Why TVL (Total Value Locked) is important

You've probably heard or seen the phrase "total value locked" or "TVL" in practically every crypto article or YouTube video out there, and most of the time the authors and influencers associate it with having a direct impact on the price, but what exactly is total value locked? Is it relevant, or is it just another indicator that may be influenced by a billionaire's tweet?

I'm gonna try my best to decipher what this indicator is so sit back and be at ease ;)

• What it means:
  The total value of cryptocurrency "locked" or stored in a DeFi application or smart contract is represented by TVL. TVL is a significant indicator for most DeFi platforms, particularly those linked to lending or swaps, because it has a direct impact on the returns and usability of these services for end users. In general, the greater the TVL, the better, because swaps will be more efficient and lending markets will be able to offer liquidity to borrowers more effectively.
• What it measures:
  The total value locked indicator is used to assess the overall health of the DeFi and yielding markets. Many systems allow you to track the total value locked in (using DefiLlama as reference in the image below). When comparing two chains with similar functionalities, TVL can be viewed as a statistic for a chain's popularity. In short, a higher TVL indicates a higher level of trust within the specific ecosystem.

https://preview.redd.it/715a9aco31e81.png?996&format=png&auto=webp&s=262abe37c7415ae3a5ca982a3801dbafcf05fba1

• If it goes up or down, what happens?
  In layman's terms, as the TVL increases, so does its liquidity, popularity, and/or usability. An increase in TVL may also be due to higher token values; thus, when evaluating TVL growth, it is crucial to utilize a consistent denominator - is it the number of actual tokens increasing, or just their fiat price? This involves an in-depth assessment of the application in question. Rising TVL indicates growing usage and confidence in the dApp but if it goes down it could be that users are providing less liquidity, it's popularity isn't as good as it's competitors and/or it's openly not useable to all.
• Final Thoughts
  Just like how you DYOR, TVL should not be your standalone metric. Being one dimensional in crypto will lead you to a hard path, trust i've been there and burned me. One way you can use TVL is to find the TVL ratio (Marketcap divided by the TVL) of a chain or crypto. In theory, the higher the TVL ratio, the lower the asset value must be; however, in practice, this is not always the case. One of the simplest ways to utilize the TVL ratio to determine if a crypto/chain is undervalued or overvalued is to look at the ratio. In most cases, it is devalued if it is less than one.