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What is Total Value Locked (TVL)? The Secret Every DeFi Investor Must Know
If you’ve been in crypto for a while, you’ve probably heard of TVL (Total Value Locked). It sounds complicated, but it’s simpler than it seems.
In simple words
TVL is basically the total amount of money that users have deposited in DeFi protocols to earn yields. Think of it as the sum of all the savings people leave in a decentralized bank.
Just two years ago, the TVL was around $400 million$169 . Today, it’s in the range of (billion globally. Ethereum dominates most of these deposits. That means the DeFi market has multiplied by over 400 times in a short period.
How is it calculated?
Suppose you deposit:
Total TVL of that protocol = $3,000. That’s it.
How to use TVL to invest better
Here’s where it gets interesting. Platforms like Aave, Uniswap, and PancakeSwap issue tokens. You can evaluate whether they are expensive or cheap using this formula:
Market Capitalization ÷ TVL = Ratio
It’s like the P/B ratio in stocks. The lower, the better )less risk(.
Current example:
Three things TVL tells you
1. If a token is fairly valued: A low ratio suggests the market hasn’t fully recognized its true value. A high ratio could indicate a bubble.
2. The state of the DeFi market: If we divide the total DeFi cap by its total TVL $118 )billion(, we get 0.70. This means there is no uncontrolled euphoria. It starts to be concerning when it reaches 3-4).
3. If a platform is legitimate: Be cautious of unknown protocols with very low TVL. The best ones have over $1 billion and audit reports from firms like CertiK. It’s like trusting companies with audited financial statements.
The point
TVL doesn’t tell everything, but it’s a vital signal. It helps you know if you’re entering a solid platform or a disguised scam. And if you want to evaluate DeFi tokens, this ratio saves you a lot of unnecessary analysis.
In summary: high TVL + low market cap/TVL ratio + audit = better opportunity.