Author: Flip Reserch, crypto researcher; Translated by: 0xjs@Golden Finance
My timeline has been filled with bullish comments about SOL lately, mixed with memecoin subterfuge. I’m starting to believe that the memecoin supercycle is real and Solana will replace Ethereum as the main L1.
But then I started digging into the data, and the results were worrisome to say the least… In this post I’ll describe my findings and why Solana might be a house of cards.
Let’s first look at the case in favor of Solana, which @alphawifhat succinctly laid out:
I have four different opinions on the indicators compared with ETH plus L2s
1. The number of user transactions is relatively high
2. The cost will increase accordingly
3. High DEX trading volume
4. The proportion of stablecoin trading volume is significantly high
User number comparison
The following is a comparison between the ETH mainnet and SOL (only the mainnet is compared, because most of the fees after Dencun come from the mainnet, source: Token Terminal):
Number of ETH users and transactions
Solana users and transactions
On the surface, Solona’s numbers look good, with over 1.3 million daily active users (DAU) compared to 376,300 for ETH. However, when we add transaction counts into the mix, I notice something odd.
For example, on Friday, July 26, ETH had 1.1 million transactions and 3.763 million DAU, which averaged about 2.92 transactions per user per day. However, SOL had 282.2 million transactions and 1.3 million DAU, which averaged 217 transactions per user per day.
I think maybe it’s because of the low fees, which allows for more trades, more frequent position adjustments, increased arbitrage bot activity, etc. So I compared it to another popular chain, Arbitrum. However, Arbitrum only had 4.46 trades/user on the same day.
Looking at other chains gives similar results:
Since Solana has more users than ETH, I checked it based on Google Trends, which should be agnostic about the value of each user.
ETH is either on par with SOL or ahead of SOL. Given the DAU difference, plus all the hype around the SOL memecoin trend, this is not what I expected.
So what happened?
DEX Trading Volume Analysis
To understand the transaction count discrepancy, it helps to look at Raydium’s LPs. Even at first glance, it’s clear that something is wrong:
At first I thought this was just fake trading on low liquidity honeypot LPs to lure out weird memecoin traders, but looking at the chart it’s much worse:
Every low liquidity pool is a project that has run away in the past 24 hours. Take MBGA as an example. In the past 24 hours, 46,000 transactions occurred on Raydium, with a trading volume of $10.8 million, 2,845 independent wallets buying and selling, and more than $28,000 in fees. (Note that a widely recognized LP of similar size, MEW, only generated 11.2K transactions)
Judging from the wallets involved, the vast majority appear to be bots in the same network, with tens of thousands of transactions. They independently generate fake transaction volume, with random amounts of SOL and transactions until the project is completed, then move on to the next one.
In the past 24 hours, there were over 50 runaways with over $2.5M in volume on Raydium Standard LP, generating a total of over $200M in volume and over $500K in fees. Orca and Meteora appear to have far fewer runaways, while I struggled to find any runaways with any meaningful volume on Uniswap (ETH).
Clearly, there are serious issues with Solana’s runaway projects, with multiple implications:
Given the unusually high transaction-to-user ratio and the amount of fake/fraudulent transactions on-chain, it seems likely that the vast majority of transactions are non-human. The highest daily transaction-to-user ratio on the main ETH L2 is 15.0x, on Blast (where fees are similarly low and users are farming Blast S2). For a rough comparison, if we assume the real SOL transaction-to-user ratio is similar to Blast, that would mean that over 93% of transactions (and fees) on Solana are non-human.
The only reason these scams exist is because it is profitable to do so. As a result, users lose an amount at least equal to the fees + transaction costs incurred, which can run into millions of dollars per day.
Once deploying these scams becomes unprofitable (i.e. when actual users get tired of losing money), you’d expect most trading volume and fee revenue to decline.
So it looks like users, human fees, and DEX volume are all grossly overstated.
I'm not the only one to come to these conclusions, @gphummer recently posted something similar:
MEV on Solana
MEV on Solana is in a unique position. Unlike Ethereum, it does not have a built-in mempool; instead, projects like Jito created (now deprecated) extra-protocol infrastructure to emulate mempool functionality, allowing for MEV opportunities such as front-running, mezzanine attacks, etc. Helius Labs put together an insightful article detailing MEV:
https://www.helius.dev/blog/solana-mev-an-introduction
The problem with Solana is that the vast majority of tokens traded are extremely volatile, low-liquidity memecoins, and traders often set trade slippage to >10% to ensure successful execution. This provides MEV with a lucrative attack surface to extract value:
If we look at the profitability of block space, it’s clear that most of the value is now coming from MEV:
While this is “real” value in the strictest sense, MEV will only be implemented as long as it is profitable, i.e. as long as retail investors continue to come in and play (and net lose) MEME. Once MEME starts to cool, MEV fee income will also collapse.
