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Market Cap to TVL Ratio: Simple But Underrated Crypto Indicator

2022-09-11 11:02:03


What Is Market Cap to TVL Ratio?

The market cap to TVL ratio is calculated by dividing the market cap of a crypto by its total value locked (TVL). While many beginner crypto investors get dazzled by a high market cap, it’s this ratio that really shows whether it has good investment potential.

market cap to tvl ratio

  • When a protocol or network’s market cap to TVL ratio is above 1.0, this means it is overvalued. There may be a price correction i.e. depreciation on the horizon.
  • When a protocol or network’s market cap to TVL ratio is below 1.0, this means it is undervalued. The price might appreciate going forward.


What is crypto market cap and how to calculate it? – Phemex Academy

What Is total value locked in crypto: a critical DeFi indicator – Phemex Academy

The market cap to TVL ratio can be directly obtained from the Coinmarketcap dashboard as follows:

aave coinmarketcap

Market cap/TVL ratio of Aave shows that it is currently undervalued (Source: Coinmarketcap)

Of course, it is impossible to predict exactly what will happen to an asset’s value as it is often an emotional market and driven by many factors, however, the market cap to TVL ratio helps give an indication of what might be coming based on investor behavior toward the project.

To deem that a project is very undervalued and worth looking into as a possible investment, a trader or investor should be looking for a figure as close to 0 as possible.

If a project is above 1.0 and thus overvalued, it does not mean it should be discarded, however, as it can still have good potential as a long-term investment.

TVL is the total value locked, or held by a DeFi platform within its smart contracts. It represents the sum of all funds present on the platform in the borrowing, lending, and transactional capacity. The more successful a DeFi app has been in attracting real interest from active, transacting users, the higher its TVL is.

Why is a Market Cap to TVL Ratio Important?

DeFi is still a young industry, and one that is growing every day. For this reason, it is still difficult to determine when or why a project is undervalued or overvalued. We must consider what users are looking for, what the DeFi space is missing, how established and functional a protocol or network is, how much trust there is in the project and more.

This adds up to a lot of data and research, which when considering how many altcoins are launched every day, makes it a daunting task and one that is too slow in such a fast-moving and volatile industry. The market cap to TVL ratio simplifies this process.

The market cap to TVL ratio allows investors and traders to quickly filter thousands of DeFi protocols and networks to find those that are most undervalued. This way they immediately have access to a strong list of potential investments, after which they can do their own technical analysis on sites such as the Phemex trading platform and TradingView, before making their investment.

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TVL vs Market Cap

The TVL and the market cap of a project are both indicators of market value. However, they are not the same. While a market cap is a simple way to show the value of one company, based on its one stock type or cryptocurrency, a TVL can show the value of a project, based on its inner workings across different locked assets.

Which is more important: TVL or market cap?

The differences in TVL vs market cap are important because of the different set ups found between companies and DeFi protocols. For example, Bitcoin is a cryptocurrency that functions solely as a digital payment system, meaning that its supply times its value will give an indication of its overall market value — as with a fiat currency.

However, Ethereum (ETH) is a protocol designed to create new decentralized applications (DApps), making its value harder to track as it is spread across multiple projects and has many more coins in circulation than Bitcoin. Thus, neither a project’s market cap nor TVL is more important than the other.

It is best to look at both indicators. After all, if one were solely to look at market cap, then BTC’s $658,566,269,512 would far outstrip ETH’s $307,431,799,648, however, if one were only to look at TVL, then ETH would far outstrip BTC, with $102.03 billion to $132.65 million.

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Can TVL be higher than market cap?

TVL can be higher than a market cap because a project that has many staked or locked tokens could have more of its value locked-up than in circulation. An example of this can be found in SushiSwap with a TVL of $2.94 billion to its market cap of only $269 million. This is because, as a decentralized exchange (DEX) its main function is to exchange other cryptocurrencies, while its own native tokens are used to run the platform and are therefore mostly locked.


Investors cannot simply look at TVL vs market cap, or just one or the other, to establish the value of a company or protocol. Instead, they must also look at market cap to TVL ratio. This indicator is crucial in working out whether an asset is overvalued or undervalued—important knowledge when investing large sums of money or in volatile assets such as crypto.

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