TVL is a common measure used to evaluate the value of digital assets in DeFi protocols, including all assets that are locked in its smart contract for staking, lending, and yield farming. This ratio is calculated by multiplying the total value of all assets or tokens deposited and multiplying it by the current price of each asset.
A higher TVL signifies that there is an increase in user rewards, and asset deposits, and the protocol is growing while gaining more credibility; while a lower TVL signifies lower yields, lower rewards, and less stability from its money circulation. There are a wide range of reasons why TVL is one of the most popular metrics in DeFi.
A way for DeFi users to assess the market, TVL gauges if an asset is overvalued or undervalued. For founders and analysts, TVL serves as an indicator of a protocol’s success while predicting potential trends in the space. Moreover, it is a great way to determine the overall health and adoption of the DeFi ecosystem.