It includes all number of tokens in Defi activities; primarily lending, staking, and liquidity pools.
It also acts as a good indicator and is used as a metric to measure the overall health of DeFi ecosystem.
A higher TVL indicates that more capital is tied to the platform.
Whereas a lower TVL means less available capital, which ultimately results in lower earnings for users.
Investors use TVL to determine if a project's native token is overvalued or undervalued. If the token market cap is high compared to TVL for the entire project, the token may be overvalued and vice versa.
It is to be noted that TVL does not disclose current loan balances but only reflects the current value of deposits.