Solana has solidified its position as one of the Big Three in crypto. With the other two giants already or about to launch spot ETFs, it is likely that Solana will also launch a spot ETF in the near future, and its impact on SOL may be the biggest yet.

Note: GSR holds SOL.

Solana — — Synchronizing the World at the Speed ​​of Light

Solana
Founded in 2018 by Anatoly Yakovenko and Raj Gokal and launched in 2020
Launched in 2017, Solana is a delegated proof-of-stake blockchain designed for high performance and mass adoption. With extremely low transaction costs, a wide range of decentralized applications, and an active user and developer community, Solana
It has accumulated nearly 300 billion transactions and over $4 billion in total locked value.
Continues to stand out among the crowd, with recent highlights including a number of high-profile token launches, various projects migrating to Solana, the release of key innovations such as token scaling, and the ongoing developments around Solana.
Unique use cases like order books, batching NFTs, DePINs, memecoins, and more.

Solana
The foundation of this success is its technological excellence, which we believe provides a sustainable competitive advantage, in particular in three particularly salient ways. First up is Solana
Proof-of-history, which provides validators with a sense of time. Similar to how mobile towers alternate transmissions to avoid interference, proof-of-history allows validators to generate blocks when it is their turn without the network having to reach consensus on the current block first, bringing huge speed and scalability advantages. Second, unlike the single-threaded virtual machines behind the current cryptocurrency space, Solana

Supporting parallel transaction processing not only significantly increases throughput, but also exploits the main source of gains in computing speed, where most performance gains today come from adding more cores rather than increasing the performance of each core.
Solana’s historically high hardware and bandwidth requirements have sacrificed decentralization to some extent in order to optimize for speed and security, but as costs fall (Moore’s Law), Solana
It will naturally benefit from this, perhaps becoming the first project to truly solve the blockchain trilemma and finally realize its vision of synchronizing the global state at the speed of light.

Undervalued Cryptocurrency ETFs Have Further Potential for Growth

As Solana establishes its place behind Bitcoin and Ethereum, both of which have (or are about to) launch US spot ETFs, the natural question arises — is Solana next? This question is particularly important in the current cycle, when spot ETFs are the main driver of price.

In short, under the current framework, launching spot digital assets in the United States
ETF
The path to success is clear, there needs to be a federally regulated futures market (currently there are none other than Bitcoin and Ethereum), the futures market needs to exist for many years to demonstrate sufficient relevance, and the futures market needs to be regulated by the regulators.
ETFs need to be approved before spot products can be considered. In other words, there will be no additional spot digital asset ETFs in the near future. However, we think this severely underestimates the potential for change.

In fact, change is already underway, with Donald Trump’s recent support for the crypto industry causing the Democratic Party to relax its stance on digital assets in a tense election year. Although it was unimaginable a month ago, we have already seen both houses of Congress pass a bill to overturn the controversial
SEC Cryptocurrency Accounting Policy (SAB)
121), and the House of Representatives passed a comprehensive framework for digital asset regulation (FIT21). Although the current legislative and regulatory structure is unlikely to allow the launch of various spot digital assets
ETF rules, but the Trump administration and the liberal SEC
The Commission may be able to achieve this goal, especially through the Digital Asset Market Structure Act, which defines securities and commodities. Not only is this possible, but it may even become a reality.

Key Determinants of the Next Spot ETF

Under more relaxed laws and regulations, we believe that the next spot
The two key factors for ETFs are decentralization and potential demand. In terms of the former, whether FIT21 circumvents the Howey
Whether it is the SEC’s recommendation that “sufficient decentralization” may affect securities classification, the degree of decentralization may be the key to whether digital assets can obtain ETFs. In terms of the latter, any new ETF

The potential demand for ETFs is equally important as it will be the biggest factor affecting profitability. Here, issuers may weigh reputational risk, ability to pass various internal committees, and the best interests of their customers against potential demand. Overall, while crypto-native issuers may apply for a large amount of spot
ETFs, but we believe larger issuers are more likely to focus on one or two digital assets with sufficient decentralization and high potential demand.

Next, we provide a brief analysis that attempts to quantitatively determine the decentralization score and the demand score and add them together to form
ETF Likelihood Scores. Note that we convert the various category metrics to Z scores to facilitate combining categories, and then take the Z for each category.
The final decentralization and demand scores are calculated by taking a simple average of the scores. Finally, note that many of the metrics used have flaws and a degree of subjectivity, but we believe that they are still valuable for the task at hand.

Decentralized Analysis

Analyzing the degree of decentralization of a blockchain is difficult because there is no universally accepted definition, many metrics are not satisfactory, and the topic is generally highly complex, technical, and even philosophical. In addition, decentralization encompasses many concepts, such as permissionless participation, development control, key person influence, token distribution, etc.
/ distribution, share characteristics, and software and hardware diversity. Finally, note that most public chains gradually become more decentralized over time, which is evident in the following groups, such as Cardano
The upcoming Voltaire era will substantially decentralize governance, or Solana’s upcoming Firedancer client will make Solana
It has become the only network besides Bitcoin and Ethereum that has a second independent client on the mainnet. In summary, we believe that some more sound and valuable decentralization indicators are:

The Nakamoto coefficient measures the minimum number of independent entities that could collude to attack the network, with higher values ​​indicating greater decentralization.

