Editor's note: This article profoundly explains the potential problems of Solana. Although its user base and transaction volume seem to be better than Ethereum, in-depth analysis shows that most of the transaction volume may originate from wash volume and runaway projects, leading to false prosperity. . Through detailed data analysis of user activity, DEX transaction volume, MEV phenomenon, etc., the author points out that Solana’s indicators are exaggerated and the on-chain ecology is facing serious fundamental problems.
Lately, my social media timeline has been filled with bullish talk about $SOL, as well as some altcoin hype. I'm starting to believe that the altcoin super cycle is real and that Solana will surpass Ethereum and become the major Layer 1 blockchain. However, when I dug deeper into the data, the results were troubling… In this post, I’ll share what I discovered and why Solana may be a house of cards.
First, let’s look at the bull case articulated by @alphawifhat:
Source: X
User base comparison
Four key data comparisons with Ethereum and Lauer2:
High user ratio
Relatively higher handling fees
High decentralized exchange (DEX) trading volume
Significantly higher proportion of stablecoin transactions
The following is a comparison of the user base of the Ethereum mainnet and $SOL (only the mainnet data is compared, because after the Dencun upgrade, most of the Ethereum handling fees come from the mainnet):
Figure source: Token Terminal Ethereum user base and number of transactions
Figure source: Token Terminal$SOL user base and number of transactions
On the face of it, $SOL’s numbers are impressive, with over 1.3 million daily active users (DAUs), compared to just 376,300 for Ethereum. However, when I factored in the number of transactions, I noticed something strange.
For example, on Friday, July 26, there were 1.1 million transactions for Ethereum, corresponding to 376,300 DAUs, for an average of approximately 2.92 daily transactions per user. However, $SOL’s data is 282.2 million transactions, corresponding to 1.3 million DAUs, which means that each user conducts an average of 217 transactions per day.
Further reading
Have you been cheated? Don’t trust the project side gullibly, “daily active addresses” cannot represent real users
I thought this might be due to $SOL’s low fees, allowing users to make more trades, adjust positions more frequently, increase arbitrage bot activity, etc. But when I compared it to another popular chain, Arbitrum, I found that Arbitrum had only 4.46 transactions per user on the same day. Looking at the data of other chains also yielded similar results:
Source: X
Given that $SOL has a higher number of users than Ethereum, I checked Google Trends, which should be relatively neutral to the value per user.
Source: X
It turns out that Ethereum is either trending in line with or ahead of $SOL. This isn’t what I expected given the huge gap in $SOL’s daily active users and the recent hype surrounding the $SOL altcoin craze, so what exactly is going on?
Image source: BlockBeats
Analysis of decentralized exchange trading volume
In order to understand the difference in transaction volume, it is instructive to analyze Raydium’s liquidity pools (LPs). Even from a preliminary inspection, it's obvious that something is amiss:
Image source: BlockBeats
At first, I thought this was just wash trading via low-liquidity “honeypot” liquidity pools (LPs) to attract the occasional altcoin speculator, but after taking a closer look at the charts, it was far worse than I thought.
Image source: BlockBeats
Every low-liquidity fund pool project has run away in the past 24 hours. Taking MBGA as an example, in the past 24 hours, there were 46,000 transactions, with transaction volume reaching $10.8 million, 2,845 unique wallets participating in buying and selling, and generating more than $28,000 in fees on Raydium. (For comparison, $MEW, a legitimate liquidity pool of similar size, only generated 11,200 transactions)
Looking at the participating wallets, the vast majority appear to be bots belonging to the same network, making tens of thousands of transactions. They independently generate fake trading volume with a random $SOL amount and a random number of transactions until the project runs away and then moves on to the next g target.
In Raydium's standard liquidity pool, more than 50 projects have been idle in the past 24 hours alone, with a trading volume of more than 2.5 million US dollars, a total of more than 200 million US dollars in trading volume, and more than 500,000 US dollars in procedures. fee. Orca and Meteora have significantly fewer off-the-shelf projects, while there are almost no off-the-shelf projects with substantial trading volume on Uniswap (Ethereum).
Obviously, the problem of running away on Solana is very serious, which has brought many impacts:
Given the unusually high ratio of exchange users, as well as the number of wash trades and runaway projects on the chain, the vast majority of transactions are not organic. On the main Ethereum L2, the highest daily transaction user ratio is Blast (the handling fee is also low, and users are also farming Blast S2), with a transaction user ratio of 15.0x. As a rough comparison, if we assume that the real $SOL transaction user ratio is similar to Blast, this means that more than 93% of transactions (and corresponding fees) on Solana are inorganic.
The only reason these scams exist is because they make money. As a result, users lose at least an amount equal to fees and transaction costs every day, cumulatively reaching millions of dollars.
Once these scams are no longer profitable (for example, when actual users get tired of losing money), most trading volumes and fee income are expected to decrease significantly.
It appears that users, true fee income, and DEX trading volume have all been greatly overstated.
