Written by: Michael Nadeau, Founder of The DeFi Report
Translated by: Glendon, Techub News
Translator's Note: In this cycle, Solana has surged rapidly, with its native token SOL reaching a high of 264 USDT, setting a historical record, while Ethereum appears to be somewhat stagnant. Additionally, compared to July this year, the proportion of Solana’s market cap to Ethereum’s has risen 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 underperforming, or has it not yet taken off? This has become a question worth exploring. This article will analyze whether Solana has the opportunity to surpass Ethereum based on various factors such as data, market sentiment, cognition, and narrative.
Looking back to January 2023, Solana's market cap was only 3% of Ethereum's, and the gap seemed insurmountable. However, as of July this year, this gap has significantly narrowed, with Solana's market cap share rising to 17% of Ethereum's. At that time, we wrote: 'Should SOL's market cap be 83% lower than ETH?' The fundamental data provided 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?
And is the market still in a state of chaos? Let's delve deeper.
SOL and ETH (and top L2s):
Comparison data
When comparing data between Solana and Ethereum, we particularly noted 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, including these L2s in the comparison between Solana and Ethereum 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 for Ethereum and top L2s.
In the past 90 days, Solana's fee revenue has reached $192 million, accounting for approximately 49% of Ethereum's ($374 million) and top L2s' ($21 million) total fee revenue.
Please note that the above fees only include Gas fees, excluding MEV (Maximum Extractable Value) fees.
DEX trading volume
Solana's DEX trading volume reached $108 billion in Q2, accounting for about 36% of Ethereum and top L2s' trading volume.
In the past 90 days, Solana's DEX trading volume increased to $153 billion, accounting for about 57% of Ethereum's ($125.5 billion) and top L2s' ($145 billion) trading volume.
Stablecoin supply
In July 2024, Solana's stablecoin supply was about $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 that of Solana, while Base's stablecoin supply 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.
However, in the past 90 days, Solana's stablecoin trading volume has dropped to $963 billion — accounting for about 30% of Ethereum's ($1.9 trillion) and top L2s' ($1.26 trillion) trading volume.
Why has Solana's trading volume decreased?
We believe that Solana's trading volume growth in Q2 was mainly driven by wash trading and algorithmic trading.
And according to Artemis 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 about 6.3% of Ethereum's ($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's L1 TVL. During the same period, it attracted $14 million in TVL from Arbitrum.
Meanwhile, Solana has 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, Solana's data summary 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 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 (far below the 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 slightly less than 2% of Ethereum's TVL.
Again, 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 conduct some more qualitative analysis.
Market sentiment, cognition, and narrative
In the cryptocurrency field, price fluctuations often lead cognition, narrative, and fundamentals, so 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 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 this blockchain.
Therefore, despite the current market narrative being favorable to Solana, we should anticipate that this trend may change soon. If Ethereum rebounds in 2025, the market narrative may swiftly shift from 'Ethereum is dead' to 'Ethereum is the future of finance.'
Meanwhile, Solana's acceptance of the Memecoin casino may also negatively impact its overall perception and narrative.
Catalysts
Ethereum
Exchange-Traded Funds (ETFs)
Ethereum spot ETFs have recently 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, only 1.7% of the net inflow for Bitcoin spot ETFs, far below our original expectation of a 10-20% capital capture ratio.
So far, this reality has significantly deviated from our predictions, but this gap will not last long. We still believe that as the market cycle develops, capital will shift towards Ethereum.
DeFi and Real World Assets (RWA)
With the increasing clarity of the global regulatory environment, we will focus on whether the narrative of DeFi and RWA will heat up. If this happens, we may see companies like Blackrock pushing for more funds to tokenize on-chain.
This speculation is based on three reasons: 1. They hope to tokenize existing funds to improve the efficiency of blockchain in backend accounting and management tasks; 2. They hope to capture fees related to the transformation associated with (traditional financial service companies); 3. Blackrock has enough motivation to bring more practical use cases to Ethereum, paving the way for the legalization of Blackrock's ETF products as a new financial infrastructure.
Once more funds tokenize, we may see new use cases in 'Permissioned DeFi' to service asset trading.
In fact, if Ethereum can demonstrate a positive price trend now, its new narrative as 'the chain of Wall Street' 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 profit value Base brings to Coinbase (approximately $68 million so far this year), we believe they may have created a blueprint for other financial services 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 reinforce Ethereum's potential narrative as 'the chain of Wall Street.'
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, it is also a sign of a market overheating.
The next question is: how much growth potential does the market still 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 market activity is still about 50% lower than the peak of the previous cycle.
While we tend to believe that this number will rise to an extreme level after Bitcoin reaches $100,000, we still maintain a cautious attitude 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 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. - this is a key criterion emphasized by the SEC when approving Bitcoin and Ethereum ETFs.
Thus, the issue with this narrative is whether positive headlines will become 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 forex and cryptocurrency markets) where investors trade based on unconfirmed information or rumors and sell after these pieces of information are confirmed to make a profit.)
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 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 a failure at a certain point in the system causes the entire system to fail to operate. Solana adopts a unique consensus mechanism that combines Proof of History (PoH) and Proof of Stake (PoS), which aims to improve the performance and reliability of the system, but may also introduce the risk of a single point of failure.)
Firedancer is expected to be ready for mainnet deployment in 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 not really taken off yet. The decentralized wireless network Helium has increased by 147% so far this year, but is still 43% lower than its cycle peak; the decentralized mapping network Hivemapper has risen by 164%, but is 80% lower than its cycle peak. Compared to July, we have less confidence in the DePIN space today. At the same time, we notice that Memecoin (and to some extent Bitcoin) is drawing attention and liquidity away from other areas in the market.
Social media
In July, I wrote: It is expected that a social media application that integrates 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 Memecoin. In the short term, it is difficult to see this situation change.
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 increased SOL's pricing 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 the July report, we expected the performance of Ethereum ETFs post-listing to outperform SOL and believed that in this cycle, SOL's market cap would peak at around 25% of Ethereum's market cap. However, it turned out that our predictions were biased in two aspects: because the performance of Ethereum ETFs is more akin to a 'sell the news' event (but so far, we still firmly believe that demand will come), while SOL continues 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 in the last cycle, Bitcoin reached its all-time high in Q4 2020, while Ethereum peaked in early February 2021 and achieved a 5.4 times increase within the first four months of that year.
Again, it is emphasized that in the cryptocurrency field, prices lead the way, and market narratives follow prices.
The market may witness similar trends in this cycle. If so, we may see a positive shift in sentiment and narrative for Ethereum in 2025.
However, Solana, as a 'retail casino/Memecoin chain', may face some challenges.
Of course, there is also the opposing 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 the market has largely reassessed SOL's valuation relative to ETH, and the current fundamentals are roughly in line with its relative valuation. However, future trends remain uncertain, and what happens next remains to be seen.
