Written by: Michael Nadeau, Founder of The DeFi Report
Compiled by: 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 peak, while Ethereum appears somewhat stagnant. Additionally, compared to July this year, Solana's market cap share relative to Ethereum has increased from 17% to nearly 30%. Since the low in December 2022, SOL has achieved an astonishing 25 times growth, while ETH has only risen by 1.7 times. Is Ethereum lacking momentum or yet to exert its strength? This has become a question worth exploring, and this article will analyze whether Solana has the opportunity to surpass Ethereum based on data, market sentiment, cognition, and narrative, and what catalysts Ethereum has that could drive its price up.
Looking back to January 2023, Solana's market cap was only 3% of Ethereum's market cap, and the gap between the two seemed insurmountable. However, as of July this year, this gap has narrowed significantly, with Solana's market cap weight climbing to 17% of Ethereum's. At that time, we wrote, 'Should SOL's market cap be 83% lower than ETH?' The fundamental data gave a negative answer.
Since then, the market has reassessed SOL, and its market cap has soared to 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?
Is the market still in disarray? Let's delve deeper.
SOL vs. ETH (and top L2s): Comparative Data
When comparing Solana to Ethereum's data, we pay special attention to an 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 to Ethereum, considering these L2s can provide a more comprehensive and in-depth perspective.
Fees
In Q2 2024, Solana's fee revenue was $151 million, accounting for about 27% of the total fee revenue of Ethereum and top L2s.
In the past 90 days, Solana's fee revenue has reached $192 million, accounting for about 49% of the total fee revenue of Ethereum ($374 million) and top L2s ($21 million).
Please note that the above fees only include Gas fees and do not include MEV (Maximum Extractable Value) fees.
DEX trading volume
In Q2, Solana's DEX trading volume reached $108 billion, accounting for about 36% of Ethereum and top L2s trading volume.
In the past 90 days, Solana's DEX trading volume has risen to $153 billion, accounting for about 57% of Ethereum ($125.5 billion) and top L2s ($145 billion) trading volumes.
Stablecoin supply
By July 2024, Solana's stablecoin supply was approximately $3.1 billion, accounting for about 3.5% of Ethereum and L2s stablecoin supply.
Currently, its stablecoin supply has reached $4.3 billion, accounting for about 4.1% of Ethereum + L2s stablecoin supply.
Please note that Arbitrum's stablecoin supply exceeds Solana's, while Base's stablecoin supply has reached 80% of Solana's.
Stablecoin trading volume
In Q2, Solana's stablecoin trading volume reached $4.7 trillion, 1.9 times that of Ethereum and top L2s trading volume.
Yet 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 decreased?
We believe that the growth in Solana's trading volume in the second quarter was primarily driven by wash trading and algorithmic trading.
According to data from Artemis, only about 6% of Solana's stablecoin trading volume consists of peer-to-peer transfers. However, on Ethereum L1, this figure 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 about 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 has 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.
At the same time, Solana has also lost some TVL to OP ($540,000) and Base ($5 million).
Based on 90 days of performance, Solana's data summary is as follows:
1. 49% of Ethereum's fee revenue (up from 27% at the end of Q2).
2. 57% of Ethereum's DEX trading volume (up from 36% at the end of Q2).
3. 4.1% of Ethereum's stablecoin supply (up from 3.5% in Q2)
4. 30% of Ethereum's stablecoin trading volume (far below the 190% at the end of Q2)
5. 12% of Ethereum's TVL (up from 6% at the end of Q2)
6. Solana attracted slightly less than 2% of TVL from Ethereum.
To reiterate, the current market pricing for 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 conduct some more qualitative analysis.
Market sentiment, cognition, and narrative
In the cryptocurrency space, price fluctuations often lead cognition, narratives, and fundamentals; therefore, considering the price trends of SOL and ETH, the current narrative may lead you to believe that Solana is about to surpass Ethereum.
But the reality is, 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 trend (and fundamentals) is largely driven by this casino. From what I've heard, this phenomenon is subtly affecting Wall Street's perception of this blockchain.
Therefore, although the current market narrative is relatively favorable for Solana, we should anticipate that this trend may change soon. If Ethereum rebounds in 2025, the market narrative could quickly shift from 'Ethereum is dead' to 'Ethereum is the future of finance.'
At the same time, Solana's acceptance of the Memecoin casino may also negatively impact its overall perception and narrative.
Catalyst
Ethereum
Exchange-Traded Fund (ETF)
Recently, Ethereum spot ETFs have finally begun to see some capital inflows, 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, just 1.7% of the net inflow for Bitcoin spot ETFs, far below our initial expectation of a 10-20% capital capture ratio.
So far, this reality has deviated significantly from our predictions, but this gap will not last 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 focus on whether the narratives surrounding DeFi and RWA will heat up. If this occurs, we might see companies like Blackrock pushing for more funds to be tokenized on-chain.
