Written by: Michael Nadeau, Founder of The DeFi Report
Translated by: Glendon, Techub News
Translator's Note: In this cycle, Solana has surged, with its native token SOL reaching a peak of 264 USDT, setting a new all-time high, while Ethereum appears to be stagnating. Additionally, compared to July of this year, Solana's market cap relative to Ethereum's has increased from 17% to nearly 30%. Since the low point in December 2022, SOL has achieved an astonishing 25-fold increase, while ETH has only risen 1.7 times. Is Ethereum lacking momentum, or is it yet to exert its strength? This has become a question worth exploring. This article will analyze whether Solana has the opportunity to surpass Ethereum based on various factors, including data, market sentiment, cognition, and narratives.
Looking back to January 2023, Solana's market cap was only 3% of Ethereum's market cap, and the gap seemed hard to bridge. However, by July of this year, this gap had narrowed significantly, and Solana's market cap weight had risen to 17% of Ethereum. 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 cannot help but raise this question again: Should SOL's market cap be 70% lower than ETH?
Is the market still in a state of chaos? Let's dive deeper into this.
SOL vs ETH (and top L2s): Comparative Data
When comparing data between Solana and Ethereum, 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 ETH's network effect as a core asset. Therefore, including these L2s when comparing Solana and Ethereum can provide a more comprehensive and in-depth perspective.
Fees
In the second quarter of 2024, Solana's fee revenue was $151 million, accounting for approximately 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 fees above only include gas fees and do not include MEV (Maximum Extractable Value) fees.
DEX Trading Volume
In the second quarter, 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 increased to $153 billion, accounting for about 57% of Ethereum ($125.5 billion) and top L2s ($145 billion) trading volume.
Stablecoin Supply
In July 2024, Solana's stablecoin supply was approximately $3.1 billion, accounting for 3.5% of Ethereum and L2s' stablecoin supply.
Currently, its stablecoin supply has reached $4.3 billion, accounting for 4.1% of the stablecoin supply of Ethereum + L2s.
Please note that Arbitrum's stablecoin supply exceeds that of Solana, while Base's stablecoin supply has reached 80% of Solana's.
Stablecoin Trading Volume
In the second quarter, Solana's stablecoin trading volume reached $4.7 trillion, 1.9 times that of Ethereum and top L2s' trading volume.
However, in the past 90 days, Solana's stablecoin trading volume has dropped to $963 billion — accounting for about 30% of Ethereum ($1.9 trillion) and top L2s ($1.26 trillion) trading volume.
Why has Solana's trading volume decreased?
We believe that the trading volume growth of Solana in Q2 was primarily driven by wash trading and algorithmic trading.
According to Artemis's data, only about 6% of Solana's stablecoin trading volume is 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 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 has attracted over $1.2 billion in TVL from Ethereum, accounting for approximately 2% of Ethereum's L1 TVL. During the same period, it attracted another $14 million in TVL from Arbitrum.
At the same time, Solana also lost some TVL to OP ($540,000) and Base ($5 million) during the same period.
Based on the performance over the past 90 days, the summary of Solana's data is as follows:
1. Accounts for 49% of Ethereum's fee revenue (up from 27% at the end of Q2).
2. Accounts for 57% of Ethereum's DEX trading volume (up from 36% at the end of Q2).
3. Accounts for 4.1% of Ethereum's stablecoin supply (up from 3.5% in Q2)
4. Accounts for 30% of Ethereum's stablecoin trading volume (down significantly from 190% at the end of Q2)
5. Accounts for 12% of Ethereum's TVL (up from 6% at the end of Q2).
6. Solana attracted just below 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 explore the reasonableness of this valuation in detail later. Before that, let's conduct some more qualitative analysis.
Market Sentiment, Cognition, and Narrative
In the cryptocurrency space, price changes 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 that Solana currently primarily 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. I have heard that this phenomenon is quietly affecting Wall Street's perception of this blockchain.
Thus, although the current market narrative is relatively favorable towards Solana, we should anticipate that this trend may soon change. If Ethereum rebounds in 2025, market narratives may swiftly 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.
Catalysts
Ethereum
Exchange-Traded Fund (ETF)
Ethereum spot ETFs have finally begun to see some fund inflows recently, although the inflow amount is only a small portion compared to Bitcoin spot ETFs. As of November 20, the net inflow for Ethereum spot ETFs was $469 million, only 1.7% of Bitcoin spot ETFs' net inflows, far below our previous expectations of a 10-20% fund capture ratio.
