How Is the Concept of “Total Value Locked” (TVL) Used as a Valuation Metric?

TVL represents the total value of assets (e.g. collateral, liquidity) currently staked or locked within a DeFi protocol. It is used as a proxy for a protocol's adoption, utility, and security.

Investors often look at the Market Cap to TVL ratio, where a lower ratio may indicate the token is undervalued relative to the capital it secures. However, TVL can be inflated by volatile asset prices or unsustainable incentives.