There are various articles on the market explaining TVL intimately, right here I intention to convey a concise abstract of what TVL is. Consider this as reference notes.
Whole worth locked is a determine that represents the spot worth (normally in fiat phrases i.e. USD) for all of the property which are at present staked in a particular protocol. The property might be:
- Staked in easy yield protocols that enable depositors to obtain an equal illustration of their deposited tokens.
- Staked in lending protocols the place the deposited property are collateral for the loans.
- Within the liquidity swimming pools in an AMM (Automated Market Maker) change.
- Act as underlying for artificial property, futures contracts, and choices.
- Liquidity for cost protocols facilitating the switch of property from l2 (layer 2) to the ETH mainnet.
The TVL determine for Defi can be the entire worth of the property staked in all the Defi system. This worth doesn’t characterize any leverage created from the underlying property. An analogy for this might be the funds a financial institution holds in its deposit all through the fractional lending course of.
The TVL is a metric used to gauge the well being of a Defi protocol. The TVL of an asset might be interpreted as how a lot of the property’ capital is utilised throughout all the Defi ecosystem giving a tough concept of its utility. To make the metric extra comparable throughout property with totally different market caps, a TVL Ratio is used which is outlined as:
Whole market cap of locked asset / Whole worth locked
The market cap right here can both be the entire circulating provide or the entire provide multiplied by the worth of a single unit (token) of the asset. It’s essential to notice this variability issue within the metric.
The calculation above is correct in a easy situation the place the worth of the token deposited is counted as soon as. Nevertheless, the advanced nature of Defi staking yields eventualities the place worth is counted twice. For instance, say an investor stakes 10 ETH right into a protocol and is then given 10 SETH tokens (staked Ethereum tokens) in return. These 10 SETH tokens validate the investor’s preliminary stake of ETH and the SETH tokens may be accepted by one other protocol permitting the investor to stake their SETH tokens. While the investor has launched 10 ETH of worth into the Defi area when the entire TVL is calculated or the TVL per-protocol is calculated the values will probably be inflated as a result of this double counting. Such a situation is widespread in Defi and thus TVL calculations must be given leeway.
If wanting on the TVL as measured by the market cap of the entire circulating provide then theoretically the decrease the TVL ratio the higher because the extra saturated the staking pool, the decrease the ROI (return on funding) per token. Thus increased the TVL ratio, the decrease the worth of an asset must be.
Clearly, with the creativity of Defi, not each token is similar, and extra elements influence a token’s value than simply the TVL. For instance, the utility of the token issues, if staking the token doesn’t generate yield then a TVL metric is nearly nugatory. Tokens which have governance properties might request a premium.
Although it isn’t an all-encompassing metric for figuring out the worth of a token, it’s nonetheless extensively used and an incredible level of reference for traders just like the Value to Fairness ratio into equities. In reality, a Defi index by Defi pulse (the populariser of the TVL metric) exists to balancing its weights throughout the included tokens by way of the TVL metric.
