Market capitalization is calculated by multiplying the current price by the circulating supply. If a token trades at $10 and there are 100 million tokens in circulation, the market cap is $1 billion. It represents the total value of all currently available tokens at the current price. It is the most widely used measure of a crypto asset size and is the primary way assets are ranked and compared.
The problem with market cap is that it treats every token equally regardless of liquidity. If someone buys $100 of a token with a $10 million market cap but only $50,000 in daily volume, the price might jump 5%, adding $500,000 to the market cap. That $100 purchase did not create $500,000 in value. It just moved the price on thin liquidity. Market cap is best understood as a rough size indicator, not a precise measure of the capital invested in an asset.
Fully diluted valuation (FDV) multiplies the current price by the total supply, including tokens that have not yet been released. A token with 100 million circulating tokens and 1 billion total tokens at $10 per token has a $1 billion market cap but a $10 billion FDV. The gap between market cap and FDV tells you about future dilution. Large gaps mean significant token unlocks are coming that could create selling pressure.
FDV matters because it represents what the market is implicitly valuing the entire token supply at, assuming no price change. When a new token launches with 5% of supply circulating and a $500 million market cap, its FDV is $10 billion. That means the market is valuing this project as if it is worth $10 billion, which might be reasonable or might be absurd depending on what the project does. Comparing FDV to competitors and to traditional companies doing similar things is a useful sanity check.
Total value locked (TVL) measures the total amount of capital deposited in a DeFi protocol smart contracts. If users have deposited $2 billion worth of tokens into a lending protocol, its TVL is $2 billion. TVL is the primary metric for measuring the adoption and scale of DeFi protocols, similar to how assets under management works for traditional financial firms.
TVL has well-known limitations. It can be inflated through recursive deposits (depositing, borrowing, and redepositing). It changes with token prices even if no one deposits or withdraws. Two protocols with the same TVL might have very different revenue, user counts, and sustainability. TVL tells you about capital deployment but not about how efficiently that capital is being used.
The ratio of market cap to TVL is a rough valuation metric for DeFi protocols. A protocol with $1 billion TVL and a $100 million market cap (ratio of 0.1) might be undervalued compared to one with $1 billion TVL and a $2 billion market cap (ratio of 2.0), assuming they generate similar revenue per dollar of TVL. This ratio has limits, but it provides a starting point for relative valuation.
Revenue is increasingly recognized as a more fundamental metric than any of these three. A protocol that generates $50 million in annualized fees from $1 billion in TVL is fundamentally different from one that generates $2 million from the same TVL. Token Terminal and DefiLlama have made protocol revenue data more accessible, allowing valuations based on actual economic activity rather than just capital parked in contracts.
For practical decision-making, use all three metrics together rather than relying on any single one. Market cap tells you the current size. FDV tells you about future dilution risk. TVL tells you about DeFi adoption. Revenue tells you about actual economic value. Comparing these across similar protocols gives you a much better picture than any individual number, and that comparative framework is more useful than trying to calculate a precise fair value.