To better understand TVL, imagine that you deposit $1,000 into a DeFi protocol that allows you to earn interest on your deposit. Your $1,000 is now locked or staked in the protocol. Now, if ten other people also deposit $1000 each into the same protocol, the TVL of the protocol becomes $11,000.
Then convert the value of the assets to a standard unit, such as USD or another fiat currency. Finally, add the total value of all assets to determine the TVL of the DeFi protocol.
Data aggregators are popular sources for tracking TVL in DeFi. These platforms collect data from various DeFi protocols and aggregate it into a single dashboard, making it easy to track the overall growth and adoption of the DeFi ecosystem.
TVL is an important metric for understanding the state of the DeFi ecosystem, as it can help users assess the potential of a particular protocol. Here are some of the reasons why TVL is important in DeFi:
TVL provides insight into the overall health and growth of a DeFi protocol or platform. A higher TVL generally indicates greater adoption and activity within the ecosystem.
TVL can be used as a measure of how much liquidity is available within a particular DeFi ecosystem. The more liquidity there is, the easier it is for users to trade, borrow, lend, or swap assets.
A high TVL can also make a DeFi platform more attractive to users. A platform with a large amount of assets locked in may be more trustworthy and stable than a platform with a lower TVL, as it suggests that more users are willing to entrust their assets to the platform.
However, TVL shouldn't be used as the sole metric for evaluating DeFi projects. It's only one of many factors that should be considered in a comprehensive evaluation of DeFi projects.
In addition, it's important to note that the TVL can fluctuate as users add and remove assets, so it's important to check the TVL regularly to get an accurate picture of the current state of the ecosystem.