Written by: Michael Nadeau, Founder of The DeFi Report
Compiled by: Glendon, Techub News
Translator's note: In this cycle, Solana has been unstoppable, with its native token SOL reaching a record high of 264 USDT. In comparison, Ethereum seems to be stagnant. In addition, compared with July this year, the ratio of Solana's market value to Ethereum's market value has increased from 17% to nearly 30%. Since the low point in December 2022, SOL has achieved an astonishing 25-fold growth, while ETH has only risen 1.7 times. Is Ethereum lacking momentum, or has it not yet exerted its strength? This has become a question worth exploring. Based on the analysis of multiple factors such as data, market sentiment, cognition and narrative, this article will explore whether Solana has a chance to surpass Ethereum, and what catalysts Ethereum has to drive prices up?
Looking back to January 2023, Solana’s market cap was only 3% of Ethereum’s, and the gap between the two seemed insurmountable. However, as of July this year, the gap has narrowed significantly, and Solana’s market cap has climbed to 17% of Ethereum’s. At the 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 re-evaluated SOL, and its market value has soared to nearly 30% of Ethereum's market value. Faced with this change, I can't help but ask this question again: Should SOL's market value be 70% lower than ETH?
Are markets still in disarray? Let’s take a closer look.
SOL vs. ETH (and top L2s): Comparative Data
When comparing Solana’s data with Ethereum’s, we particularly noticed an important variable - the second-layer 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 blockspace, but also further enhance the network effect of ETH as a core asset. Therefore, taking these L2s into account when comparing Solana to Ethereum can provide a more comprehensive and in-depth perspective.
cost
In Q2 2024, Solana’s fee revenue was $151 million, accounting for approximately 27% of the total fee revenue of Ethereum and top L2s.
Over the past 90 days, Solana has generated $192M in fee revenue, which is approximately 49% of the total fee revenue for Ethereum ($374M) and top L2s ($21M).
Please note that the above fees only include Gas fees and do not include MEV (Maximum Extractable Value) fees.
DEX Trading Volume
Solana’s DEX trading volume reached $108 billion in the second quarter, accounting for approximately 36% of Ethereum and top L2s trading volume.
Over the past 90 days, Solana’s DEX volume has increased to $153 billion, accounting for approximately 57% of Ethereum’s ($125.5 billion) and top L2s’ ($145 billion) volume.
Stablecoin supply
In July 2024, Solana’s stablecoin supply was approximately $3.1 billion, accounting for approximately 3.5% of Ethereum and L2s stablecoin supply.
Currently, its stablecoin supply has reached 4.3 billion US dollars, accounting for about 4.1% of the Ethereum + L2s stablecoin supply.
Note that Arbitrum’s stablecoin supply exceeds Solana’s, while Base’s stablecoin supply is 80% of Solana’s.
Stablecoin transaction volume
Solana’s stablecoin trading volume reached $4.7 trillion in the second quarter, 1.9 times the trading volume of Ethereum and top L2s.
Over the past 90 days, Solana’s stablecoin volume has fallen to $963 billion — roughly 30% of Ethereum’s ($1.9 trillion) and top L2s’ ($1.26 trillion) volume.
Why has Solana’s transaction volume dropped?
We believe Solana’s volume growth in Q2 was primarily driven by wash trading and robotic/algorithmic trading.
And according to Artemis data, only about 6% of Solana’s stablecoin transaction 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, about 6.3% of the TVL of Ethereum ($60.3 billion) and top L2s ($9.5 billion).
Currently, Solana’s TVL has risen to US$8.2 billion, accounting for 12% of Ethereum and top L2s TVL.
Fund Flow
In the past 90 days, Solana has attracted over $1.2 billion in TVL from Ethereum, or about 2% of Ethereum’s L1 TVL. In the same period, it has attracted another $14 million in TVL from Arbitrum.
Meanwhile, Solana also lost some TVL to OP ($540,000) and Base ($5 million) during the same period.
