Article source: Techub News
Written by: Michael Nadeau, Founder of The DeFi Report
Translation: Glendon, Techub News
Translator's note: In this cycle, Solana has surged, with its native token SOL reaching a high of 264 USDT, setting a new historical high. In contrast, Ethereum appears somewhat stagnant. Additionally, compared to July of this year, the market capitalization ratio of Solana to Ethereum has risen from 17% to nearly 30%. Since the low point in December 2022, SOL has achieved an astonishing 25-fold growth, while ETH has only risen 1.7 times. Is Ethereum lacking momentum, or has it not yet exerted its strength? This has become a question worth exploring. This article will analyze various factors such as data, market sentiment, cognition, and narratives to explore whether Solana has the potential to surpass Ethereum and what catalysts could drive Ethereum's price upwards.
Looking back to January 2023, Solana's market cap was only 3% of Ethereum's market cap, and the gap between them seemed insurmountable. However, as of July this year, this gap has narrowed significantly, with Solana's market cap share climbing to 17% of Ethereum's. At that time, we wrote, 'Should SOL's market cap be 83% lower than ETH's?' The fundamental data gave a negative answer.
Since then, the market has reassessed SOL, and its market cap has surged, reaching nearly 30% of Ethereum’s market cap. In light of this change, I can't help but ask again: Should SOL's market cap be 70% lower than ETH's?
Is the market still in a state of chaos? Let's delve deeper into this.
SOL vs ETH (and top L2s): Comparison data
When comparing data between Solana and Ethereum, we particularly noted one important variable — Layer 2 networks (L2s): Arbitrum, Base, Optimism, Blast, Celo, Linea, Mantle, Scroll, Starknet, zkSync, Immutable, and Manta Pacific.
Our view is that these L2s not only create new demand for Ethereum L1 block space but also further enhance the network effect of ETH as a core asset. Therefore, when comparing Solana with Ethereum, incorporating these L2s can provide a more comprehensive and in-depth perspective.
Fees
In Q2 2024, Solana's fee revenue was $151 million, accounting for approximately 27% of Ethereum and top L2s' total fee revenue.
In the past 90 days, Solana's fee revenue has reached $192 million, accounting for approximately 49% of Ethereum ($374 million) and top L2s ($21 million) total fee revenue.
Please note that the above fees only include Gas fees and do not include MEV (Maximum Extractable Value) fees.
DEX trading volume
Solana's DEX trading volume reached $108 billion in Q2, accounting for approximately 36% of Ethereum and top L2 trading volumes.
In the past 90 days, Solana's DEX trading volume has increased to $153 billion, accounting for 57% of Ethereum ($125.5 billion) and top L2s ($145 billion) trading volumes.
Stablecoin supply
In July 2024, Solana's stablecoin supply was approximately $3.1 billion, accounting for about 3.5% of Ethereum and L2s' stablecoin supply.
Currently, its supply of stablecoins has reached $4.3 billion, accounting for approximately 4.1% of Ethereum + L2s' stablecoin supply.
Please note that the supply of stablecoins on Arbitrum has surpassed that of Solana, while the supply of stablecoins on Base has reached 80% of Solana's.
Stablecoin trading volume
Solana's stablecoin trading volume reached $4.7 trillion in Q2, 1.9 times that of Ethereum and top L2s' trading volume.
In the past 90 days, Solana's stablecoin trading volume has dropped to $963 billion — about 30% of Ethereum ($1.9 trillion) and top L2s ($1.26 trillion) trading volumes.
Why has Solana's trading volume declined?
We believe that the increase in Solana's trading volume in Q2 was primarily driven by wash trading and algorithmic trading.
And according to Artemis data, only about 6% of Solana's stablecoin trading volume involves peer-to-peer transfers. However, on Ethereum L1, this number is close to 30%, indicating that Ethereum is used for non-speculative activities to a much greater extent than Solana.
TVL
At the end of Q2, Solana's TVL was $4.2 billion, accounting for approximately 6.3% of Ethereum ($60.3 billion) and top L2s ($9.5 billion) TVL.
Currently, Solana's TVL has risen to $8.2 billion, accounting for 12% of Ethereum and top L2s' TVL.
Capital flow
In the past 90 days, Solana attracted over $1.2 billion in TVL from Ethereum, accounting for about 2% of Ethereum L1 TVL. During the same period, it attracted $14 million in TVL from Arbitrum.
