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What does Total Value Locked (TVL) Mean and Why is it Important?

With the advent and growing popularity of DeFi, new ways of measuring their effectiveness have also come into usage.

In addition to market capitalization, trading volume and total circulating supply, total value locked (TVL) is one of the crypto indicators that is popular among DeFi investors to assess the total value of assets. 

TVL can be measured both in US dollars or any fiat currency, and in cryptocurrency assets.

DeFi assets include rewards and interest received from the provision of various types of services, such as lending, staking and liquidity pools. 

In order for DeFi projects to be able to provide their services, lend money or provide liquidity with an instant exchange of cryptocurrencies, there are special liquidity pools in which users block their assets. 

For blocking assets, users, who are called liquidity providers, receive a reward. Thanks to this, more and more people are providing liquidity, and the liquidity pools are getting bigger, giving DeFi users more and more opportunities. 

Total value locked (TVL) is one of the important indicators for any DeFi project, showing the level of trust in it, the demand in it and its liquidity.

In 2022, TVL reached $2 billion worldwide.  It has increased from $400 million in the previous two years. 

With the growing popularity and value of DeFi, TVL has become an important indicator for investors, which helps to assess whether the entire ecosystem or a separate protocol is promising and if it is worth investing in it.

TVL is defined as the total value of the cryptocurrency locked in a smart contract of protocol of the DeFi ecosystem.

Why TVL is important

For DeFi platforms to function, funds must be locked as collateral for a loan or liquidity in trading pools. 

TVL is important for analyzing the prospects of the project, as it indicates the amount of funds blocked in the DeFi protocol and the need for the project.

When the TVL of the DeFi platform increases, its liquidity rises together with popularity and usability. 

These factors contribute to the success of the project. A higher TVL means that more capital is concentrated in DeFi protocols. In such projects, participants receive more significant rewards and income. 

A lower TVL means less availability of money, which leads to lower profitability.

The higher the TVL is, the more attractive the project is for investors and users. A high TVL indicates the prospects and demand for a platform, which has a strong development team and valuable products for users. 

All this should attract more participants and investors, contributing to the growth of TVL and the popularity of the project.

On the other hand, the alarm should be raised when DeFi protocols with lower TVL offer high returns. 

It can be an advertising campaign, for example, for new platforms to attract new users and increase their market share, but it can also be a scam. 

In any case, it is worth noting that with a low TVL, the project will not be able to offer high profits for a long time. 

Either such a project, having increased the number of its users and market share, will eventually offer its investors average profit, or it will turn out to be a scam and close at the result. 

For this reason, it is worth checking very carefully projects that offer too high profit to their investors and at the same time have a low TVL indicator.

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