FDV and TVL
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Beyond the Hype: A Deep Dive into How FDV and TVL Works and What YOU Should Know

FDV and TVL

FDV (Fully Diluted Valuation) and TVL (Total Value Locked) are two important metrics used to evaluate cryptocurrencies and decentralized finance (DeFi) protocols.

FDV refers to the fully diluted market capitalization of a cryptocurrency. It is calculated by multiplying the current market price of a coin by the total supply, including coins that are locked or restricted.

FDV shows the theoretical maximum market cap if all coins were circulating and available for trade. It provides investors with a view of the potential growth of a project based on the overall token supply.

TVL measures the total value of crypto assets deposited in a DeFi protocol. It represents the sum of all assets staked in yield farming protocols, locked in staking contracts, used to provide liquidity to decentralized exchanges, and more.

TVL shows the adoption and growth of a protocol by quantifying the assets entrusted by users. The higher the TVL, the more popular a protocol is perceived to be.

Both FDV and TVL are important barometers of value and success in crypto. FDV indicates the possible upside of a project, while TVL signals real-world usage and traction.

Although not without limitations, these metrics are widely tracked by analysts and investors to gauge market opportunities when researching cryptocurrencies and platforms.

How FDV is Calculated 

Crypto market cap

Fully Diluted Valuation (FDV) aims to measure the valuation of a cryptocurrency project if all existing tokens are released and circulating in the market. The FDV formula is:

FDV = Price per Token x Total Supply of Tokens

Where:

  • Price per Token is the current market price of the cryptocurrency
  • Total Supply is the maximum number of tokens that will ever exist for that cryptocurrency

This differs from market capitalization, which only accounts for the circulating supply or tokens currently available.

For example, if a cryptocurrency called XYZ has:

  • The current Price per Token of $1 
  • Total Supply of 1 billion tokens
  • But only 500 million tokens currently circulating

Then the FDV for XYZ would be:

`FDV = $1 x 1,000,000,000 = $1 billionʼ 

While the market capitalization would be lower since it only factors in the 500 million circulating tokens: 

`Market Cap = $1 x 500,000,000 = $500 million`

So FDV projects the potential full valuation if the total token supply was circulating, which is usually higher than the market capitalization at any given time.

This allows investors to gauge the possible future valuation if the project succeeds in distributing all planned tokens.

What FDV Tells Investors

FDV gives investors a way to assess the long-term potential market capitalization of a cryptocurrency project if all coins were in circulation. This helps investors compare projected market caps across different projects. 

For example, if Project A has a current market cap of $1 billion with 50% of its total supply in circulation, it would have an FDV of $2 billion.

If Project B has a current market cap of $500 million with only 10% of its supply circulating, its FDV may also be around $2 billion.

This shows that while Project A currently has a higher market cap, Project B may have similar long-term potential.

A higher FDV versus market cap can also indicate that a project has significant growth expectations built into its current valuation.

Investors may see the large discrepancy between the current cap and the potential cap as a signal that the project could see massive returns if it reaches its maximum circulation.

Overall, FDV gives investors a better way to assess a project’s possibilities for expansion and growth potential. It provides useful context around the project’s current valuation and the expected magnitude of future valuations according to the network’s own structure.

By considering FDV, investors can make more informed comparisons, especially when looking at newer projects with lower market cap but a high future coin supply.

Criticisms and Limitations of FDV

FDV has received criticism and skepticism from some investors and analysts due to some of its limitations:

  • Doesn’t account for velocity: FDV simply looks at overall circulating supply and price. It does not take into account the velocity or rate at which coins actually change hands. A coin could have a very high market cap but low velocity, meaning scarce actual usage and demand.
  • Assumes all supply will circulate: FDV calculations make the assumption that the entire supply in existence will become available and in circulation over time. However, some supply may be permanently locked up or unavailable, skewing the FDV value.
  • Vulnerable to hype and speculation: Since FDV does not account for real economic activity and usage, it can be vulnerable to hype, speculation, and “pump and dump” schemes that artificially inflate price and market cap. This means FDV should be taken with a grain of salt.

FDV can still serve as a quick benchmark of a network’s value. But investors should be aware it does not tell the whole story and has some limitations in accounting for actual utility and economic activity.

