Lightning did not "flippened" this crypto
Understand the difference between Total Value Locked (TVL) and Market Cap (MCap)
Some bitcoin maximalists have played a logical fallacy of false comparison to convince their followers that the Lightning Network has “flippened” Nano (XNO) in value. And the same reasoning could be applied to any other coin.
I will talk about it.
Lightning Network advocates and Maximalism
Lightning Network advocates strike again with incomplete and/or false information, with high viral sharing power as it spreads on social media among the so-called “bitcoin maximalists”.
If you are more interested in knowing about maximalism, I recommend reading this essay: “The Rise and Fall of Bitcoin Culture”, by Dr. Paul J. Dylan-Ennis. An academically focused Bitcoin OG that began its studies in 2012, attracted by the Silk Road.
The target of the moment is the low market cap cryptocurrency Nano (ticker: XNO), positioned at rank #199 on CoinMarketCap at the time of writing.
Despite this, Nano is not the only one that offers a real competitive threat to LN and, therefore, it is expected that this same argument will be used against other coins with a higher market cap, as the network grows in liquidity.
It was for this reason that I decided to write this article. In order to demonstrate the fallacy in the argument and debunk this narrative once and for all, reducing the damage it can cause to newcomers.
Nano is perhaps the lowest market cap coin that offers some sort of “competition” for LN and BTC. Which partially explains the annoyance on the part of Lightning advocates and maxis; and the need to create fallacious arguments in a show of fanciful superiority.
With a Layer 1 network capable of deterministically and irreversibly settling feeless transactions, often confirmed in less than a second, in a decentralized network, it is natural for investors with a “vested interest” in Lightning to feel that their business could be threatened.
The argument: Lightning Network “flipped” nano
The first one I saw sharing this information was u/sgtslaughterTV, moderator of r/CryptoCurrency (5.5M members), r/CryptoMarkets (1.1M members) and other related subreddits.
Moderator u/sgtslaughterTV posted: “BTC on lightning has just flipped Nano. The USD Value of all the money in Bitcoin's lightning network has surpassed the Market Capitalization of Nano.” October 18th on r/CryptoCurrency. That garnered over 200 comments.
In the post he shared two images, one with the total bitcoin deposited in Lightning (5,017.19 BTC = $98.42M USD) and another with the market cap of XNO ($98.35M USD).
Two days later, similar information was shared by @BitcoinIsaiah, founder of @CleBitcoinClub and who defines himself as “Layer-2 Promoter”, in his Twitter bio.
In this post, the influencer shares again LN's Network Capacity (5,021.42 BTC), compared to nano's market cap, measured in bitcoin (5,006.92 BTC).
The information then began to take shape in its viral power, for example, shared by @carol_bitcoin, Brazilian influencer co-founder of area.bitcoin (>120,000 followers on instagram), a bitcoin-only education platform that sells the course “ Bitcoin Starter” for R$1,837 (~US$345.00) to form new bitcoiners.
Difference between TVL and Market Cap
The problem is that the metrics used to compare both networks are different. Their formation is different and they are used for different measurement purposes.
In the Lightning Network, the metric used is the Total Value Locked (TVL), widely used for DeFi platforms to measure the amount of coins that are being used directly on that platform or smart contract, which helps to metrify the relevance of the DeFi project. I wrote about it in a Portuguese article here: “What is TVL (...)”.
At Nano, the metric used is the Market Capitalization (MCap), normally calculated from the last traded price of the asset in a specific pair (ie. XNO/USD) multiplied by the current supply at the time of calculation.
MCap ≠ TVL
Not only are they different, which in itself could make any comparison fallacious, as the measure used in Lightning could never be applied in the nano protocol, since there is no type of deposit, staking or locking of direct values in the nano protocol – as with LN and other projects.
It would be like comparing the area of a square (m2) with the volume of a cube (m3), stating that the cube is superior, as it has a greater volume. The thing is that the square could never be analyzed from this point of view, because it’s a 2D shape.
In addition, Total Value Locked is easier to manipulate and does not always represent an organic measure, as it only measures X amount of coins that have been deposited in a given network, at a given time, to be used in that network.
Taking this point to the extreme, it would be possible, for example, for a single large whale of Bitcoin to deposit 5,000 BTC in Lightning, which is a negligible amount compared to the total circulating supply of bitcoin (<20M BTC), of approximately 0.025% – to forge a network growth in public perception. And then withdraw it again.
Something similar happened with Solana’s TVL, as reported by Coindesk in: “Master of Anons: How a Crypto Developer Faked a DeFi Ecosystem”.
Currently, only 5 entities are estimated to own more than half of all lightning TVL, as reported by me on Cointimes in: “Centralization in Lightning Network: Only 5 entities dominate the new “banking system”, based on a post from @sethforprivacy.
In the case of the Market Cap, its manipulation is more difficult and also more expensive. To increase the market cap of a currency established in the market and with a fixed supply and already fully diluted, as is the case of nano, where new units will never be put into circulation, it would be necessary to carry out a price pump operation.
The problem with this is that the more the price goes up, the more capital is needed to keep it going up at the same rate. Furthermore, it is very likely that older investors could take the opportunity to take profit by selling their XNO units and forcing the price down.
In this way, MCap is a much more organic and more credible metric than TVL. Again, they are different things.
Total Value Locked in the Lightning Network
As with the DeFi ecosystem, TVL should be compared with other TVLs of similar projects; preferably viewed as a percentage share in relation to the total supply of the currency used in the network, protocol or smart contract.
For example, we can compare Total Value Locked on Lightning to Total Value Locked on wBTC, a smart contract that mints tokens tied to BTC on the Ethereum blockchain. A kind of second layer of bitcoin and a direct competitor of the LN.
In wBTC, its TVL is 244,980.34 BTC (1.225% of bitcoin's circulating supply), according to CoinMarketCap. Which is 49 times higher than the ~5,000 BTC (0.025%) seen in Lightning.
With this measure, it is clear that a vast majority of investors and users prefer to keep Bitcoin on-chain, in its first layer, or else use it in the Ethereum ecosystem, before LN.
You cannot consider the amount of BTC deposited in LN as a market cap, otherwise this value would be doubled, as it is already considered in the general market capitalization of bitcoin, by multiplying the current price by the circulating supply.
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