Pattern Matching within Solana

Will Solana's core infrastructure projects outperform SOL in this cycle?

March 20, 2024Michael Nadeau
Pattern Matching within Solana

Hello readers,

Long-time subscribers know that our thesis is that there will be 4-5 primary layer 1 networks when it’s all said and done. To date, we’ve built conviction (and portfolio construction) around Bitcoin, Ethereum, and Solana.

In this week’s report, I want to share the approach we’ve taken with Solana. You’ll find that the key theme of this report is pattern matching — with the intent of providing you with a framework for building a portfolio of quality crypto assets within a high-growth network.

Disclaimer: Views expressed are the author’s personal views and should not be taken as investment or legal advice.

Let’s go.

Why Solana?

Without getting too far into the weeds, here is where Solana ranks across some important KPIs amongst the top layer 1 blockchains today:

Daily Transactions: #1

Data: Artemis, Token Terminal (ETH L2s = Arbitrum, Optimism, zkSync, Starknet, Base, Manta Pacific, Blast)

Active Addresses: #1

[with a recent surge, but this is hotly contested between Ethereum, BNB, Polygon, and Tron]

Data: Artemis, Token Terminal (ETH L2s = Arbitrum, Optimism, zkSync, Starknet, Base, Manta Pacific, Blast)

DEX Trading Volumes: #2 (currently behind Ethereum)

Data: Artemis (L2s = Arbitrum, Optimism, zkSync, Base, Mantle, Scroll)

Daily Fees: #2.

Ethereum still dominates, however, Solana surged past Bitcoin, Tron, and BNB over the last few weeks. We’ll see if this persists or is simply a flash in the pan related to memecoin trading.

Data: Artemis, Token Terminal (Ethereum L2s = Arbitrum, Optimism, Base, zkSync, Starknet, Manta Pacific, Blast)

From a more qualitative perspective, we like Solana’s:

  • Technology (speed, UX, decentralization, integrated tech stack, differentiated)

  • Leadership team (highly respected, humble, mission driven, willing to “chew glass”)

  • Community (tribal nature reminds us of ETH in 2018/2019)

  • Hacker House & Developer Programs (the best in crypto in our opinion)

  • VC Presense (addition by subtraction after FTX)

  • The Solana Foundation (well-funded, and well-organized)

  • Developer focus on users and apps vs infrastructure

Finally, Solana “rose from the ashes” post FTX after the token dropped 97% and the market left it for dead. It seems clear now that these tough times ultimately strengthened the community and brought it closer together — something that successful blockchains such as Bitcoin and Ethereum have already experienced.

We gained conviction on Solana in late ‘22 and ultimately shared our due diligence on the project in the first week of January ‘23:

Pattern Matching

Having been through multiple crypto cycles, it was really pattern matching that forced us to take a good look at Solana despite the many challenges in the crypto winter.

For example, we shared this data table comparing Ethereum in Jan. 2019 to Solana in Jan. 2023.

Data: Token Terminal, Etherscan, Solscan, Nansen, Coingecko, Defillama

The combination of the quantitative factors above + the qualitative factors (leadership, mission-driven dev community, tech, foundation, etc.) helped tie it all together.

Core Infrastructure & Portfolio Construction

In this section, we share our current thinking on how one might construct a Solana portfolio — following similar “pattern matching” criteria.

This is the “aircraft carrier” approach to investing in crypto networks. It goes like this:

  1. Develop a thesis for the L1 and invest. This is the aircraft carrier.

  2. Identify core infrastructure sectors that could outperform the L1 if your thesis is correct.

  3. Develop a thesis for each sector of core infrastructure.

  4. Conduct your due diligence on individual projects and invest in projects that could outperform the L1. These are the jets, planes, and smaller boats on top of the aircraft carrier.

Please note that we’re keeping it high-level in this report for brevity's sake. We’ll have deeper dives on each sector/individual in the coming weeks.

Let’s dive in.

Decentralized Exchange (DEX)

If you study enough L1s and L2s, you’ll notice that the first project typically built is a DEX. Why? DEXs are the backbone of the entire ecosystem. They help to 1) bootstrap liquidity/TVL, 2) bring in users, and 3) facilitate efficient, peer-to-peer markets.

Naturally, this begs a few questions:

What are the top DEXs on Solana?

Raydium and Orca dominate today in terms of volume and liquidity — with Raydium edging out a slight lead today. Both projects launched in Feb. ‘21.

Given that Solana’s DEX volume is now outpacing ETH L1 on some days, it’s reasonable to project that one of these projects could reach a similar market cap as the largest DEX on Ethereum. Naturally, one might ask the following questions:

What’s the #1 DEX on Ethereum and what do its fundamentals look like?

