Hello readers,
You don’t have to “be first” or super early to succeed in crypto.
In fact, I almost never want to be super early. It’s not my style. I’d rather watch others go first. Be curious. Study onchain data. Observe the nuances of the crypto markets. Identify where we’re at in the business/liquidity cycles.
And wait for market dislocations.
The greatest gift of the crypto markets is that you can get venture-style returns by doing this well — something that is not possible in TradFi.
One of the largest dislocations we’ve seen was in December of 2022. Solana’s market cap had dropped to just 3% of Ethereum’s in the wake of the demise of FTX.
We didn’t think that was right — and so we shared our research and went long SOL (a position we still hold). Pt. 1. Pt. 2.
Since that time, Solana has appreciated to capture 17% of Ethereum’s (+the top L2s) market value. It’s been the trade of the cycle.
And now it’s time to revisit the network to answer the following question:
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.
Let’s go.
Note that we included the following L2s in the comps data: Arbitrum, Base, Optimism, Blast, Celo, Linea, Mantle, Scroll, Starknet, zkSync, Immutable, and Manta Pacific.
Data: Token Terminal, Artemis
In Q2, Solana averaged 1.3 million daily active addresses (a proxy for users) — 50% of Ethereum and the top L2s.
Data: Token Terminal, Artemis
In Q2, Solana did $151m in fees — 27% of Ethereum + the top L2s.
Data: Artemis
Solana did $108 billion in DEX trading volume in Q2 — 36% of Ethereum + the L2s.
Data: Artemis
Solana did $4.7 trillion (!) in stablecoin volume in Q2 — 1.9x that of Ethereum + the top L2s.
*We are not concerned about the fact that a large % of that is related to meme coins & bots/algorithms. Why? It’s estimated that more than 60% of TradFi volume is algorithmic trading. The signal here is that Solana has product/market fit with stablecoins. 99.2% of the Q2 volume was USDC.
Data: Artemis
Solana averaged $4.3 billion of TVL in Q2 — 7% of Ethereum and the top L2s.
Data: Token Terminal
Solana averaged 59 active core developers per day in Q2 — 11% of Ethereum + the top L2s. Note that these figures do not include app/protocol/ecosystem devs.
Based on Q2 performance, Solana now has:
50% of Ethereum’s Users.
27% of Ethereum’s Fees.
36% of Ethereum’s DEX Volumes.
190% of Ethereum’s Stablecoin Volumes.
7% of Ethereum’s TVL.
And 11% of Ethereum’s Developers.
Remember, the market is currently pricing Solana at an 83% discount to Ethereum.
Let’s move into some of the more qualitative differences. Maybe the market is seeing something that is not revealed in the onchain data.
The DeFi Report is powered by Token Terminal — the leading onchain data & analytics platform for institutional investors. If you’re interested, you can sign up for a free account at the link here: FREE ACCOUNT
It’s easy to be bullish on Ethereum right now. But how do you express your view?
Within the ethereum ecosystem, execution and settlement are separated. Which means more value could ultimately accrue to one or the other. L2s (execution). Or the L1 (settlement). We broke that all down in our last report.
Solana doesn’t have this issue — because settlement and execution are batched together.
SOL (the asset) covers it all.
Furthermore, the SOL token has similar utility and value accrual mechanisms as ETH:
Pay for gas/block space. If you want to transfer a stablecoin, transact on a DEX, mint an NFT, play a game onchain, get a loan, etc. You’ll need some SOL.
Collateral to access yield. Want to capture the yield (fees) coming off of the Solana blockchain? You’ll need some SOL.
Deploy a smart contract. Want to build something on Solana? You’ll need some SOL.
Medium of exchange. Want to purchase your favorite NFT on Tensor? You’ll need some SOL.
Solana does not have (VC-funded) L2 infrastructure components competing for user fees/MEV and market share — potentially diluting value accrual to SOL. ETH does.
The SOL token captures value in the same ways that ETH does, and is growing a network effect around its utility in a similar manner.
The ETF. Given the success of the BTC ETF, we expect to see a similar outcome for ETH, pushing prices past all-time highs sometime this fall — even if the flows are only 10-20% of BTC’s
Real World Assets. We’ll be looking to see if the RWA narrative heats up post-ETF. This is something Blackrock is pushing. Three reasons why (speculating): 1) They want to tokenize their funds for the efficiencies the blockchain will bring to the back-end accounting & admin. 2) They want to capture fees related to the transition. 3) Blackrock is motivated to legitimize its ETF product by bringing more utility to Ethereum as new financial infrastructure.
