400 trillion USD is a staggering amount of money that commands attention whenever it’s brought up in conversation. During a presentation by Radix Works, the speaker mentioned that digital ledgers and their total market cap have barely touched the total world wealth value of 400 trillion USD, which is based on the Annual Wealth Report from Credit Suisse, and has recently grown to a whopping 463 trillion USD, this is the total market cap of planet earth. While market capitalization has traditionally been used to measure the value of something, like cryptocurrencies or stocks, there is another metric that is becoming increasingly popular in the world of decentralized finance (DeFi) known as Total Value Locked or TVL.

At present, the total crypto market cap is about 1.2 trillion USD, while the TVL or total value of digital assets locked in DeFi ledgers or platforms is only around 35 billion USD. TVL is the total value of digital assets that are locked or staked in a particular DeFi ledger or platform. Essentially, it is a measure of the value of a DeFi platform because it takes into account the amount of digital assets that are actively being used on that platform. This difference between market cap and TVL raises the question of why TVL is so much lower than market cap. To answer that question, it’s important to understand what TVL represents.

First, let’s start with some numbers. As mentioned above, the total crypto market cap is about 1.2 trillion USD. In comparison, the total value of digital assets locked in DeFi ledgers or platforms is only around 35 billion USD. That’s a huge difference, and it begs the question: why is TVL so much lower than market cap?

To understand the answer, let’s take a closer look at what TVL actually means. TVL is the total value of digital assets that are locked or staked in a particular DeFi ledger or platform. Here is a real world example to help understand how it works. Suppose we drop off a coat at dry cleaning and get a redemption ticket in return, if the only way to get the coat back is to swap it for the ticket, then we can see that the ticket is worth 1 coat. Similarly, on a DLT if you lock up 1,000 USD as USDC in a staking pool or vault and get 1 FLOOPY token in return, then 1 FLOOPY is worth 1,000 USD. In other words, TVL is one accurate representation of the actual value of a particular DeFi platform or ledger because it takes into account the amount of digital assets that are actively being used on that platform.

On the other hand, market cap is a more traditional metric that has been used to measure the value of stocks and cryptocurrencies for a long time and market cap is calculated by multiplying the current price of a cryptocurrency by the total number of coins or tokens in circulation. However, market cap can be a misleading metric because it doesn’t necessarily reflect the true value of a cryptocurrency. For example, if some random person, one evening in his/her basement, creates 1 billion digital tokens and then turns around and sells 1 token to a friend for $10, the market cap would be 10 billion USD even though there is no real depth of market for those tokens. Clearly this person didn’t just become a multi-billionaire in his/her basement just by digitally creating tokens and then selling exactly one of them. As an aside, if you want to see this kind of mark to market accounting and fake value creation in the real world, simply follow the disastrous collapses of Enron and FTX. These two companies faked value in the same manner, then borrowed real dollars against this fake value. How can we be sure that there isn’t the same house of cards in the market cap metric? I don’t think it is possible at this time. Anonymous wallets can create prices and pretend volume for very little cost and make certain market caps seem large. Depth of market is difficult to define in a way that it isn’t gamed. That is why I think TVL is much more informative.

Another issue with market cap is that it doesn’t take into account the depth of the market. This means that even if a particular cryptocurrency has a high market cap, it doesn’t necessarily mean that there is a large number of buyers and sellers actively trading that cryptocurrency, and even if there are a large number of buyers and sellers, it is not easy to know if these transactions are real or fake, or acting to game the system. This is where TVL comes in handy, as it provides one type accurate representation of the actual usage and value of a particular DeFi platform or ledger.

TVL is an accurate metric for measuring the value of decentralized ledgers because it takes into account the actual usage of digital assets on a particular platform. Market cap can be misleading because it doesn’t necessarily reflect the true value of a cryptocurrency and can be easily manipulated by creating fake volume or inflated prices. While it’s still early days for TVL as a metric, it’s becoming increasingly popular in the DeFi space as a way to measure the true value of decentralized ledgers.

So can the TVL or market cap ever reach 463 trillion USD? I think TVL will be the number to look at, that market cap is more or less meaningless, and more importantly, the rate of TVL growth, is the most important metric for a particular DLT because this is an indicator of network effects.