Author: Flip Research
Compiled by: TechFlow
Lately my social media timelines have been filled with bullish arguments for $SOL, mixed with some meme coin pushes. I started to believe the meme coin supercycle was real and that Solana would surpass Ethereum as the dominant layer 1 blockchain. But then I started digging into the data and the results were worrying, to say the least… In this post, I’ll show what I found, and why Solana might be a house of cards.
First, let’s look at the bullish thesis, succinctly laid out by @alphawifhat:
Explanation of the above picture:
Nachi: “I watched @BanklessHQ’s recent show about $SOL, which was mentioned to be 83% below $ETH, and I was completely shocked at how mispriced Solana is relative to ETH, even though Solana is my largest holding.
Based on the second quarter’s performance, Solana’s numbers are as follows:
50% of ETH+L2 users
27% ETH+L2 Fees
36% of DEX volume
190% of ETH+L2 stablecoin transactions"
Integrated Kyle e/acc: “We almost never make specific forecasts, especially to our liquidity providers.
In our annual letter, we predicted that Solana would surpass Ethereum on most major on-chain metrics by the end of the year. We specifically pointed to transaction volume as the most important statistic.”
There are four clear claims regarding the metrics with ETH and L2:
A high proportion of user base
Relatively higher costs
High DEX volume
Significantly higher proportion of stablecoin trading volume
User base comparison
Here is a comparison between the ETH mainnet and SOL (only comparing the mainnet, because the vast majority of fees come from this, source: @tokenterminal):
ETH user base + transaction volume
SOL User Base + Transaction Quantity
At first glance, these numbers look pretty good for SOL, with over 1.3 million daily active users (DAUs), while ETH only has 376,300 DAUs. However, when we take the number of transactions into account, I noticed something odd.
For example, on Friday, July 26, ETH had 1.1 million transactions, and ETH only had 376,300 DAUs, with an average of about 2.92 transactions per day. However, SOL had 282.2 million transactions and 1.3 million DAUs, with an average of 217 transactions per day.
I thought this might be due to lower transaction fees, which allows more trades, more frequent position compounding, increased arbitrage bot activity, etc. So I compared it to another popular chain, Arbitrum. However, Arbitrum's average user transaction volume on the same day was only 4.46. Looking at other chains also yielded similar results.
Given that the number of users is higher than ETH, I looked at Google Trends, which should be relatively unbiased about user value:
ETH is trending either equal to SOL or ahead of SOL. I shouldn’t have expected this given the difference in DAU and all the hype around the SOL meme coin trend. So what’s going on?
DEX Trading Volume Analysis
To understand the discrepancy in transaction numbers, looking at Raydium’s liquidity providers (LPs) can be instructive. Even at first glance, it’s clear that something is amiss:
At first I thought this was just wash trading on low liquidity honeypot LPs to attract the occasional meme coin speculator, but looking at the chart, it’s far worse than that:
Each low liquidity pool is a project that has had a “pump” in the past 24 hours. Take MBGA as an example. In the past 24 hours, there were 46,000 transactions, $10.8 million in trading volume, 2,845 unique wallets buying and selling, and more than $28,000 in fees on Raydium. (Note that a similarly sized legitimate LP, $MEW, only generated 11,200 transactions)
Looking at the participating wallets, most appear to be bots in the same network, making tens of thousands of transactions. They independently generate fake transaction volumes, random amounts of SOL, and random transaction times until the project is pumped, and then move on to the next project.
On Raydium’s standard liquidity pool, there have been over 50 pumps in the last 24 hours, with over $2.5M in volume, generating over $200M in volume and over $500K in fees. Orca and Meteora have significantly fewer pumps, and I could hardly find any pumps with any substantial volume on Uniswap (ETH).
Clearly, there is a serious pump problem on Solana, which has multiple implications:
Given the abnormally high transaction-to-user ratio, and the number of on-chain wash trades and pumps, it appears that the vast majority of transactions are unnatural. On the main ETH L2, the highest daily transaction-to-user ratio is 15.0x, on Blast (where fees are similarly low and users are mining Blast S2). As a rough comparison, if we assume that the true SOL transaction-to-user ratio is similar to Blast, that would mean that over 93% of transactions (and corresponding fees) on Solana are unnatural.