Analyzing factors like velocity, circulating supply dynamics, and real-world usage is advised when evaluating FDV.

How TVL is Calculated

DeFi protocols

Total Value Locked (TVL) refers to the total value of crypto assets deposited in DeFi protocols. It is one of the most commonly used metrics to gauge adoption and growth of DeFi platforms.

The TVL calculation methodology involves summing up the value of assets staked in or collateralized by all DeFi protocols at any given point in time. This includes:

  • Value of assets deposited by users to earn interest, provide liquidity, or interact with dApps
  • Value of assets locked as collateral to borrow or mint stablecoins
  • Value of assets staked to validate transactions and secure blockchain networks

Some key aspects of TVL calculation:

  • Assets are valued at the current market price, not the deposit value
  • Supports multi-chain calculation by aggregating TVL across different blockchains 
  • Generally excludes derivatives protocols like options and futures
  • May include ‘double counting’ as assets move between protocols

A large portion of TVL typically comes from liquidity mining and yield farming activities. Users lock up their crypto holdings in return for rewards. The longer the assets are locked up for staking, the higher the TVL.

Rising TVL signals growing engagement and participation in DeFi ecosystems. It indicates more crypto moving from speculation toward utilization. However, TVL only captures quantity, not quality of activity. High TVL does not automatically imply useful products.

What TVL Tells Investors

Total Value Locked (TVL) is often used as a key metric to assess adoption and usage of decentralized finance (DeFi) platforms. TVL refers to the total value of assets deposited in a protocol. This provides investors with valuable insights:

  • Gauge of Adoption and Usage: A higher TVL generally indicates greater usage and activity on a platform. Investors can use TVL to compare adoption across platforms and track growth over time. For example, if a lending protocol’s TVL rises from $100 million to $500 million in a year, it likely signals growing adoption.
  • Assessing Attractiveness of Yields: TVL also helps gauge the yields and incentives offered by platforms. High TVLs can reflect attractive yields, drawing in capital. Investors may prefer platforms with higher TVLs and yields. However, sustainably high yields from high TVLs may indicate risks like insufficient collateral backing.
  • Benchmarking Across Protocols: Evaluating TVL makes it possible to compare adoption and attractiveness across DeFi protocols like lending platforms, DEXs, yield optimizers, etc. Investors can identify leading platforms in terms of assets deposited. Rapid TVL growth may highlight rising platforms to watch.

In summary, Total Value Locked serves as a key metric for investors to assess platform adoption, attractiveness, and yields. It enables benchmarking DeFi protocols and uncovering promising investment opportunities. However, TVL has limitations and risks that should be considered.

Criticisms and Limitations of TVL

TVL has received some criticism within the cryptocurrency industry. Here are some of the main limitations to be aware of when evaluating TVL metrics:

  • Not All Assets are Liquid: One issue with TVL is that not all assets counted are liquidable or can be easily withdrawn. For example, some assets may be staked or locked up for governance, which means they cannot actually be taken out of the protocol. So the TVL metric may overstate the real liquid assets under management.
  • Doesn’t Show Real Capital Flow: TVL is a snapshot of funds deposited in protocols at a point in time. But it does not show the actual flow of capital going in and out of protocols.

Some critics argue TVL can be gamed by temporarily pumping up deposits right before metrics are calculated. So it may not reflect real investor demand and adoption over time.

  • Distorted by Incentives: Projects are incentivized to maximize TVL to attract investors. This can lead to “TVL wars” between protocols aiming to inflate their TVL. Projects may offer high promotional yields, bonuses, and other incentives to bootstrap TVL growth.

But these inflated TVL numbers may not be sustainable long-term without incentives. So investors need to look past raw TVL at the incentives and growth over time.

Overall, TVL provides a useful snapshot of funds allocated to protocols. But it has limitations, so it’s important to analyze it carefully within full context. Investors should not view TVL as the sole metric for comparing protocols or making investment decisions.

Using FDV and TVL Together

Comparing a cryptocurrency’s Fully Diluted Valuation (FDV) to its Total Value Locked (TVL) can provide valuable insights for investors assessing potential opportunities.

In particular, analyzing the relationship between FDV and TVL can help indicate whether a cryptocurrency’s growth is driven more by hype or real substance and adoption.

