If you are new to cryptocurrencies, you might have heard the term “TVL” thrown around. But what exactly does it mean? In this beginner’s guide, we will explore what TVL stands for in cryptocurrency and its significance in the crypto world.
What is TVL?
TVL stands for Total Value Locked. It is a term used to describe the total amount of value that has been locked up in a decentralized finance (DeFi) protocol or application. DeFi refers to the use of blockchain technology to create financial instruments and applications that allow users to interact with each other without the need for intermediaries like banks.
Why is TVL important?
TVL is an important metric for investors and users of cryptocurrencies. It provides insights into the overall health and activity of the DeFi ecosystem. Here are some reasons why TVL is important:
- Measures the size of the DeFi market
- Indicates liquidity
- Reflects market sentiment
How is TVL calculated?
TVL is calculated by taking the total value of assets held by users and the protocol itself. This includes both the principal amount and any interest or rewards earned on those assets. Here is a simple formula for calculating TVL:
TVL (Principal Amount + Interest/Rewards) x 2
For example, if a user deposits 100 ETH into a DeFi protocol that offers a 5% annual percentage rate (APR), the total value of the assets held by the user is 100 x (1 + 0.05) = 105 ETH. If the protocol also has 500 ETH locked up in its reserves, the total value of assets held by both the user and the protocol is 605 ETH.
Real-life examples of TVL in action
There are many examples of TVL in action in the DeFi ecosystem. Here are a few:
Uniswap
Uniswap is one of the most popular DeFi protocols and applications.