These scams exist because they are profitable. As a result, users lose an amount at least equal to the fees and transaction costs incurred every day, which amounts to millions of dollars.
Once deploying these scams becomes unprofitable (i.e. when actual users get tired of losing money), you would expect most trading volume and fee revenue to decline.
Therefore, users, organic fees, and DEX trading volumes are all greatly exaggerated.
I’m not the only one to come to these conclusions, @gphummer recently posted something similar:
gphummer.eth: “Some self-proclaimed “researchers” are making a big fuss about SOL surpassing ETH in DEX volume. Let’s dig deeper. The numbers are highly suspicious and suggest wash trading and counterfeiting, which is not unexpected for a chain that was initially made popular with the help of SBF.”
Ryan Connor | BWR: “Most interesting and important milestone in crypto markets today -> Solana surpassed Ethereum in DEX volume over the past 30 days for the first time. From this perspective, it is now the most used chain.”
MEV on Solana
MEV on Solana has unique characteristics. Unlike Ethereum, Solana does not have a built-in mempool; instead, participants like @jito_sol created (now deprecated) extra-protocol infrastructure to simulate the functionality of a mempool, allowing MEV opportunities such as front-running, pincer attacks, etc. Helius Labs put together an in-depth article that details MEV.
The problem on Solana is that the vast majority of tokens traded are ultra-volatile, low-liquidity meme coins, and traders often set slippages of more than 10% to ensure successful execution of trades. This provides a rich attack surface for MEV:
Ben: “In the past 1-2 months, the famous sandwich robot arsc has made more than $30 million in profit on Solana! Their profits are mainly stored in the following two wallets.”
If we look at the profitability of block space, it’s clear that the majority of value now comes from MEV tips:
Dan Smith: “Solana generated $5.5M in total fees yesterday, the highest level in the past three months. 58% of the value came from MEV tips and 37% from priority transaction fees. Most of the activity came from spot DEX trading.”
While this is strictly true value, MEV will only be earned when it is profitable, i.e. as long as retail investors continue to participate and lose money on the meme. Once the meme starts to cool, MEV revenue will also collapse.
I see a lot of arguments for SOL mentioning an eventual move to infrastructure projects like $JUP, $JTO, etc. This may be possible, but it is worth noting that their lower volatility and higher liquidity simply do not offer the same MEV opportunity.
Complex players are incentivized to build the best infrastructure to take advantage of this situation. In my research, some sources mentioned rumors of these players investing in controlling transaction pool space and then selling access to third parties. However, I was unable to verify this information.
However, there are some clearly distorted incentives at play - by shifting as much meme coin activity as possible to SOL, this enables sophisticated individuals to continually profit from MEV, profit from insider trading of said memes, and profit from the price increase of SOL.
Stablecoins
There is another oddity in terms of stablecoin trading volume and total locked value (TVL). Trading volume is significantly higher than ETH, but when we look at @DefiLlama’s stablecoin data, ETH’s stablecoin TVL is $80 billion, while SOL is only $3.2 billion.
I think stablecoin (and more broadly) TVL is a metric that is less susceptible to manipulation than volume and fees on low-fee platforms, and it shows the actual investment of participants.
This is highlighted by stablecoin volume dynamics — @WazzCrypto noted that once the CFTC announced its investigation into Jump, volumes suddenly dropped:
Wazz: “Since Jump was investigated by the CFTC, the graph of Solana stablecoin trading volume has actually flattened. It’s a big mystery what caused this.”
