Imagine a giant virtual vault where people store their cryptocurrencies. This vault is called a decentralized finance (DeFi) protocol. The more cryptocurrencies people store in this vault, the more valuable it becomes. This total value of all cryptocurrencies locked up in the vault is called Total Value Locked (TVL).
TVL is like a popularity score for DeFi protocols. The higher the TVL, the more popular and trusted the protocol is considered to be. It’s like a signal that many people believe in this protocol and are willing to entrust their valuable crypto assets to it.
Why is TVL important?
- It shows how much money is flowing into the DeFi ecosystem.
- It indicates the liquidity of a DeFi protocol, meaning how easily you can exchange crypto assets within it.
- It helps investors assess the potential of a DeFi protocol.
But it’s important to remember:
- TVL doesn’t tell you everything about a DeFi protocol. You still need to consider its security, team, and tokenomics.
- TVL can be manipulated, so be cautious of exceptionally high TVLs.
- TVL fluctuates with cryptocurrency prices.
