Bitcoin was created in 2009 as a peer-to-peer money utilizing digital ledger technology to function without centralization.
Before Ethereum’s 2015 smart contract feature and permanent dApps, early proposals focused on replacing the financial system’s money.
Users must stake digital assets or tokens with the app like a mortgage borrower to secure a loan. Staked cryptocurrency deposits are “locked” on that network, meaning they are still in circulation but unusable.
This led to the phrase “total value locked,” which gives consumers a glimpse of an application or network’s relevance based on the assets secured on its chain.
Summing the value of digital assets secured on a DeFi platform or dApp gives the chain’s entire worth. Digital assets are cryptocurrencies or stablecoins used as loan collateral or platform liquidity.
Investors utilize third-party DeFi analytics systems like DefiLlama for numbers. These platforms will collect crypto application data via APIs and other computer technologies. Users may search the site for their desired information.
TVL became a crucial cryptocurrency statistic since it let investors assess the risks and rewards of a DeFi platform. A platform with a lot of assets locked on its network seems safe and trusted by crypto investors.
Like conventional banks, investors evaluate a bank’s deposits. A bank that attracts deposits may lend or invest that money. If deposits fall, the bank may lend less, reducing revenue.
The DeFi boom from 2020 to 2022 was caused by decentralized finance platforms offering high APR interest rates for staking and lending. This also occurred when global central banks used near-zero interest rates to boost growth.
When decentralized apps peaked in December 2021, their TVL exceeded $179 billion. After a technology stock top, investors lowered risk and pulled speculative funds from crypto. To fight inflation, central banks aggressively tightened interest rates, and investors fled to government savings. A $40 billion crypto TVL was reported on Oct. 24, 2023.
TVL only shows the total amount of assets staked in a platform, not activity levels. A platform with a high TVL but minimal user activity may have a limited number of investors, which is a red signal and requires more research. Investors can also check third-party analytics companies’ data standards to guarantee TVL values are current.
TVL may be used to evaluate a decentralized financial project or application, but it shouldn’t be the primary investment criteria. Other areas of due diligence for investors include founder experience, governance model, tokenomics, and community size.