General value extraction
Scams and MEV aside, the outlook for the general market remains bleak. Celebrities have chosen Solana as their blockchain of choice, but the results have not been great:
Slorg: “Jason Derulo’s coin is labeled DERULO instead of JASON, but the data does use the correct coin.” Andrew Tate’s DADDY is the best performing celebrity token, but has a -73% return. At the other end of the spectrum, the situation is just as bad:
Penn Fengと: “Regarding $WIF, Ansem once stated verbatim that the main player should be the one chosen by the entire ecosystem. On $NEIRO, one has clearly been chosen, and the transaction volume has exceeded 50 million. This is annoying The guy then backed one on a 2 million basis and it was important to talk about old projects when in fact he just missed out on major opportunities and that's what happened to him after WIF, you guys have to stop worshiping this celebrity idol."
A quick search on X also shows rampant insider trading and developer selling to buyers:
Lookonchain: “$Neiro developers earned 15,508 $SOL ($2.85 million) with only 3 $SOL ($552), a 5,169x return! 😱
He spent 3 $SOL ($552) to buy 97.5 million $Neiro when he deployed $Neiro.
He then traded 15,511 $SOL ($2.85 million) across multiple wallets, selling 68 million $Neiro for a profit of 15,508 $SOL ($2.85 million).
He also sent 10 million $Neiro to the burn wallet, leaving him with 19.5 million $Neiro ($1.8 million) for an unrealized gain of $1.8 million!
$Neiro is a#MEMEcoinon#Solananamed after the newly adopted dog from $DOGE's (Kabosu) owner."
But Flip, my timeline is full of people making millions trading memes on Solana. How does this relate to what you’re saying?
I simply don’t believe that a KOL’s posts on X are representative of the broader user base. It’s easy for them to build a position in the current frenzy, promote their token, profit from followers, and repeat. There’s definitely survivorship bias going on here — the winners are far more vocal than the losers, creating a distorted perception of reality.
To put this in perspective, the general market is losing millions every day to scammers, developers, insiders, MEV, KOLs, and that’s not even counting the fact that most of the tokens they trade on Solana are just memes with no real backing. It’s hard to argue against the fact that most memes will eventually meet the same fate as $boden.
Additional considerations
Markets are volatile, and when sentiment shifts, factors that buyers had overlooked become apparent:
The instability of blockchain and frequent failures
High transaction failure rate
Difficult to use block explorer
The development threshold is high, and Rust is much less user-friendly than Solidity
Poor interoperability with the EVM. I think it’s healthier to have multiple interoperable chains competing for our attention than to be stuck on a single (relatively centralized) chain.
The likelihood of an ETF is low, both from a regulatory and demand perspective. This article highlights the reasons why institutional demand is low in Solana’s current state. @malekanoms also highlights a few points that I think are relevant to traditional finance (and rebuttals from @0xmert):
Omid Malekan: “ETH is a high quality liquid asset (HQLA) in crypto. In preparation for the launch of an ETH ETF, I wrote a brief paper explaining what HQLA is, why we need a native digital asset, and why ETH is the most likely choice. My analysis contrasts it with BTC and SOL.”
Up to 67,000 SOL ($12.4 million) of newly minted tokens per day
41M SOL ($7.6B) remains locked in the sale of FTX assets. 7.5M ($1.4B) will unlock in March 2025, with an additional 609,000 ($113M) unlocked monthly thereafter until 2028. Most tokens were purchased for around $64 each.
in conclusion
As usual, it is the shovel sellers who profit, while speculators often suffer losses without knowing it.
I believe that the commonly cited SOL metrics are grossly inflated. Furthermore, the vast majority of organic users are rapidly losing money to malicious actors. We are currently in a mania phase where general inflows still exceed outflows, creating a façade of positivity. Once users become exhausted by continued losses, these metrics will quickly collapse.
As mentioned above, SOL also faces a number of fundamental headwinds that will surface once sentiment turns. Any price increase will exacerbate inflationary pressures and unlocking.
Ultimately, I believe SOL is overvalued from a fundamental perspective, and while existing sentiment and momentum may drive prices higher in the short term, the long-term outlook is more uncertain.
Disclaimer: While I have held SOL at various times in the past, I do not currently hold any material position in SOL. Many of the views I have stated above are my own speculative opinions and are not factual. I may be wrong in my assumptions and conclusions. Please always do your own research - this is not investment advice.
