Total Value Locked (TVL)

What is TVL?

Total value locked (TVL) is the amount of user funds deposited in a decentralized finance (DeFi) protocol. These funds could be vested in the project for several functions, such as staking, liquidity pools or lending.
DeFi protocols are specialized and autonomous programs designed to address issues within the traditional finance industry. An example of a DeFi protocol is Uniswap — a leading decentralized exchange that allows investors to trade cryptos without any central oversite.
TVL does not indicate the number of outstanding loans or the yield these deposits earn. It simply reflects the current value of the deposits. Therefore, the total locked-up value will change if investors withdraw or deposit funds into the project. Plus, it constantly changes with the changing value of the US dollar.
DeFi protocols can operate on a single network or can be spread out over various networks. If they are spread out over multiple networks, they have an independent TVL on each network.
So far, the largest network by TVL is Ethereum, which has billions of dollars of value locked up as well as over five hundred projects currently onboard. It accounts for nearly half of the TVL of the DeFi industry.

Why does it matter?

TVL indicates the overall health of the DeFi market. The TVL of individual projects denotes the amount of investor faith in the protocol. A rapid increase in TVL shows that investors value the project, and more money is flowing through its network. It helps investors determine if a protocol is healthy and worth investing in.
A high TVL means high liquidity, high popularity and high usability — the factors that define the success of a DeFi protocol. An increasing TVL also benefits its investors as they enjoy considerably higher liquidity and returns.
However, a lower TVL translates into lesser availability of money, which means the investors will not get enough rewards if they choose to stake the token of this protocol.
Investors can also use TVL to figure out if the native token of a particular protocol is undervalued or overvalued. A token can be overvalued or undervalued if its market cap is high or low relative to the TVL of the entire project/protocol.
Currently, the total value locked in the DeFi industry is a little less than $35 billion/
The combined TVL of DeFi protocols has surged over the last couple of years. At the beginning of 2020, the combined Value was $630 million, with more 3edp[rt,fgthan half of the share owned by MakerDAO. At the time of writing, the total value locked in MakerDAO is nearly $8 billion.

How to calculate TVL

Calculating the TVL of a project is easy. Multiply the number of tokens deposited in a project by its current price in USD, and you arrive at the project’s TVL. If a project accepts deposits in multiple tokens, one will have to calculate the TVL for each token and then add them up to get the TVL of the project.
Next, to check if a project's native token is under or overvalued, we need to calculate the MC/TVL ratio of the project. For this, we need to divide the market cap by the TVL of the token. Market cap is nothing but the total number of tokens in circulation multiplied by their current price. An asset can be considered undervalued if the TVL ratio is less than one and vice versa.