If Blackrock starts tokenizing more funds post ETF, this could create some reflexive volatility to the upside for ETH.
Coinbase & Base. Base is now the fastest-growing L2. ETH could be a beneficiary as Coinbase continues to push more of its users into the ecosystem via Base.
Blinks. Blicks = “blockchain links.” It allows you to embed a link into Twitter (and soon other places) in which you can interact onchain directly from your social feed. It basically connects your web3 wallet to all of the conveniences of web2. Phantom and Backpack wallets have already integrated it. Solflare is next.
We think this is a big deal.
Why?
In web2 if you want to buy something, you need to 1) connect to a new website, 2) connect your email, 3) pay with a credit card, 4) put in your billing address, etc.
This is about to change.
With blinks, a creator could share a link to content that users could pay or subscribe to right in their feed. Viral memecoins could share links right to DEX swaps directly on twitter. NFTs could be minted right on the social app.
We think this will change e-commerce in ways that are hard to imagine right now. For example, Nike could share links to new consumer goods right from its company Twitter (or via influencers) with customers buying right from their social feed.
Nike would then have the wallet address of the buyer (the “perfect cookie”) and can share additional perks, experiences, and rewards via NFTs.
Blockchain links can also be used for onchain governance — again, right from the social feed.
Blinks are rolling out on Twitter but we should expect to see them on other social media sites soon. The use cases will likely look scammy or “toy-like” in the beginning.
But we’re looking for this to heat up later in the current cycle.
Firedancer. Firedancer is a new Solana validator client developed by Jump Crypto. It promises to significantly improve Solana’s performance, reliability, and scalability by supporting more concurrent transactions. It will also enhance overall network efficiency and reduce operational costs for node operators.
Most importantly, the introduction of Firedancer will eliminate Solana’s single point of failure today and eliminate the chances of the chain being halted in the future.
Firedancer should be ready for mainnet deployment later this year.
Stablecoins/Payments. As noted, Solana is now doing nearly 2x the stablecoin volume of Ethereum. Stripe recently integrated with Solana.
DePIN. With Helium and Hivemapper thriving on Solana, we think the DePIN narrative will heat up later in the cycle — with most of the activity taking place on Solana.
Social. We continue to believe that a social media app that integrates crypto in some way could go mainstream via celebrities and influencers. It’s possible that this could play out via a combination of Twitter + Blinks + Liquid Staking Tokens (via Sanctum — a topic we plan to cover in an upcoming report). Keep an eye on Farcaster as well — which is now integrated with Solana.
SOL ETF? VanEck filed for a SOL ETF recently. We’re now hearing rumors that Blackrock is preparing an application. Given that we may see a change in the White House in 5 months or so, it’s possible we could see a SOL ETF as early as next year.
It’s better on Solana. There’s not much more to add here. Fees are cheap. There is no bridging. Transactions are instant. The wallets are easy to use. And the onboard is simple.
Solana is VC-funded. It moves fast and operates more like a start-up than Ethereum — which is heavily focused on research. Furthermore, if you’re Blackrock and you want to get something done on Ethereum, who do you call? There is no business development. And very little developer support.
Meanwhile, Solana has the most robust hacker house program in crypto + a well-funded Foundation focused on building apps to onboard users — rather than infrastructure and research.
Data: Token Terminal
Back in December of ‘22, Solana was trading at just 3% of Ethereum’s market cap. It’s outperformed ETH in a big way since — with the network now capturing 17% of Ethereum’s market cap (+ the top L2s).
The question moving forward is whether SOL will continue to outperform for the remainder of the cycle.
Our view is that ETH will outperform post-ETF approval. However, we believe that Solana will peak out at roughly 25% of Ethereum’s market cap this cycle. If we get to the $10 trillion total crypto market cap target, this means SOL could get to somewhere in the $400-$450 billion range. This would be roughly 6x from today and would exceed our expectations for ETH.
Ultimately, we believe Solana is well-positioned to gain more of Etheruem’s market share with time. With that said, we expect Ethereum to capture more of Bitcoin’s market share as well. And to be clear, we do not see them cannibalizing each other. Rather, the pie is growing for everyone with the market getting smarter as to where the most value lies.
As always, crypto is risky. There are many risks that could derail our forecast including 1) tech risk, 2) execution risk, 3) political risk, 4) macro/economic risk.
Thanks for reading and please do your own research.
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 an 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.