Based on the 90-day performance, Solana data is summarized as follows:
1. 49% of Ethereum 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. 4.1% of Ethereum stablecoin supply (up from 3.5% in Q2)
4. 30% of Ethereum stablecoin transactions (down from 190% at the end of Q2)
5. 12% of Ethereum TVL (up from 6% at the end of Q2)
6.Solana attracted just under 2% of TVL from Ethereum.
Once again, the current market price of SOL has risen to 70% of Ethereum's market value. We will explore the rationality of this valuation in depth later. Before that, let's do some more qualitative analysis.
Market sentiment, perception and narrative
In the cryptocurrency space, price movements tend to lead perception, narrative, and fundamentals, so given the price action of SOL vs. ETH, the current narrative might lead you to believe that Solana is about to surpass Ethereum.
But the reality is that Solana currently exists primarily as a Memecoin casino. Sure, there are real projects on Solana, such as Helium and Hivemapper, but the current price action (and fundamentals) are largely driven by this casino. From what I’ve heard, this phenomenon is quietly affecting Wall Street’s view of the blockchain.
Therefore, while the current market narrative is favorable to Solana, we should expect this trend to change quickly. If Ethereum rebounds in 2025, the market narrative may quickly change from "Ethereum is dead" to "Ethereum is the future of finance."
At the same time, Solana’s acceptance of Memecoin casinos could also have a negative impact on its overall perception and narrative.
catalyst
Ethereum
Exchange Traded Funds (ETFs)
Ethereum spot ETFs have finally started to see some inflows recently, although the inflows are only a small fraction of those of Bitcoin spot ETFs. As of November 20, the net inflows of Ethereum spot ETFs were $469 million, only 1.7% of the net inflows of Bitcoin spot ETFs, far lower than the 10-20% fund capture ratio we originally expected.
So far, this reality has deviated significantly from our forecast, but this gap will not last long. We still believe that funds will move to Ethereum as the market cycle develops.
DeFi and Real World Assets (RWA)
As the global regulatory environment becomes clearer, we will watch to see if the DeFi and RWA narratives pick up steam. If this happens, we may see companies like Blackrock push 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 back-end accounting and management work; 2. They want to capture the costs associated with the transformation (of traditional financial services companies); 3. BlackRock has enough motivation to bring more practical uses to Ethereum and use it as a new financial infrastructure, thus paving the way for the legalization of BlackRock's ETF products.
Once more and more funds are tokenized, we may see new use cases emerge in “Permissioned DeFi” to serve asset trading.
In fact, if Ethereum can now show positive price trends, its new narrative as the “Wall Street Chain” may be about to emerge.
Coinbase and Base
Among Ethereum L2s, Base stands out as the fastest growing L2 with its rapid growth in fees, active users, and stablecoin trading volume. Considering the profit value that Base has brought to Coinbase (about $68 million so far this year), we think they may have created a blueprint for other financial services companies to launch L2 on Ethereum.
Just imagine what would happen if giants like JPMorgan Chase (JPM), Blackrock (Blackrock), Fidelity (Fidelity) or Robinhood announced the launch of Ethereum L2?
Obviously, this will further strengthen Ethereum’s potential narrative as the “Wall Street Chain.”
Solana
Memecoin Mania
Phantom recently surpassed Google to become the number one free utility app on Apple's App Store.
This is undoubtedly a clear sign that Solana is attracting a large number of new users to the cryptocurrency field. At the same time, it is also a sign that the market is overheated.
The next question is: How much room for growth does the market 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 number of views on popular cryptocurrency YouTube channels. As we can see from the figure below, market activity is still about 50% lower than the high point of the previous cycle.
Data: From Benjamin Cowen
While we tend to think this number will rise to extreme levels after Bitcoin reaches $100,000, we remain cautious in the short term.
SOL ETF?
