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Cardano has surpassed Bitcoin's TVL

Published 5.6.2023, updated 26.6.2023

Cardano community celebrates Bitcoin's TVL surpassing. Bitcoin's TVL at the time of writing is 176M USD while Cardano's TVL is 182M USD. Cardano moved up to 15th in the rankings. Cardano is rising up in all the important metrics, and that's a good thing. As exciting as this news is, it may not be something to celebrate. The road to success will be a long one. It's healthy to see things in a reasonable context.

TLDR

The TVL of all DeFi services on Cardano has essentially surpassed the TVL of Lightning Network which is used only for sending value. SC platforms compete for TVL, users, and market share at the utility level. TVL is not an all-encompassing metric and is not measured correctly.

Understanding Total Value Locked (TVL)

TVL is a metric that measures the total value of digital assets locked or held within a smart contract platform. The TVL metric is calculated by aggregating the total value of all assets held within all decentralized applications that are deployed on a particular protocol.

A typical example of applications that are included in the TVL metric are DEXes to which people provide liquidity. Assets are locked in liquidity pools. In order to create DJED, ADA coins need to be locked, so the algorithmic stablecoin Djed is also included in this metric. Only locked ADA coins are counted, not the value of DJED coins minted.

TVL metrics can be tricky, as different portals comparing blockchains may have different strategies for measurement. It is questionable whether the value of all minted tokens or liquid staking should also count toward TVL. There may be a difference between what value the blockchain secures (what all minted assets are worth) and TVL.

For example, the Defillama portal counts the Lido project in the Ethereum TVL. There is $13.3B worth of ETH locked up in Lido and it makes up almost 50% of the TVL. Cardano has a liquid staking with almost 23B ADA coins (8.7B USD) locked in it and the same portal does not count the staking in the TVL.

EDIT: We made a mistake. Defillama does not include Lido in the TVL of Ethereum.

If native liquid staking were counted into the TVL, Cardno would rank third in the statistics, just behind Ethereum (27B USD) and Tron (6B USD). Paradoxically, native liquid staking is technologically superior to the same functionality achieved via smart contract but is not counted in the TVL metric because of this. Without Lido, there would not be such a significant difference between the TVL of Cardano and Ethereum.

Anyway, in general, TVL provides insights into the level of adoption and activity within a specific blockchain network or DeFi ecosystem. It indicates the amount of capital being deployed or "locked" in various decentralized applications and protocols. It is commonly used to assess the popularity, growth, and success of different DeFi projects and platforms.

TVL can be artificially inflated by VC funds, so more important than the high value of this metric is user activity, asset security, reliability, etc.

From our perspective, TVL is a good metric within a single blockchain project as it is possible to track historical development. To compare individual blockchains against each other can be very misleading depending on what the team includes in the metric. Sometimes it happens that teams take a long time to include a new application with a high TVL. The statistics may not be completely accurate.

In the context of the article, the question is whether it makes sense to measure Bitcoin's TVL and celebrate that Cardano has surpassed Bitcoin in this metric.

TVL and the mission of the project

Bitcoin is not a typical TVL project, as its first-layer programmability is largely limited and it does not scale well. It can be argued that TVL is not an important metric for the Bitcoin mission. Bitconers want BTC primarily for HODL and only a small portion of the community wants to do anything else with it (including payments for goods and services). The current narrative and desire to use BTC may change in the future.

The Defillama portal counts the Lightning Network, which has 143M USD locked up and has 81% dominance, in the Bitcoin TVL. In second place is Thorchain with a TVL of 21M USD.

How many people use the Lightning Network? Exact figures are hard to come by, but we can estimate. If each user transferred an average of 200 USD to LN, there would be approximately 700,000 users. Because LN has centralized nodes with high liquidity, the actual users may be orders of magnitude fewer, roughly tens of thousands, at most smaller hundreds of thousands. This number corresponds to the number of LN nodes (over 16,000) and open channels (almost 71,000).

At the time of writing, roughly 80,000 users have used Cardano in the last 24 hours. I don't think anyone with an open LN channel has sent BTC in the last 24 hours. This suggests that Cardano (mostly a DeFi service) has been used by more people than Lightning Network in the last day.

To add context, Bitcoin was used by 870,000 users and Ethereum by 500,000 users. Tron leads the statistics with 2.2M active users in the last 24 hours.

The TVL of all DeFi services on Cardano has essentially surpassed the TVL of Lightning Network which is used only for sending value. Cardano has very likely been used by more people than Lightning Network in the last 24 hours. However, Cardano's TVL is still low compared to other projects. This is the correct context for the perception that Cardano has surpassed the TVL of Bitcoin.