FDV represents the maximum potential market capitalization if all supply is released. As such, a high FDV may signify speculative hype and optimism about a cryptocurrency’s future prospects.

In contrast, TVL represents the total dollar value of crypto assets deposited in a protocol. TVL is therefore a metric of current, real-world adoption and usage. 

If a cryptocurrency has a high FDV but low TVL, this could indicate that the growth is mostly speculative rather than based on proven utility and adoption.

Essentially, the cryptocurrency looks good on paper but may not have substance yet. Investors should be wary of high valuations disconnected from underlying fundamentals.

On the other hand, if TVL is high relative to FDV, it indicates stronger real-world usage and adoption so far, suggesting potential for more growth as market capitalization catches up. The cryptocurrency has already attracted significant investment based on its current utility.

By comparing FDV and TVL, investors can better evaluate the balance between hype and substance. Analyzing these metrics together provides a more nuanced perspective on valuation and adoption trajectories.

Rather than relying on market caps alone, investors should incorporate FDV and TVL to assess growth potential versus current maturity. Those who use these concepts wisely stand to make better informed investment decisions in the dynamic crypto markets.

Best Practices for Investors

When it comes to using FDV and TVL metrics, investors should keep the following best practices in mind:

  • Don’t overly rely on any one metric. FDV and TVL can provide valuable insights, but they are limited snapshots based on assumptions and formulas. No single number or data point should dictate investment decisions.
  • Monitor changes over time. Look at how FDV and TVL are trending, rather than just the latest data. Significant changes could indicate shifting dynamics.
  • Understand context and limitations. The assumptions behind FDV and TVL calculations can vary. Know what is being measured and what is excluded. Be aware of discrepancies between platforms reporting on these metrics.
  • Use alongside qualitative analysis. Quantifiable metrics alone lack nuance. Factors like project roadmaps, developer activity, and real-world adoption also matter.
  • Consider FDV and TVL together. These metrics capture different aspects of project value. Evaluating them in tandem provides a more complete picture.
  • Maintain perspective. Don’t let hype over inflated expectations. Focus on long-term project fundamentals over short-term speculation.

Thoughtfully incorporating FDV and TVL into due diligence while heeding their constraints empowers investors to make smarter crypto investment decisions.

But relying too heavily on these metrics in isolation risks incomplete or distorted analysis. Employ them judiciously as part of a balanced, prudent approach.

Conclusion

FDV (Fully Diluted Valuation) and TVL (Total Value Locked) are two important metrics that provide insights into different aspects of cryptocurrency projects. While neither metric is perfect, together they can help investors evaluate projects more comprehensively.

FDV aims to measure the fully diluted value of a cryptocurrency’s token supply. It accounts for all tokens in circulation as well as those not yet released. However, critics argue FDV makes unrealistic assumptions about token release and price.

TVL tracks the total value deposited in smart contracts on a blockchain. It serves as a proxy for adoption and usage. But TVL can be manipulated through wash trading, and it doesn’t consider real economic activity.

When assessing crypto projects, investors should examine FDV and TVL trends over time rather than relying on temporary snapshots. No single metric provides the full picture. Analyzing both FDV and TVL, along with on-chain activity and fundamentals, allows for a more nuanced valuation.

Key takeaways for investors:

  • Use FDV and TVL together to evaluate projects more holistically.
  • Consider FDV and TVL trends over time rather than temporary spikes.
  • Supplement FDV and TVL with on-chain data and project fundamentals.
  • No metric is perfect; apply critical thinking when analyzing crypto valuations.

As the crypto space matures, new valuation metrics will likely emerge. But for now, a multifaceted approach using FDV and TVL provides a solid starting point for researching projects and managing risk. The future may bring improvements, but informed investors have powerful tools already at their disposal.

Author

  • Brainiac Williams

    From DAOs to AI, from avatars to algorithms, Brainiac Williams is your bridge between the complexities of Web3 technology and the language of human connection. With every word, he infuses creativity, clarity, and a sprinkle of that Web3 magic. His mission? To empower, educate, and inspire the pioneers of the Web3 frontier. He immerses himself in the latest trends, so you can ride the wave of innovation with confidence.

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