Regarding the SOL ETF, the Chicago Board Options Exchange (Cboe) has submitted applications for four Solana spot ETFs to the U.S. Securities and Exchange Commission (SEC), with the issuers being VanEck, 21 Shares, Canary Capital, and Bitwise. Given the upcoming personnel changes at the SEC, we can expect to see the SOL spot ETF as early as next year. Nevertheless, unlike Bitcoin and Ethereum, SOL has not yet established a regulated futures market in the United States - a key criterion emphasized by the SEC when approving Bitcoin and Ethereum ETFs.
The question for this narrative, therefore, is whether positive headlines will become a “Buy the rumor, Sell the news” event, as we have seen so far with the Ethereum ETF. (Techub News Note: “Buy the rumor, sell the news” refers to a strategy in which investors trade on unconfirmed information or rumors in financial markets (including foreign exchange and cryptocurrency markets) and sell for a profit after the information is confirmed.)
Firedancer
Firedancer is very important to the future development of Solana.
Firedancer is a new Solana validator client developed by cryptocurrency company Jump Crypto. It promises to significantly improve Solana's performance, reliability, and scalability by supporting more concurrent transactions. It will also improve overall network efficiency and reduce operating costs for node operators.
Most importantly, the introduction of Firedancer will eliminate Solana’s current single point of failure (SPOF) and reduce the possibility 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 function. Solana uses a unique consensus mechanism that combines Proof of History (PoH) and Proof of Stake (PoS). This mechanism is designed to improve the performance and reliability of the system, but it 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 be beneficial to Solana’s future, it may not be a significant price catalyst in this cycle.
Decentralized Physical Infrastructure Network (DePIN)
As for the Decentralized Physical Infrastructure Network (DePIN) narrative, it has yet to really take off. Helium, a decentralized wireless network, is up 147% year to date, but is still 43% below its cycle high; Hivemapper, a decentralized mapping network, is up 164% and 80% below its cycle high. We are less confident in the DePIN space today than we were in July. At the same time, we note that Memecoin (and to some extent Bitcoin) is siphoning attention and liquidity from other areas of the market.
Social Media
Back in July, I wrote that I expected a social media app that integrated cryptocurrency in some way to enter the mainstream through celebrities and influencers. While this could still happen, right now this “attention economy” is being expressed through Memecoin. It’s hard to see this changing in the short term.
in conclusion
Should SOL's market cap be 70% lower than ETH's?
Given the following circumstances:
SOL/ETH hits all-time high
Over the past few years, the market has increased the pricing of SOL relative to ETH by 10 times
Since its December 2022 low, SOL has risen 25 times, while ETH has only risen 1.7 times
Solana’s on-chain fundamentals owe much to Memecoin transactions
We tend to think that SOL's relative valuation is reasonable. But the key question is whether SOL can continue to perform well and even surpass Ethereum?
In our July report, we expected the Ethereum ETF to outperform SOL after its launch, and believed that SOL's market value would peak after reaching about 25% of Ethereum's market value in this cycle. However, it turns out that our predictions were wrong in both aspects: because the Ethereum ETF's performance was closer to the "news sell" event (but so far, we still believe that demand will come), while SOL continued to rise with Bitcoin.
Currently, Bitcoin has seen a significant rally 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 hit an all-time high in the fourth quarter of 2020, while Ethereum reached its peak in early February 2021, and achieved a 5.4-fold increase in the first four months of that year.
Once again, in the cryptocurrency space, price leads and market narrative follows price.
The market may see a similar move this cycle. If so, we may see a positive shift in sentiment and narrative around Ethereum by 2025.
As a “retail casino/Memecoin chain”, Solana may face some challenges.
Of course, there is also the opposite view that "things that perform well early in the cryptocurrency cycle tend to continue to show strong momentum later" - this also provides strong support for SOL's continued rise.
In summary, we believe that the market has largely re-evaluated the valuation of SOL relative to ETH, and the fundamentals at this stage are roughly consistent with the relative valuation. However, the future trend is still full of uncertainty, so let us wait and see what happens next.