I see a lot of SOL papers discussing how infrastructure will eventually rotate out, like JUP, JTO, etc. This is very likely, but it is worth noting that they are lower volatility, higher liquidity, and simply do not offer the same MEV opportunities.
Experienced players are incentivized to build the best infrastructure to take advantage of this situation. During my research, some sources mentioned rumors of these players investing in controlling mempool space and then selling access to third parties. However, I was unable to confirm this information.
However, there are some clearly perverse incentives here - by directing as much memecoin activity as possible to SOL, it allows savvy individuals to continue to profit from insider trading in MEV, memecoin, and rising SOL prices.
Stablecoins
Speaking of stablecoin trading volume + TVL, there is another strange phenomenon. Stablecoin trading volume is significantly higher than ETH, but when we look at DefiLlama stablecoin data, ETH has a stable TVL of $80 billion, while SOL is only $3.2 billion.
I think stablecoin (and more broadly) TVL is a much harder metric to manipulate than volume/fees on low-fee platforms, and it simply shows how much real money is in the game.
This is highlighted by stablecoin volume dynamics, with @WazzCrypto noting a sudden drop in stablecoin volumes after the CFTC announced its investigation into Jump:
Retail Value Extraction
Apart from running away and MEV, the outlook for retail investors remains bleak. Celebrities chose Solana as their preferred public chain, but the results were not optimistic:
Andrew Tate’s DADDY was the best performing celebrity token with a return of -73%. The other end of the spectrum wasn’t much better:
A quick search on X also reveals evidence of rampant insider trading and developers dumping on buyers:
But Flip, my timeline is full of people making millions trading memes on Solana. What does that have to do with what you’re saying?
I simply don’t believe that a KOL’s posts on X are representative of the wider user base. In the current frenzy, it’s easy for them to take a position, promote their token, profit from their followers, and repeat. There’s definitely survivorship bias here — the voices of the winners are far louder than the losers, creating a distorted view of reality.
Objectively speaking, retail investors seem to be losing millions of dollars every day from scammers, developers, insiders, MEV, KOLs, and that’s not even taking into account that most of what they trade on Solana is just memes with no real backing. It’s hard to deny that most memes will eventually go the same way as Boden.
Other considerations
Markets change rapidly, and when sentiment shifts, factors that were once blind to buyers become clear:
Poor chain stability and frequent interruptions
High transaction failure rate
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The development threshold is high, and Rust is far less user-friendly than Solidity
Poor interoperability compared to the EVM. I believe that having multiple interoperable chains competing for our attention is much healthier than being tied to a single (fairly centralized) chain.
The likelihood of an ETF is low both from a regulatory perspective and from a demand perspective. This article highlights why institutional demand will be low in Solana’s current state. @malekanoms also highlights a few points that I think are relevant from a traditional finance perspective (along with @0xmert):
Launch volume up to 67,000 SOL/day ($12.4 million)
FTX Estate still has 41 million SOL ($7.6 billion) locked. 7.5 million ($1.4 billion) will unlock in March 2025, and an additional 609,000 SOL ($113 million) will unlock each month until 2028. Most tokens appear to be available for purchase at around $64 each.
in conclusion
As usual, those selling picks and shovels profited from the Solana memecoin craze, while speculators got washed out, often without knowing it.
I believe that commonly cited SOL metrics are grossly overstated. Additionally, the vast majority of organic users are losing on-chain funds to bad actors at a rapid rate. We are currently in a mania phase where retail inflows are still outstripping outflows from these sophisticated players, which is bullish. Once users become exhausted from continued losses, many metrics will quickly collapse.
As mentioned above, SOL also faces some fundamental headwinds that will come to the fore once sentiment shifts. Any price increase will add to inflationary pressures/unlocks.
Ultimately, I believe SOL is overvalued from a fundamental perspective, and while existing sentiment + momentum may drive prices higher in the short term, the long-term outlook is more uncertain.
Original link: https://x.com/Flip_Research/article/1818216739680710776/