Meanwhile, Solana also lost some TVL to OP ($540,000) and Base ($5 million) during the same period.
Based on 90 days of performance, the summary of Solana's data is as follows:
1. Accounting for 49% of Ethereum's fee revenue (up from 27% at the end of Q2).
2. Accounting for 57% of Ethereum DEX trading volume (up from 36% at the end of Q2).
3. Accounting for 4.1% of Ethereum's stablecoin supply (up from 3.5% in Q2)
4. Accounting for 30% of Ethereum's stablecoin trading volume (down from 190% at the end of Q2)
5. Accounting for 12% of Ethereum's TVL (up from 6% at the end of Q2)
6. Solana attracted just under 2% of TVL from Ethereum.
Again, it is emphasized that the current market pricing of SOL has risen to 70% of Ethereum's market cap. We will delve deeper into the reasonableness of this valuation later. Before that, let's first conduct some qualitative analysis.
Market sentiment, cognition, and narratives
In the cryptocurrency space, price movements often precede cognition, narratives, and fundamentals. Therefore, considering the price trends of SOL and ETH, the current narrative might lead you to believe that Solana is about to overtake Ethereum.
But the reality is that Solana currently mainly exists as a Memecoin casino. Of course, there are real projects on Solana, such as Helium and Hivemapper, but the current price trends (and fundamentals) are largely driven by this casino. From what I hear, this phenomenon is quietly affecting Wall Street's perception of the blockchain.
Therefore, although the current market narrative is relatively favorable to Solana, we should anticipate that this trend may change soon. If Ethereum rebounds in 2025, the market narrative may quickly shift from 'Ethereum is dead' to 'Ethereum is the future of finance.'
Meanwhile, Solana's acceptance of Memecoin casinos may also negatively impact its overall perception and narrative.
Catalysts
Ethereum
Exchange-Traded Funds (ETF)
Ethereum spot ETFs have finally started to see some fund inflows recently, although the inflow amount is only a small fraction compared to Bitcoin spot ETFs. As of November 20, the net inflow for Ethereum spot ETFs was $469 million, only 1.7% of the net inflow for Bitcoin spot ETFs, far below our initial expectation of a 10-20% fund capture ratio.
So far, this reality has deviated significantly from our predictions, but this gap is unlikely to last too long. We still believe that as the market cycle progresses, funds will shift towards Ethereum.
DeFi and Real World Assets (RWA)
As the global regulatory environment becomes clearer, we will pay attention to whether the narratives around DeFi and RWA will heat up. If this happens, we may see companies like Blackrock driving more funds to tokenize on-chain.
There are three reasons for this speculation: 1. They hope to tokenize existing funds to enhance the efficiency that blockchain brings to backend accounting and management; 2. They want to capture fees associated with the transformation related to (traditional financial service companies); 3. Blackrock has sufficient motivation to bring more practical use cases to Ethereum, establishing it as a new financial infrastructure and paving the way for the legalization of Blackrock's ETF products.
As more funds tokenize, we may see new use cases emerging in 'Permissioned DeFi' to facilitate asset trading.
In fact, if Ethereum can demonstrate a positive price trend now, its new narrative as 'Wall Street's chain' may emerge.
Coinbase and Base
Among Ethereum L2s, Base stands out for its rapid growth in fees, active users, and stablecoin trading volume, becoming the fastest-growing L2. Considering the profitability value Base brings to Coinbase (about $68 million so far this year), we believe it may create a blueprint for other financial service companies to launch L2s on Ethereum.
Imagine if giants like JPMorgan, Blackrock, Fidelity, or Robinhood announced the launch of Ethereum L2s, what would happen?
Clearly, this will further strengthen the potential narrative of Ethereum as 'Wall Street's chain.'
Solana
Memecoin frenzy
Phantom recently surpassed Google in Apple's App Store, becoming the number one free utility app.
This undoubtedly serves as a clear signal that Solana is attracting a large number of new users into the cryptocurrency space. At the same time, it is also a sign of an overheated market.
The next question is: How much more growth potential does the market have?
Retail investors have indeed entered the market, although on a smaller scale than in the previous cycle. One way to measure this phenomenon is to look at the view counts of popular cryptocurrency YouTube channels. From the chart below, we can see that the current market activity is still about 50% lower than the peak of the previous cycle.