The Bitcoin ecosystem is not used for DeFi. Bitcoiners who want to use financial services must use some smart contract platform. The largest "Wrapped BTC" project has a market capitalization of 4,2B USD. WBTCs are ERC-20 tokens deployed on Ethereum. This single project has 30x more BTC value locked up than the Lightning Network. In the last 24 hours, less than 1,000 users have used WBTC on the Ethereum network (it could be much more on centralized exchanges).

Bitcoin is no competition for Cardano in terms of market share. The real competitor is other smart contract platforms led by Ethereum. Other platforms like Fantom, Solana, and Avalanche, or even relatively new projects like Optimism, Polygon, and Arbitrum are ahead of Cardano in the TVL metric. The first 5 projects have market capitalizations in the billions of dollars. Even if we don't count Lido in Ethereum's TVL, other DeFi projects have TVLs in the billions. For example, MakerDAO (6.3B USD), AAVE (4.6B USD), and Curve Finance (3.9B USD).

The aforementioned networks are real competition for Cardano. Not Bitcoin, whose mission is different.

If people want to use BTC in DeFi services, they will choose some other network. At the current stage of adoption, only some HODLers are doing this. A large group of HODLers are not interested in DeFi. We expect interest in DeFi to grow with higher adoption and people's need to use digital assets in financial services.

If the primary use case for Bitcoin is currently considered to be HODL, it makes no sense to compare it to TVL. TVL is the use of value while HODL is the holding of value. One would have to compare Bitcoin's market capitalization with Cardano's TVL. But this doesn't make sense either, since HODL and the use of digital value in financial services (lending, savings, insurance, etc.) are different financial operations.

Staking can definitely be classified as a financial operation as it is a form of increasing the owner's wealth (the number of ADA coins held by stakers is growing). At the same time, staking involves holding coins for a longer period of time. Staking is close to the HODL use case.

It might make sense to compare the market capitalization of projects, but we run into the problem of properly classifying coins into metrics. The market capitalization of projects includes all coins in circulation. This is logical, of course, but it has a catch. In theory, the number of coins that have left the first layer of the protocol and their value is used elsewhere should be subtracted. For example, the value of wrapped BTC coins should be subtracted from the market capitalization of Bitcoin. If it were calculated this way, Bitcoin's market capitalization would be roughly 1% lower. It is possible that the difference will be more significant in the future.

One day, 10% of all BTC in circulation may be locked in DeFi by various SC platforms. Later, even more. The important thing will be what platforms users choose. The efforts of the IOG team and the Cardano community should be directed toward making Cardano the platform that will have an edge over the others. This could be for example decentralization, quality second layers, or the Plutus platform. TVL can show us where we stand.

If it came to the point where people were using BTC on SC platforms, the question is whether it is more economically viable to hold native coins of successful platforms. The value will be created on the platforms (services), capital will be moved to them (tokenization) and the network effect will grow. Native coin projects will automatically absorb success. In the case of PoS projects, stakers will receive a portion of the fees collected. It is impossible to predict at this time whether this vision will be realized.

Cardano's mission is to become a global financial operating system. It makes sense to track the historical development of TVL. It makes even more sense to track the number of active users of DeFi services.

Conclusion

Ethereum's TVL is huge compared to Cardano, however, as of 2022 it has plummeted from 93B USD to the current 27B USD. Bitcoin's TVL has risen from 157M to 175M, so it is basically almost constant. Cardano's TVL has grown from 600K USD to nearly 500M USD today over the same period. Additionally, Lido staking is factored into Ethereum's TVL, while native liquid staking of ADA coins is not. Seen through this lens, Cardano is doing very well, but the real difference is in the DeFi applications. While successful Ethereum apps have TVLs in the billions, the most successful app on Cardano, MinSwap, has a TVL of around 66M USD.

The blockchain industry is still too young to predict future trends. If capital is pouring into cryptocurrencies, users will have a greater need to use DeFi. We expect more and more BTC to be wrapped and used on SC platforms. Cardano and other SC platforms are not competing for market share with Lightning Network. LN can only transfer the value of BTC and there is not much capital in it at the moment. If we see the Lightning Network as a project that brings some utility to Bitcoin, the good news is that it is easy to surpass this network in terms of users. Cardano probably has about as many or more active users than Lightning Network.

The goal of the Cardano community is to build DeFi services on Cardano that are attractive to users. It will be a success when we have the first DeFi service that has a TVL of over a billion USD. Cardano does not compete with Bitcoin because BTC is primarily an asset for holding capital. SC platforms compete for TVL, users, and market share at the utility level.

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