Uniswap has dominated the DEX scene on Ethereum from the start. It’s #1 across each of the metrics below.

Data: Token Terminal

How do Solana DEXs compare to Uniswap based on fundamental analysis?

Purely looking at trading volumes, Orca did about 27% of the volume that Uniswap did over the last 30 days. Raydium did about 35%.

But Orca is just 3% of Uniswaps fully diluted market cap today. Raydium is 11%.

How big did the #1 DEX on Ethereum get in the last cycle?

Uniswap averaged nearly $2b in volume/day in ‘21 and almost $4m in trading fees/day — levels that Orca and Raydium have in their sights today.

Its market cap got as high as $22 billion at those trading volumes (106x Orca today and 39x Raydium).

Is there a reason to think that a DEX on Solana could be bigger (or smaller)?

Solana is more performant and less complex from a user experience today.

However, there is a rather large elephant in the room: Jupiter. Jupiter, a DEX aggregator (and more), owns the relationship with users on Solana today.

Data: Artemis

This differs dramatically from what we see on Ethereum in terms of the splits between active users on dexes vs aggregators:

Data: Token Terminal

Despite the service that 1inch delivers in terms of sourcing liquidity from a number of DEXs at the best price, Uniswap owns the relationship with the user on Ethereum. As a result, Uniswap has a market cap today of $7.4b while 1inch is just $681m.

Key Takeaway: the market is putting a premium on where the user interfaces (we agree with this). Therefore, the most relevant comp to Uniswap on Solana is Jupiter in our opinion. Jupiter has a market value of $1.8b today.

Of course, this doesn’t necessarily mean that Jupiter will outperform Orca and/or Raydium this cycle. Given the lower market cap, it’s still very possible that Orca outperforms given the volume running through it.

Liquid Staking

Up next is liquid staking. We’ve covered Marinade (our preferred provider) and Jito in prior coverage (with comps to Lido). We recommend checking out that report as our thesis has not changed.

Data: Dune (ilemi), marinade.finance, defillama, coingecko, crunchbase as of 3.18.24

Data Oracles

Chainlink owns a 97% market share amongst EVM chains when it comes to data oracles — critical infrastructure for any L1 network.

But a different story is playing out on Solana, where Pyth appears to have achieved escape velocity and similar market dominance.

Chainlink reached a market cap of $22b in the last cycle. Pyth is $1.3b today.

Data: Dune @agaperste, Pyth Network, Chainlink, Coingecko

Identity

We shared our thesis for ENS last year. If you’re interested, you can check that out here (our views have not changed).

Bonfida, or Solana Name Service, is the ENS equivalent on Solana. So, if you 1) believe Solana is here to stay, and 2) that Solana users will want to make their wallet addresses human-readable, FIDA could be a way to express that thesis.

It has 237k active .sol registrations to date. ENS has over 2 million .eth active registrations.

ENS Market Cap: $588m

Bonfida Market Cap: $57.9m

Moonshots (DePIN +Memecoin)

Moving on to a few potential moonshots that are not necessarily “core infrastructure,” though one could argue that each chain has a“culture coin.” We think Bonk represents Solana’s culture in a similar way that Shiba Inu plays this role on Ethereum.

Shiba reached a market cap of $40b last cycle.

Today, Bonk has a market cap of $1.3b. Of course, keep in mind that memecoin mania has taken hold on Solana — potentially diluting Bonk’s future upside.

Finally, we are bullish DePIN and we think Hivemapper has a chance to catch a serious narrative later in this cycle. A few stats on Hivemapper, a decentralized global mapping service:

Unique kilometers mapped globally: 9.24m (15% of the globe)

Contributors: 86k

Regions: 3,624

To be clear, Hivemapper seeks to disrupt Google Maps by producing fresh mapping data with a global, decentralized team of drivers incentivized with tokens and pseudo ownership in the service. The DAO sells its mapping data B2B. Given the size of the global mapping business (projected $40b by 2030), we think Hivemapper represents a project with disproportionate risk/reward given its rather small market cap ($181m). If the project were to make it into the top 100 coins this cycle (*a big if*), its valuation could potentially reach $5- $10b. That’s why we put it in the “moonshot” category.

Conclusion

If you’re bullish Solana, we think you should also be bullish on Solana’s core infrastructure — where there are projects with seemingly disproportionate risk/reward that could potentially outperform the L1 this cycle.

As noted, we’ll be diving into each sector individually in the coming weeks & months with more data-driven coverage.

Thanks for reading.

Take a Report.

And Stay Curious.

Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not a registered investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

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