TVL is down, here's what that means / why it's important
Hey gang, let's talk TVL.
( when you read that sentence, picture us sitting backwards on a chair, like a cool youth pastor).
Alright, so - the Total Value Locked (TVL) in crypto is down 66% since April - from $160B to $70B.
...here's what that means / why it's important.
The TVL number represents how much crypto is tied up in smart contracts.
Think of it like buying a house - you start out with cash in your bank account, then you lock it up as a downpayment when you sign your mortgage agreement.
Sure, your money is still there, but moving it will require you to sell your home or adjust your loan, so it's considered 'locked.'
It's a similar thing with TVL, where your crypto plays the role of cash and smart contracts play the role of the mortgage agreement.
The fact that these smart contracts lock folks' money up for varying degrees of time, makes TVL a good barometer for the market's faith in the crypto space.
If everyone believes crypto prices will stay steady (or go up), they'll happily lock more crypto up. If folks think the market is at risk of going down or that they might need quick access to their funds, the less they'll lock up.
So if you're doing the math in your head, thinking 'TVL down 66% = bad,' you're absolutely right!
But it's not necessarily a reason to hit the panic button...
First off, all markets are down and it looks like we're in (or at least about to enter) a recession - so it'd be weird if TVL was up.
Second, TVL doesn't take into account normal transactions (if the money isn't being locked, it isn't being tracked).
Plus - it doesn't factor in the growth of layer 2 scaling solutions, which you can think of like...like a supermarket and its delivery service, during the pandemic.
...here's what we're on about:
Imagine Ethereum (a layer 1) is a supermarket operating during a lockdown, and Polygon (a layer 2) is the delivery service that runs groceries from the supermarket to peoples homes.
Because TVL ignores layer 2 growth, that'd be like the supermarket reporting only their in-store purchases (which would've been way down during the pandemic) and ignoring the HUGE growth in food delivery earnings.
Point is, Total Value Locked is a helpful metric, but it's not perfect.
The good news? While TVL is down, the amount of new wallet addresses and developers entering the Web3 space continues to grow.
Nice!
