September 19, 2021
If you look at DeFi protocols and dapps you’ll find that many of them mention their total value locked, or TVL. This metric has grown to be central to the DeFi ecosystem, comparable to market capitalization in the rest of the crypto market.
It represents the number of tokens at stake in any given protocol, multiplied by its price. Although the name might be misleading, since the funds are not actually locked, it is a good demonstration of how valuable a project is.
If the TVL of a DeFi protocol is high, it means a lot of users trust in the project enough to invest in it. TVL can also be measured in DEX trading pairs. In that case, it means the amount of tokens available for a given pair. A high TVL on a trading pair means both tokens are highly traded, and this liquidity benefits its market performance.
Another metric to consider is the TVL ratio, calculated by dividing the market capitalization by the TVL. Recently, TVL ratios have been used to gauge whether a token is undervalued or overvalued.
If the ratio is below 1, the chances are it is undervalued and will increase its price in the near future. However, this metric is not completely accurate and its efficiency has been disputed by some analysts.
TVL on Uniswap and PancakeSwap
Uniswap v2 and PancakeSwap are two of the most-used DeFi protocols in the ecosystem. These dapps together hold over $12 billion value locked, making them the second and third largest DEXs, according to DefiLlama. The first position is held by Curve, but this exchange only handles stablecoins.
Uniswap was the first automated market maker (AMM) protocol in the market, and the one that started the DeFi boom. There are currently two versions of Uniswap in the market (v2 and v3), both with specific trading dynamics.
If we sum the TVL of both versions of Uniswap it comes to over $7 billion, above PancakeSwap, but still below Curve. The only downside of this protocol is that it only operates on the Ethereum blockchain (although v3 also operates on Optimism, an Ethereum sidechain).
PancakeSwap is the Binance Smart Chain’s (BSC) counterpart to Uniswap. It only operates on BSC and it’s the largest DEX on that chain. It has grown a lot in the last months due to congestion on the Ethereum blockchain. In fact, Uniswap v3 uses Optimism to offer lower fees as a way of regaining lost users.
The TVL of PancakeSwap is $5.26 billion, with a TVL ratio of 0.8. This means it is poised to grow and become more valuable.
Staking liquidity on DEXs
The TVL of DEXs consists of tokens staked in liquidity pools (LP). LPs are the backbone of AMMs, enabling users to trade tokens instantaneously.
Liquidity providers receive a percentage fee for every trade, and pairs with high demand can be more profitable. However, providing liquidity for low demand pairs can also offer high rewards due to there being less competition.
LP staking is slightly different to PoS staking. With the latter, you hold funds at a specific address to secure the network and validate transactions. The rewards are less likely to happen and the entrance barrier is often high.
Providing liquidity to a DEX is a better option for starters because there are fewer associated risks. You still need to research the project you will invest in, but security is better if you stick with renowned exchanges.
TVL over time
The rise of TVL over the past several months has been a demonstration of the DeFi ecosystem’s growth. Overall market TVL grew from $21.17 billion on January 1 to $157.5 billion on May 10, which was also around the time when many coins hit their all-time highs.
After a month-long dip, the figure went back up and reached its current ATH of $183.2 billion on September 6. To put this in context, market TVL in 2020 went from $602 million to $20.79 billion, an increase of 3,353%.
The benefits of providing liquidity
The explosion in TVL demonstrates that DeFi applications are not only on the rise, but here to stay. The reason is simple – locking value in DEX is an effective way to earn money.
When a user stakes, they become a liquidity provider, and are thus providing a service: their tokens are being used by others to conduct trades.
Typically, doing so requires depositing two types of token in amounts of equal value. With Kirobo staking, for example, users deposit KIRO and ETH on Uniswap V2 and receive ‘LP tokens’ in return to prove their stake in the pool. They receive a fee of 0.3% (relative to their part in the pool) for every transaction on that pair, and can also earn rewards by staking those LP tokens via Kirobo.
Israeli, Canadian, and USA citizens cannot participate in the staking of KIRO
If you’re already a staking participant, there’s no need to do anything — the staking will continue automatically.
For a full explanation of how to complete this process, just follow this link.
Kirobo’s Uniswap V2 liquidity pool, click here