token of DeFi protocol is overvalued or undervalued. If the ration comes out to be below 1, it means that the asset is undervalued and vice versa. Lower the Market Cap/TVL ratio the better the health of the Protocol.
To Determine Current State of Investor Psychology
The Market Cap to TVL ratio also helps in determining the state of Investor psychology as lower the ratio value, lower are the chances of price falling back and higher are the chances of price gaining in the near future. Locking more value in a DeFi protocol means that the investors are feeling good about the protocol and are there for the long term.
To Determine Integrity of DeFi Protocol
These days lots of investors are investing in DeFi protocols to earn rewards in return and thus they must ensure that the protocol in which they are investing has high integrity and are not scams. While investing and locking money into DeFi protocols, you must ensure that the total value locked on the platform is more than $1 Billion. More the TVL, the more will be the integrity of the protocol.
Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the topic is advisable.
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