The market cap to TVL ratio (called a ‘TVL ratio’) is most useful in informing investors of a DeFi project’s valuation in regard to its demand.
For example, if a protocol’s token has a low market cap but a high TVL, this may suggest that a token is undervalued.
A token may be more attractive to a potential investor if its TVL ratio falls below one.Generally speaking:
Protocols with TVL ratios above one are overvalued
Protocols with TVL ratios under 1 are undervalued
TVL ratios help investors to gauge numerous conditions, including:
Valuation (over or under)
Risk
Adoption and popularity
Investing risk
TVL Ratio Example
In this example, we will look at the TVL ratio of the DeFi project Aave, a borrowing and lending dApp (decentralized application).
AAVE Market Cap: $1.4 billion USD
AAVE TVL: $12.1 billion USD
The TVL ratio for Aave is, therefore, 1.14/ 12.1 = 0.094.
So since the TVL Ratio of Aave is under 1, is it undervalued?
Perhaps, but TVL ratios should be taken with a grain of salt. A lot of users borrow and lend with Aave, which gives it a disproportionately high TVL compared to other, less engaging DeFi protocols that still offer great services.
Take this ratio with a large grain of salt, and invest cautiously.
Crypto Asset Risks: investor.gov
TVL vs Market Cap vs TVL Ratio
TVL, market cap, and TVL ratio are all important things to consider before investing or interacting with a protocol. Though all three metrics offer their own distinct insight, I personally believe that TVL is the best indicator of determining the adoption and potential of a given DeFi protocol.
Top 5 Projects by TVL
The below 5 DeFi tokens currently have the highest TVL.
Lido – 32 billion USD
AAVE– 12 billion USD
MakerDAO– 7.7 billion USD
Ether.fi– 6.4 billion USD
Uniswap – 5.6 billion USD
Top 5 Cryptos by Market Cap
Here are the top 5 cryptos by market cap (including blockchain networks).
Bitcoin – 1.2 trillion USD
Ethereum – 404 billion USD
Tether – 112 billion USD
BNB – 84 billion USD
Solana – 62 billion USD
See AlsoDefinition of total value locked
📚 Read: 23 Best Crypto Research Tools
🍒Want to learn more DeFi terms? Check out our DeFi glossary!
FAQs
A DeFi protocol with a high TVL means that it has a large amount of cryptocurrency invested/staked in its network. A high TVL means a healthy protocol.
TVL is very important in crypto as it informs both participants and investors of the adoption, engagement, health, and demand of a DeFi protocol.
In June of 2024, Lido has a TVL of over 30 billion US Dollars, giving it the highest DeFi protocol TVL.
Market cap matters in crypto as it informs investors how many people believe in a project.
NFTs (non-fungible tokens)do not have TVLs as investors do not typically stake crypto through NFT marketplaces.
In June of 2024, the total value locked (TVL) on Solana DeFi protocols is 4 billion US Dollars.
