One of the main trends in the market is decentralized financing, through which people can earn much higher interest rates on their investments than with traditional centralized funds, such as bank deposits and bonds.
These decentralized services can pay higher interest rates because the entire value of digital assets fixed in the platform's smart contracts (in the form of cryptocurrencies such as Bitcoin and Ethereum) is provided by the users themselves. This value is called the aggregate amount of funds locked into the DeFi protocol, or TVL.
But how does TVL affect the value of a decentralized project, and how can this coefficient be used to determine the real value of DeFi?
When calculating and analyzing the TVL ratio of DeFi's market capitalization, there are three main factors to consider: the circulating supply, the maximum supply and the current price.
Let's take Uniswap as an example, since it is one of the most prominent projects in the DeFi sector. Uniswap currently has about half a billion UNI in circulation, while the maximum issue is 1 billion UNI.
To get the current market capitalization of Uniswap, you have to multiply the circulating supply by the current price of UNI. Then, to get the TVL ratio, we divide that number of market capitalization by the project's TVL.
For Uniswap, this figure exceeds 2. This means that the platform has only half the value of the real valuation locked in. If we take into account the maximum filing, the TVL ratio becomes even higher and is over 4.
From a purely theoretical point of view, the higher the TVL ratio - the lower should be the value of the asset. In reality, this is not always the case (as with Uniswap), but the price of a DeFi token is influenced by more factors than just TVL (e.g. the number of available services and the utility of the token). In any case, in theory the price should be around 1 or below 1, because the more saturated the pool - the lower the yield.
One of the easiest ways to use the TVL ratio to determine whether a DeFi asset is undervalued or overvalued is to simply look at the ratio. If it's less than 1, it's probably undervalued. But there are caveats here. Venus (XVS), for example, has a very low TVL ratio (below 0.2), and in theory that should mean that XVS is undervalued. But if you delve deeper into the XVS token and its role in the platform, there is little utility from it, which explains the price of the asset.
The key here is to research the DeFi asset of interest and then use TVL as a tool to help you decide whether to invest in it (because you don't want to buy anything at an inflated value). Look at how the token is used on the platform, how it is distributed, and study the tokenomics of the asset as a whole.