There are three reasons for this speculation: 1. They want to tokenize existing funds to improve the efficiency that blockchain brings to backend accounting and management work; 2. They want to capture fees related to (traditional financial services companies) transformations; 3. Blackrock has sufficient motivation to bring more utility to Ethereum, treating it as new financial infrastructure, paving the way for the legalization of Blackrock ETF products.
Once more funds are tokenized, we may see new use cases emerging in 'Permissioned DeFi' to serve asset trading.
In fact, if Ethereum can exhibit positive price trends now, a new narrative as 'Wall Street's chain' may emerge.
Coinbase and Base
Among Ethereum L2s, Base stands out as the fastest-growing L2, with rapid growth in fees, active users, and stablecoin trading volume. Considering the profitability Base brings to Coinbase (about $68 million so far this year), we believe they may have created a blueprint for other financial service companies to launch L2 on Ethereum.
Imagine what would happen if giants like JPMorgan, Blackrock, Fidelity, or Robinhood announced the launch of Ethereum L2?
Clearly, this will further reinforce Ethereum's potential narrative as 'Wall Street's chain.'
Solana
Memecoin Frenzy
Phantom recently surpassed Google on Apple's App Store, becoming the number one free utility app.
This is undoubtedly a clear signal that Solana is attracting a large number of new users into the cryptocurrency space. At the same time, this is also a sign of market overheating.
The next question is: How much more room does the market have for growth?
Retail investors have indeed entered the market, although at 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 current market activity remains approximately 50% lower than the highs 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 still maintain a cautious stance in the short term.
SOL ETF?
Regarding SOL ETFs, the Chicago Board Options Exchange (Cboe) has submitted applications for four Solana spot ETFs to the U.S. Securities and Exchange Commission (SEC), with issuers being VanEck, 21 Shares, Canary Capital, and Bitwise. Given the upcoming 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 emphasized by the SEC in 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 so far with Ethereum ETFs. (Techub News note: 'Buy the rumor, sell the news' refers to a strategy in the financial markets (including forex and cryptocurrency markets) where investors trade based on unverified information or rumors and sell to profit once this information is confirmed.)
Firedancer
Firedancer is crucial for Solana's future development.
Firedancer is a new Solana validator client developed by the cryptocurrency company Jump Crypto. It promises to significantly enhance Solana's performance, reliability, and scalability by supporting more concurrent transactions. It will also improve overall network efficiency and reduce operational costs for node operators.
Most importantly, the introduction of Firedancer will eliminate the single point of failure (SPOF) currently present in Solana, reducing 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 part of a system causes the entire system to fail. Solana uses a unique consensus mechanism that combines Proof of History (PoH) and Proof of Stake (PoS) to enhance system performance and reliability, but this may also introduce the risk of a single point of failure.)
Firedancer is expected to be ready for mainnet deployment by 2025. Although we believe it will greatly benefit Solana's future, it may not be a significant price catalyst in this cycle.
Decentralized Physical Infrastructure Networks (DePIN)
As for the narrative around decentralized physical infrastructure networks (DePIN), it has yet to really take off. The decentralized wireless network Helium has risen 147% so far this year, but is still 43% lower than its cycle peak; the decentralized mapping network Hivemapper has risen 164%, but is 80% lower than its cycle peak. 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 off attention and liquidity from other areas of the market.
Social media
In July, I wrote: It is expected that a social media application integrating cryptocurrency in some way will enter the mainstream through celebrities and influencers. While this could still happen, the current 'attention economy' is being expressed through Memecoins. In the short term, it is difficult to see this situation change.
Conclusion
Should SOL's market cap be 70% lower than ETH?
In light of the following:
SOL/ETH hit an all-time high
In recent years, the market pricing of SOL relative to ETH has been raised tenfold.
Since the low in December 2022, SOL has increased 25 times, while ETH has only increased 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, even surpass Ethereum?
In our July report, we anticipated that the performance of Ethereum ETFs post-listing would outperform SOL and believed that SOL's market cap would peak around 25% of Ethereum's market cap in this cycle. However, it turned out that we were wrong on both counts: because the performance of Ethereum ETFs 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 a significant increase over the past few weeks. We expect some volatility and pullbacks before the end of the year, but overall, the market still has upside potential in 2025.
Historical data shows that during the last cycle, Bitcoin reached an all-time high in Q4 2020, while Ethereum peaked in early February 2021, achieving a 5.4-fold increase within the first four months of that year.
To reiterate, in the cryptocurrency space, price leads, and market narratives follow price.
The market may experience a similar trend this cycle. If so, we might see a positive shift in sentiment and narrative for Ethereum in 2025.
As for Solana, as the 'retail casino/Memecoin chain,' it may face some challenges.
Of course, there is also the opposing view that 'things that perform well early in the cryptocurrency cycle often continue to show strong momentum later'—this 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 generally align with relative valuation. However, future trends remain uncertain; let's wait and see what happens next.
