Source | Web3 Academy
Compiled by Bai Ze Research Institute
There’s no doubt that investor sentiment is low on Solana…
Take a look at the price chart below. Over the past 14 months, the price of SOL (Solana’s native token) has fallen from around $260 to under $10 to, at the time of writing, just over $16.
That said, SOL is down nearly 97% from its all-time high.
To make matters worse, one of the top NFT projects on Solana, DeGods, recently announced that it would migrate to Ethereum, while the team’s second project, Y00ts, will also migrate to Polygon.
Of course, all of this happened despite the bankruptcy of FTX, one of the largest SOL holders (over 10% of total supply) and a Solana ecosystem investor.
There is no doubt that things are looking bad for Solana right now.
However, as cryptocurrency investors in 2018 know, Ethereum went through something similar.
In 2018, the price of ETH fell from its then-all-time high of $1,428 to around $85, a drop of nearly 94%.
The cryptocurrency and Web3 space was very different back then, with many projects running out of money and investors fleeing the space after the bear market set in, leaving many, even loyal members of the Ethereum community, questioning whether the Ethereum blockchain would succeed.
Thankfully, the Ethereum community eventually survived the long crypto “winter” and became the vibrant and thriving Ethereum ecosystem we know today.
If there’s one thing I learned from the 2018 ETH crash, it’s that there is a big difference between the Ethereum blockchain and the native currency, ETH.
The same is true for the Solana blockchain and its native currency, SOL. So while the price of SOL looks really bad, it may not reflect what is happening with the Solana blockchain and its community.
In fact, take a look at the price chart of Amazon stock below.
In 2000, AMZN’s price fell 94.79% to $4. AMZN’s recent all-time high was $165, and in its 26 years of stock market trading, it has seen:
Seven times the price dropped by more than 30%
Four times the price dropped by more than 50%
and three price drops of more than 60%
However, this does not prevent Amazon from being one of the largest companies in the world.
The crux of the matter is that price has nothing to do with the underlying technology. The price of technology will always fluctuate and can sometimes become significantly "decoupled" from its fundamental value.
But that doesn’t matter because network effects are the real driver of a technology’s adoption.
Why network effects matter
A network effect is a phenomenon whereby the “value” of a particular technology increases as more and more participants use (or interact with) it.
A more valuable technology increases the number of actors using (or interacting with) that technology, which again increases its "value", and thus the number of actors.
For example, the internet gets better as more people start using it. Facebook, Amazon, etc. have the same network effect advantage.
Once a technology reaches a certain level of network effects, it becomes difficult to kill — especially if the network continues to grow over time. Both Bitcoin and Ethereum may have reached this point.
So, when we ask the question “will Solana die?”, what we need to do is look at its network effects. We have to investigate what the participants of the Solana blockchain (i.e. users and developers) are doing.
The beauty of blockchain technology is that we can do this!
We can look at new user trends on the Solana blockchain.
We can review the trends of user transactions and value on the Solana blockchain
Most importantly (especially in the early days of a technology), we can study trends in developer activity and new projects being deployed on the blockchain.
Before analyzing the on-chain data, keep in mind that we are now 14 months into the bear market, so naturally, these numbers may look bad.
So what we’re going to do is compare Solana’s stats to Ethereum over the same time period, as well as Ethereum’s stats during the 2017-2018 “bear market”, to see how healthy Solana is right now.
Active wallets
If we look at daily active users (DAU) on the Solana blockchain, we see that after the FTX incident, it dropped from its all-time high of 454,229 directly to a low of 95,958 DAU, a 78.8% drop.
In contrast, Ethereum’s DAU dropped much less sharply, falling from 528,671 to a low of 295,500, a 44% drop over the same time frame for Solana.
We also need to remember that the Ethereum community is currently focused on migrating users from Layer 1 to newly thriving Layer 2s like Arbitrum and Optimism.
We can see in the chart below that these L2s actually gained users over the 14 months of the bear market.
However, a fairer comparison might be to look at Ethereum’s drop in DAU during the ETH crash of 2018. Interestingly, during the 2018 bear market, Ethereum’s DAU dropped from 459,969 to 128,265, a 72% drop in DAU.
To recap…
Daily Active Users
Solana 2022 = -78.8%
Ethereum 2022 = -44%
Ethereum 2018 = -72%
price
Solana 2022 = -97%
Ethereum 2022 = -79%
Ethereum 2018 = -94%
So far in this bear market, Solana appears to be posting similar numbers to Ethereum in 2018 in terms of price and DAU.
The main difference is that Solana faces direct competition from other public chains in this bear market, whereas in 2018, Ethereum was essentially the only viable smart contract platform.
It is important to note that Ethereum L1 and Solana blockchains should not be considered competitors as their goals are very different. However, Ethereum L2 and Polygon are considered direct competitors to Solana.
So it’s interesting that Ethereum L2 and Polygon are growing, but Solana is not.
Transactions and TVL
Solana executes significantly more transactions (txns) per week than Ethereum.
However, the legitimacy of these txns is questionable as many txns on Solana are believed to be bots executing batch transactions.
Solana’s weekly transactions dropped 74% from 496,847,478 to 127,963,178, and during the same period Ethereum dropped 40% from 11,074,661 to 6,705,093. (This chart is for reference only and does not include all voting transactions on Solana).