So far, this reality has deviated significantly from our predictions, but this gap won't last long. We still believe that as market cycles progress, 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 of DeFi and RWA will heat up. If this happens, we may see companies like BlackRock pushing for more funds to be tokenized on-chain.
There are three reasons for this speculation: 1. They hope to tokenize existing funds to improve the efficiency brought by blockchain for backend accounting and management work; 2. They want to capture fees associated with the transformation related to (traditional financial service companies); 3. BlackRock has enough motivation to bring more utility to Ethereum, positioning it as a new financial infrastructure, paving the way for the legalization of BlackRock's ETF products.
Once more funds tokenize, we may see new use cases in 'Permissioned DeFi' to serve asset trading.
In fact, if Ethereum can show a positive price trend now, its new narrative as the 'Wall Street chain' may emerge.
Coinbase and Base
In Ethereum L2, Base stands out with its rapid growth in fees, active users, and stablecoin trading volume, becoming the fastest-growing L2. Considering the profitability brought by Base to Coinbase (approximately $68 million so far this year), we believe it may have created 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 L2. What would happen?
Clearly, this will further strengthen Ethereum's narrative as the 'Wall Street chain'.
Solana
Memecoin Frenzy
Phantom recently surpassed Google in Apple's App Store to become 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 growth potential does the market still have?
Retail investors have indeed entered the market, although at a reduced scale compared to the last 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 is still about 50% lower than the peak of the last cycle.
Data: From Benjamin Cowen
While we tend to believe that after Bitcoin reaches $100,000, this figure will rise to an extreme level, we remain cautious 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. Nonetheless, unlike Bitcoin and Ethereum, SOL has not yet established a regulated futures market in the U.S. - a key standard emphasized by the SEC in approving Bitcoin and Ethereum ETFs.
Therefore, the issue with this narrative is whether positive headlines will become 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 financial markets (including forex and cryptocurrency markets) where investors trade based on unverified information or rumors and sell for profit once this information is confirmed.)
Firedancer
Firedancer is very important for the future development of Solana.
Firedancer is a new type of 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 single point of failure (SPOF) currently present in Solana and reduce the likelihood of the chain being halted in the future. (Techub News Note: A single point of failure refers to a problem where the failure of a single point in a system leads to the entire system becoming inoperable. Solana employs a unique consensus mechanism that combines Proof of History (PoH) and Proof of Stake (PoS), which aims to improve the system's performance and reliability but 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 significant price catalyst in this cycle.
Decentralized Physical Infrastructure Network (DePIN)
As for the narrative of decentralized physical infrastructure networks (DePIN), it has not really taken off yet. The decentralized wireless network Helium has risen 147% this year but is still 43% lower than its cycle peak; the decentralized mapping network Hivemapper has increased 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 notice that Memecoins (and to some extent Bitcoin) are siphoning off attention and liquidity from other areas in the market.
Social Media
In July, I wrote that a social media application that integrates cryptocurrency in some way would enter the mainstream through celebrities and influencers. While this may still happen, currently this 'attention economy' is being expressed through Memecoins. In the short term, it is difficult to see a shift in this situation.
Conclusion
Should SOL's market cap be 70% lower than ETH?
Given the following circumstances:
SOL/ETH reaches an all-time high
In recent years, the market has raised 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, even surpassing Ethereum?
In the report from July, we anticipated that the performance of Ethereum ETFs after listing would outperform SOL and believed that SOL's market cap would peak at around 25% of Ethereum's market cap during this cycle. However, it turned out that we were off in our predictions on both counts: because the performance of Ethereum ETFs was more akin to a 'sell the news' event (but so far, we still firmly believe that demand will come), while SOL has continued to rise alongside Bitcoin.
Currently, Bitcoin has seen a significant rise in 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 in the last cycle, Bitcoin reached an all-time high in Q4 2020, while Ethereum peaked in early February 2021, achieving a 5.4 times increase within the first four months of that year.
Again, it is emphasized that in the cryptocurrency space, price leads, and market narratives follow price.
The market may see a similar trend in this cycle. If so, we may witness a positive shift in sentiment and narrative for Ethereum in 2025.
As Solana operates as the 'retail casino/Memecoin chain', it may face some challenges.
Of course, there is also the opposite view that 'things that perform well in the early stages of the cryptocurrency cycle often continue to show strong momentum in later stages' - this also provides strong support for SOL's continued rise.
In summary, we believe that the market has largely reassessed SOL's valuation relative to ETH, and the current fundamentals align roughly with this relative valuation. However, future trends remain uncertain, and what happens next remains to be seen.
