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What Does Total Value Locked - TVL Mean in DeFi?

BitForex Editor
Oct 15, 2020

DeFi in recent years has been an important topic when talking about blockchain but it hasn't gotten the large-scale adoption it should get. It is quite an amazing idea which leaves out both the paperwork and the middlemen to replace them with smart contracts.

DeFi, known as decentralized finance is a system that allows for peer to peer borrowing with fast remittances for the unbanked population.

DeFi is a general term used for different financial applications in blockchain or cryptocurrency majorly for the purpose of disrupting the financial intermediaries. It is unique in the sense that it allows for the use of blockchain from a simple value transfer to complex financial use.

It provides the opportunity to borrow funds, deposit funds into a savings account, take loans, or trade complex financial products without asking for permission or opening an account anywhere.

DeFi in most cases requires that you deposit a capital either in the form of loan collateral or through liquidity in a trading pool and total value locked (TVL) remains the best measure of adoption.

Total Value Locked (TVL)

Total Value Locked refers to the total worth of the DeFi sector. The value is usually calculated in three different components and they are the TVL in dollars, in bitcoins, and in Ethereum. Total Value Locked represents the total amount of assets that are currently being staked in a protocol. It shows the total amount of underlying supply which is secured by a certain application. In the past two years, several projects have contributed immensely to the DeFi space but it was recently the industry started receiving its needed attention. Just this year, it reached the $1 billion mark, a few weeks after, $4 billion was recorded and as of last stock, it was $7 billion.

We will take a look at the projects that have contributed to the DeFi industry and how they did so.

Top Projects That Contributed To DeFi

Compound

This project which was built on the Ethereum network is a decentralized money market protocol with a total value locked in USD of $683.4 million. Compound unlike peer to peer lending has its liquidity pool funded by lenders who deposit their assets and in exchange, they get what is called a c-Token. The c-Token after accruing interest can be redeemed. Then the borrowers will pick any of the assets supported by the liquidity pool by making a deposit of collateral assets. The lenders accrue their profit when the borrowers pay back with interest which is decided individually based on its supply and demand.

Just 10 days after the launch of its governance token, COMP rose from below $100 to $372. Asides from that, its total value locked into the protocol too rose from $100 million on June 15 to an all-time high of $700 million.

Aave

With a total value locked in USD of $158.2 million, Aave is another money market platform which was rebranded from ETHLend. On this smart contract platform, lenders will have to make a deposit of their assets to provide liquidity and in return, they receive a Token that accrues their interest. A lender can decide to create a new address for the interest to be stored separately if they don't want it to be added to the same wallet as the token.

The borrowers will decide if to take an over-collateralized loan or an under-collateralized one where they'll be able to get up to 75% of the collateral value in loans.

Under Aave, there's an option called Flash loan which allows borrowers to take up a loan without having to drop any capital but the loan must be returned in full as at the time the transaction is being concluded.

Synthetix

This is a decentralized derivative platform on the Ethereum network with a total value locked in USD of $392 million. On this platform, SNX token can either be locked in or staked so as to generate what is called Synths. When a user wants to issue a USD Synths, the person will have to stake an 800% worth of SNX token as collateral then in the platform's decentralized exchange, the Synths will be traded freely by users.

Users that hold SNX are eligible for exchange fees, another benefit is the opportunity for it to grow in price due to the growth of the platform. When there is an increase in the number of locked SNX tokens, it becomes scarce in the market thereby boosting the prices.

Maker

This is a decentralized autonomous organization with a total value locked in USD of $629.3 million which is built on an Ethereum network. Maker's primary token is DAI while its secondary token is MKR.

MKR gives its holders voting rights on issues such as stability fees, collateralization ratio, and savings rates. A user can take out DAI in the loan through deposits of Ethereum or other assets which are supported by Maker's DAI-focused DApp as collateral. If a user wants to borrow DAI on oasis, the collateralization ratio is 200% and the borrower is bound to pay a recurring stability fee.

Balancer

The balancer is a decentralized algorithmic exchange with a total value locked in USD of $161.6 million built on an Ethereum network. On this platform, capital owners who provide liquidity either create private pools or send their contribution to shared pools then they can lock in their assets, determine the weight of the assets in the pool, and set trading fees.

On balancer, users are able to lock in a minimum of two and a maximum of eight separate ERC-20 tokens into a single pool. For the pool to return to its predefined proportion, the Balancer either buys or sells to a third party regardless of the value of the token.

Decentralized finance is a system that has been and is still building momentum as a result of the total value locked in being contributed by these projects. The future of DeFi is still very positive, there could be some hitches but the space is hopeful of many positivities.

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