Let’s take a look back in history and see how Ethereum was trading during the bear market of 2018. We can see that Ethereum’s weekly transaction volume dropped from 8,203,034 to 2,959,182, a 64% drop.
To recap…
Weekly Trading
Solana 2022 = -74%
Ethereum 2022 = -40%
Ethereum 2018 = -64%
Likewise, Solana and Ethereum have similar statistics from 2018.
Outside of transactions, we can also look at the total value locked in any given blockchain and how it has changed over time. Solana’s TVL dropped 98% from $10.17 billion to $230 million.
Ethereum’s TVL fell 78% from $109.49 billion to $23.82 billion.
There is no TVL metric for 2018 because DeFi didn’t exist at the time, so we have no historical comparison in this regard.
Developer activity and deployment
Similar to transactions, developer activity numbers should be taken with a grain of salt.
This is a difficult metric to track, especially in the Ethereum ecosystem, as there are many different Ethereum clients. Additionally, many teams are now only building in L2, not Ethereum itself.
In the charts below, we used Token Terminal’s tracking of Github commits for each blockchain, and it’s clear they’re not accurate in terms of numbers. So let’s focus less on the actual numbers and instead focus on the percentage changes.
Solana’s daily active developers peaked at 156 and bottomed at 61, a 61% drop. Ethereum’s recent high was 296 and its low was 153, a 48% drop.
But equally, we should consider developer growth across the Ethereum ecosystem as many Ethereum developers and teams are moving to faster and cheaper various Ethereum L2s.
This is why the recent growth in the number of developers working on Arbitrum, Optimism, Starknet, and Polygon should not be ignored.
But again, let's take a look at Ethereum's historical data in 2018. At that time, Ethereum's daily active developers dropped from 195 to 100, a drop of 49%.
To recap…
Daily Active Developers
Solana 2022 = -61%
Ethereum 2022 = -48%
Ethereum 2018 = -49%
This is the first indicator in this article so far that Solana is not emulating Ethereum in 2018. I think the reason can be traced back to competition.
In 2018, if developers wanted to develop on a smart contract platform other than Ethereum, they had nowhere to go. Today, there are more than 20 L1s and more than 20 L2s for developers to choose from.
As mentioned at the outset, we have seen some of Solana’s high-profile projects migrate to Ethereum and Polygon in the past few weeks. Therefore, it will be interesting to see if this trend continues throughout 2023.
For the last few comparisons, we’ll look at trends in newly minted fungible tokens (FTs) and non-fungible tokens (NFTs) in both ecosystems.
I would actually like to compare the total amount of smart contract deployments in both ecosystems, since developers are building more than just tokens on the blockchain. However, I can’t find smart contract deployment data for Solana.
In the chart below we can see that Solana peaked in Q3 2022 at 1,000 to 1,500 new FTs deployed per day, and has since dropped to around 300-800.
Aside from a few spikes in October, Ethereum’s FTs deployment has remained strong between 500 and 1,000 over the past few months.
From an NFT perspective, Solana has taken a pretty significant hit since October. Previously, an average of about 100,000 NFTs were minted per day, but now it’s only averaging 25,000/day, far below the peak level before October.
Ethereum’s data is a bit different because this chart reflects the number of NFT smart contracts, not the number of NFTs minted. That said, Ethereum is back to its pre-October peak levels.
An important factor to keep in mind here as well is that if we were to count the minting of FTs and NFTs within the Ethereum L2 ecosystem, then you are seeing continued growth in the entire Ethereum ecosystem during this bear market.
Is Solana dead/dying?
If we only look at on-chain metrics, there is nothing to suggest that Solana is dead.
Some may argue that these statistics indicate that Solana is “dying.” However, these statistics for Solana are very similar to those of Ethereum in 2018, which managed to survive and thrive during a 2-year bear market.
I don’t see why the same can’t be true for Solana. In addition to having an incredibly talented leadership team, they also seem to have a strong community.
However, the biggest difference between Solana today and Ethereum in 2018 is that Solana faces strong competition.
Solana is trying to become the king of “consumer” blockchains — fast, cheap, and mobile-friendly blockchains for the masses.
Ethereum is not joining this competition because that is not its goal. Instead, Ethereum’s goal is to become the ultimate decentralized and secure consensus layer for the Internet.
That said, the Ethereum ecosystem has already launched a number of competitors to Solana, such as Polygon, multiple Optimistic L2s (Arbitrum and Optimism), and ZK L2s like Immutable, with more L2s on the way.
Being based on Ethereum, each of these L2s has the ability to provide fast and cheap transactions while also remaining decentralized and secure.
While Solana’s technology has the potential to be superior in terms of scalability, we have yet to see it in action.
The debate about a multi-chain future and what properties blockchains need is beyond the scope of this article.
But I will say that the mainstream world demand for blockchain is huge and will only grow over time. While competition between blockchains is heating up, we still don’t have enough blockchains available to handle mass mainstream adoption in the short to medium term.
There is plenty of room for Solana, the Ethereum ecosystem, and other blockchains to work together to grow the pie rather than competing for market share.
To sum up, I believe Solana will not "die" and its story will continue.