Staking requirements, which measure how easy it is for anyone to participate in the network as a node operator or validator, including minimum staking requirements and hardware requirements. Less staking and lighter hardware contribute to higher decentralization.

CCData Governance Rating, which includes various governance measures such as participation, transparency, and decentralization.

As shown below, the four blockchains with above-average decentralization scores are Ethereum, Solana, Avalanche, and Aptos.

demand analysis

Potential demand is another key determinant, and issuers may look at a variety of metrics when assessing future capital inflows. The most important of these is token market capitalization, but in general, we believe the following three categories are particularly valuable:

Market indicators: higher market capitalization, higher trading volume, and strong token performance may indicate strong future demand.

Total assets under management (AUM) of existing products. High AUM of tokens in existing investment products globally indicates that demand for spot ETF products may also be high.

Activity indicators: A strong, active community and widespread usage can also be strong signals of future demand.

As shown in the figure below, the top three blockchains with above-average demand scores are Ethereum, Solana, and NEAR.

Adding our decentralization score and demand score gives us our final
ETF Likelihood Score. Note that we set the decentralization weight to 33% and the demand weight to
67%, as we believe decentralization may be a threshold factor, while latent demand may be the main criterion used by issuers. Overall, Ethereum gained key spot ETH ETFs in May
19b-4 filings and is expected to launch multiple spot ETFs this summer, taking first place by a wide margin.
Solana, which also outperformed other digital assets by a large margin, is the only one besides Ethereum that has positive scores in both decentralization and demand.
NEAR, due to performing well in two categories. Overall, the results clearly indicate that if the U.S. allows additional spot digital asset ETFs, Solana will be next.

Impact of a Potential Spot Solana ETF on Price

To assess potential spot
The impact of Solana ETF on SOL price can be simply referred to the impact of spot Bitcoin ETF on Bitcoin.
The approval of the ETF and the subsequent huge capital inflows are what pushed Bitcoin from $27,000 in October, when market participants began to consider the approval of a U.S. spot ETF to around $10,000 today.
The main factor of $63,000 is a 2.3x increase. This 2.3x will be our baseline.

Next, we need to adjust our analysis to account for the significantly smaller inflows into the spot Solana ETF relative to Bitcoin. Ultimately, we adjust by estimating the inflows into the spot Solana ETF relative to Bitcoin. Here, we consider three simple scenarios.

·
Pessimistic scenario: Solana Global Investment Products has 2% of Bitcoin’s AUM. We think this underestimates the potential Solana ETF
Inflows, as this metric gives Bitcoin a big head start, with the Grayscale Bitcoin Trust launching back in 2013 and Solana not until
It was launched only in 2020. Therefore, we take 2% as the inflow for the pessimistic scenario.

Baseline scenario: We evaluate Solana with reference to actual near-term inflows
Here, we use inflow data from 2021 to 2023, as Solana was not well known before 2021 and is not widely used as of 2024.
Data from 2017 to 2018 is used to exclude the impact of the spot Bitcoin ETF (launched in January). During these three years, the cumulative inflows of funds into Solana investment products relative to Bitcoin were
5%. We consider this 5% as the baseline scenario.

Optimistic scenario: Solana sees higher relative inflows in the past two years, accounting for 2022 and 2023, respectively.
31% and 9% of Bitcoin inflows in 2023. While we do not expect Solana to fully keep up with the 2021 and 2024
Although this is a period of unusually high Bitcoin inflows in 2017, we view the 14% relative inflows per year average over three years as a potentially bullish scenario.

Despite the pessimistic, baseline and optimistic scenarios, spot
The Solana ETF could see inflows of 2%, 5%, or 14% of Bitcoin, but we now have to adjust the spot ETF’s exposure to SOL based on its smaller size.
The adjustment will be made through market capitalization. Specifically, Solana’s market capitalization has averaged just 4% of Bitcoin’s over the past year.

Taking all factors into consideration, we can
Solana’s 2.3x growth relative to Bitcoin adjusts our relative inflow estimates. This way, in a pessimistic scenario, Solana could grow 1.4x
In the baseline scenario, it could increase by 3.4 times; and in the optimistic scenario, it could increase by 8.9 times. In addition, there is reason to believe that the impact may be higher than these estimates because, unlike Bitcoin, SOL
is actively used in staking and decentralized applications, and the relationship between relative inflows and relative size may not be linear. Finally, it is important to note that compared to Bitcoin at the beginning of our analysis, the potential
The Solana spot ETF is likely to be much less reflected in the SOL price, as evidenced by the Grayscale Trust
If this is correct, the huge potential upside of SOL in the case of a cash ETF can be seen as a
“Free choice.” In summary, if the U.S. allows more spot digital asset ETFs, then Solana will be the spot ETF
Be prepared, and the price impact will likely be the biggest yet.

Due to the lack of real-time creation and redemption mechanisms, Grayscale
The price of the Trust may deviate from its underlying Net Asset Value (NAV), but this deviation will disappear when the Trust is converted into a spot ETF, as the spot ETF has such a mechanism. Grayscale Bitcoin Trust (GBTC) is trading at a 45% discount to NAV on January 1, 2023 (and at a discount of 45% on June 15, 2023).
Before BlackRock filed for a spot Bitcoin ETF, and before Grayscale won its lawsuit against the SEC on August 31), but by early October that discount had reduced to 21%, suggesting that by the time we start measuring the price impact, Bitcoin’s price may have already factored in the increased opportunity for a spot Bitcoin ETF.