Data: From Benjamin Cowen
While we tend to believe that after Bitcoin reaches $100,000, this number will rise to an extreme level, we remain cautious in the short term.
SOL ETF?
Regarding the SOL ETF, the Chicago Board Options Exchange (Cboe) has submitted applications for 4 Solana spot ETFs to the U.S. Securities and Exchange Commission (SEC), with issuers being VanEck, 21 Shares, Canary Capital, and Bitwise. Given the impending personnel changes at the SEC, we expect to see SOL spot ETFs as early as next year. Nevertheless, unlike Bitcoin and Ethereum, SOL has not yet established a regulated futures market in the U.S. — a key criterion that the SEC emphasized when approving Bitcoin and Ethereum ETFs.
Therefore, the issue with this narrative is whether positive headlines will turn into a 'buy the rumor, sell the news' event, as we have seen with Ethereum ETFs so far. (Techub News note: 'buy the rumor, sell the news' refers to a strategy in financial markets (including foreign exchange and cryptocurrency markets) where investors trade based on unverified information or rumors and sell after these pieces of information are confirmed to realize profits.)
Firedancer
Firedancer is crucial for the future development of Solana.
Firedancer is a new Solana validator client developed by the cryptocurrency company 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 the current single point of failure (SPOF) in Solana and reduce the likelihood of the chain being stopped in the future. (Techub News note: A single point of failure refers to a problem where the failure of one point in a system can cause the entire system to fail. Solana employs a unique consensus mechanism that combines Proof of History (PoH) and Proof of Stake (PoS), aimed at enhancing system performance and reliability, but it may also introduce the risk of a single point of failure.)
Firedancer is expected to be ready for mainnet deployment in 2025. While we believe it will greatly benefit Solana's future, it may not be a major price catalyst in this cycle.
Decentralized Physical Infrastructure Network (DePIN)
As for the narrative of the Decentralized Physical Infrastructure Network (DePIN), it has yet to truly take off. The decentralized wireless network Helium has risen 147% so far this year, but is still 43% lower than its cycle high; the decentralized mapping network Hivemapper has risen 164%, but is 80% lower than its cycle high. Compared to July, our confidence in the DePIN space has weakened. At the same time, we note that Memecoins (and to some extent Bitcoin) are siphoning attention and liquidity away from other areas in the market.
Social media
In July, I wrote that a social media application integrating cryptocurrency in some way is expected to enter the mainstream through celebrities and influencers. While this could still happen, currently this 'attention economy' is being expressed through Memecoins. In the short term, it's hard to see this changing.
Conclusion
Should SOL's market cap be 70% lower than ETH's?
Given the following:
SOL/ETH reaches historical high
In recent years, the market has increased the pricing of SOL relative to ETH by 10 times
Since the low point in December 2022, SOL has risen 25 times, while ETH has only risen 1.7 times
Solana's on-chain fundamentals are largely attributed to Memecoin trading
We tend to believe that SOL's relative valuation is reasonable. But the key question is whether SOL can continue to perform well and even surpass Ethereum?
In our July report, we anticipated that the performance of Ethereum ETFs would outperform SOL and believed that the market cap of SOL would peak at around 25% of Ethereum's market cap during this cycle. However, it turned out that our predictions in two aspects were off: because the performance of the Ethereum ETF was closer to a 'news sell' event (but so far, we still firmly believe that demand will come), while SOL continued to rise alongside Bitcoin.
Currently, Bitcoin has seen significant increases over the past few weeks. We expect some fluctuations and pullbacks before the end of the year, but overall, the market still has upward potential in 2025.
Historical data shows that in the last cycle, Bitcoin set a historical high in Q4 2020, while Ethereum peaked in early February 2021, achieving a 5.4-fold increase in the first four months of that year.
Again, it is emphasized that prices lead in the cryptocurrency space, and market narratives follow prices.
The market may experience similar trends in this cycle. If so, we might see a positive shift in sentiment and narratives around Ethereum by 2025.
And Solana, as the 'retail casino/Memecoin chain', may face some challenges.
Of course, there is also the counter-argument that 'things that perform well early in the cryptocurrency cycle often continue to show strong momentum later' — which also provides strong support for SOL's continued rise.
In summary, we believe the market has largely reassessed SOL's valuation relative to ETH, and the current fundamentals align roughly with relative valuation. However, future trends remain uncertain, and what happens next remains to be seen.