I'm not the only one to come to this conclusion, @gphummer recently posted a similar sentiment:
Source: X
MEV on Solana
Solana's MEV is in a unique position. Unlike Ethereum, Solana does not have a built-in transaction pool (mempool); instead, projects like @jito_sol once (now deprecated) created infrastructure outside the protocol to simulate The transaction pool function provides opportunities for MEV, such as front-running, sandwich attacks, etc. Helius Labs has written an insightful article detailing Solana’s MEV.
The problem Solana faces is that the tokens most traded are ultra-high-volatility, low-liquidity altcoins, and traders often set slippage of over 10% to ensure trades execute smoothly. This provides MEV with an attractive attack surface from which to extract value:
Source: X
If we look at blockspace profitability, it’s clear that most of the value currently comes from MEV tips:
Source: X
Although this is technically considered the "real" value, MEV will only be executed when profits are made, i.e. as long as retail investors continue to participate in (and net losses from) altcoin trading. Once the altcoin craze begins to cool down, MEV fee income will collapse as well.
I see a lot of arguments for $SOL mentioning that it will eventually move to infrastructure type projects like $JUP, $JTO, etc. While this shift may indeed exist, it’s worth noting that these tokens are less volatile, more liquid and obviously don’t offer the same MEV opportunities.
Established players are incentivized to build the best infrastructure to take advantage of this situation. In my in-depth research, several sources mentioned rumors of these players investing in controlling trading pool space and subsequently selling access to third parties. However, I am unable to verify this information. However, there do exist some clear distorted incentives - by channeling as much altcoin activity as possible to $SOL, this allows certain sophisticated individuals to continue to profit from MEV, as well as conduct insider trading on these altcoins , and benefit from the price increase of $SOL.
Stablecoin
When it comes to stablecoin trading volume and total value locked (TVL), another strange phenomenon has emerged. Stablecoin trading volume is significantly higher than Ethereum, but when we look at @DefiLlama’s stablecoin data, Ethereum’s stablecoin TVL reaches $80 billion, while $SOL is only $3.2 billion. I believe that stablecoin (and more broadly) TVL is a less susceptible to manipulation metric than volume and fees on low-fee platforms, and shows the risk exposure of participants within it.
This is further underscored by the dynamics of stablecoin trading volumes - @WazzCrypto noted that there was a sudden drop in trading volume when the CFTC announced it was investigating Jump.
Source: X
Retail value extraction
Beyond runaways and MEVs, the outlook for the retail market remains bleak. Celebrities chose Solana as their go-to chain, but the results weren't great:
Source:X
Andrew Tate’s $DADDY is the best-performing celebrity token, but the reward rate is still a whopping -73%. At the other end of the boxing skill spectrum, things are just as bad:
Source: X
A quick search on X also shows evidence of rampant insider trading and developers dumping tokens on buyers:
Image Source: X My timeline is full of people making millions by trading altcoins on Solana.
I don't think the KOL's posts on There is definitely survivorship bias here - the voices of the winners are louder than the voices of the losers, creating a distorted perception of reality.
To put things into perspective, retail investors are losing millions every day to scammers, developers, insider traders, MEVs, KOLs, etc., and that’s not counting the majority of the tokens they trade on Solana Just altcoins with no actual backing. It’s hard to deny that most altcoins will eventually go the way of $boden.
Other considerations
The market is fickle, and when sentiment turns, factors that buyers were once blind to can emerge:
The chain has poor stability and frequent failures.
The transaction failure rate is high.
Hard to read by block explorers.
The barrier to development is high, and Rust’s user-friendliness is far lower than Solidity’s.
Poor interoperability with EVM. I think it would be healthier to have multiple interoperating chains competing against each other rather than being restricted to a single (relatively centralized) chain.
The likelihood of ETFs is low, both from a regulatory perspective and a demand perspective. @malekanoms also pointed out some points that I think are relevant from a traditional finance perspective (plus a rebuttal from @0xmert):
Source: X
High emissions of up to $67,000 $SOL per day (approximately $12.4 million).
There is still $41 million in SOL (approximately $7.6 billion) locked in the FTX estate sale. By March 2025, 7.5 million (approximately $1.4 billion) will be unlocked, with a further 609,000 (approximately $113 million) unlocked each month until 2028. Most tokens can be purchased for around $64 each.
in conclusion
As usual, shovel and hammer sellers profited from the Solana altcoin craze, while speculators suffered losses, often unknowingly, with the oft-cited $SOL metric being significantly inflated. In addition, the vast majority of organic users are rapidly losing money on the chain due to the influence of criminals. We are currently in a feverish phase, with retail inflows still outpacing outflows from these established players, creating a positive halo. These indicators will quickly collapse once the user becomes exhausted from continued losses.
As mentioned above, $SOL also faces a variety of fundamental headwinds that will come to the fore once sentiment turns, with any increase in price adding to inflationary pressures and unlocking. Ultimately, $SOL is overvalued from a fundamental perspective, and while existing sentiment and momentum may drive the price higher in the short term, the long-term outlook is much more uncertain.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: (Blockbeats)
Original author: Flip Research
