Multicoin Capital participated in Solana's seed round financing in May 2018, and Multicoin Capital has also been investing in Solana's native asset SOL and the broader Solana ecosystem. We have previously published four investment papers on Solana. During that time, the first two versions were released about nine months before the Solana mainnet produced its first block. As the Solana network has evolved, our reference framework for thinking about the Solana network and the SOL asset has also been evolving.
Now Solana has become a $100 billion asset, the fastest growing developer ecosystem and has surpassed Ethereum's primary on-chain metrics (transaction volume, daily active addresses, revenue, total economic value (TEV), DePIN payments, etc.). We want to share our thoughts on why we have continued to accumulate SOL to achieve strong returns, even as Solana's market cap has exceeded $100 billion.
This article is the fifth in our evolving Solana thesis. The previous four were: 1) Separation of Time and State; 2) The World Computer Should be Logically Centralized; 3) Technological Scalability Creates Social Scalability; 4) The Hidden Costs of Modular Systems.
In this piece, I will argue that Solana is the leading public blockchain to support the internet capital markets. Furthermore, I believe that Solana as a technology can outperform the major traditional finance (TradFi) participants (including NYSE, NASDAQ, CME, JPM, Goldman Sachs and Morgan Stanley on the financial markets side, and Visa and Mastercard on the payments side) on core performance metrics like latency, while retaining the core blockchain properties (atomic composability and permissionless access for users, developers and validators) that TradFi has never provided. Most importantly, I believe the Solana ecosystem can achieve both of the following seemingly contradictory goals:
1) Reduce end-user financial service costs by 90-99%
2) Achieve a higher total market capitalization than the existing TradFi enterprises
While traditional finance participants like the NYSE and NASDAQ only provide a small portion of the value in the financial stack, Solana has already supported the superset of functionality for these systems through the unique DeFi protocols that have been deployed in production on Solana over the years. Solana not only expands the total addressable market (TAM) for transactions by increasing access and performance, but also captures value from more layers of the financial stack.
Broadly speaking, all financial services can be categorized into two buckets: payments and finance. I will first explain how payments have become a loss leader for blockchains; then the bulk of this piece will focus on the core infrastructure of Wall Street finance.
Providing the Best Global Payments Experience
There are many ways to move money. The user experience of Apple Pay is great. Using physical credit cards is great. Using Venmo, PayPal or Square Cash is also nice. Other methods are mediocre or even worse - ACH, Wires, Zelle, Bill Pay, remittances, etc.
But even these traditional systems with good user experiences have exorbitant fees. Wire transfers cost $25, credit card fees can exceed 2%. The cost of updating a ledger entry is so high for consumers and merchants that it's insane. This violates basic common sense and directly contradicts the natural intuition that electronic transactions should be cheaper than analog ones.
Solana simplifies the payments flow and delivers an amazing user experience. And the fees are almost zero. Please watch the video (https://youtu.be/LaNwHW_NBIs) of Sling Money, which is built entirely on Solana. This is the future of money movement.
The total market capitalization of global payments companies is around $1.4 trillion. Solana's goal is to reduce this cost by 90%. The only fee Solana itself charges users is gas, which is around $0.001 per transaction, or $0.10 per 100 transactions. Even if the Solana network processes an average of 50,000 transactions per second over the course of a year, this would only amount to $150 million for users in total.
Payments are a loss leader for blockchains. Payments are critical for driving adoption, providing real utility for users and companies, but they are not the primary profit center for the blockchain or its ecosystem.
However, payments are essential for the development of blockchains. The beauty of payments is that they are inherently viral. When Alice sends money to Bob, and then Bob sends money to Carol, this naturally leads to wallet adoption growth.
The primary profit center for blockchains is not payments, which are effectively $0. Rather, the primary profit center for blockchains is the natural volatility between asset prices, which manifests as Maximum Extractable Value (MEV). My co-founder Tushar elaborated on this in his 2022 Multicoin Summit talk.
The rest of this piece will focus on how and why Solana can outperform TradFi on traditional performance metrics, and how this will allow SOL and the Solana ecosystem to capture profits.
Market Efficiency in CeFi and DeFi
Solana is a decentralized network of thousands of nodes that reach consensus on a series of financial transactions at a rolling speed of 400 milliseconds (and is expected to reduce to 120ms in the coming years).
The right way to measure market efficiency is not through transaction latency, but through the bid-ask spreads provided by market makers (MMs). At the end of the day, buyers and sellers experience prices. Human users (i.e. non-bots) cannot perceive the difference between 50ms, 100ms and 200ms financial transactions. For context, the average human blink time is 100-150ms.
Market making in Centralized Finance (CeFi) is almost deterministic. Most market makers' servers are co-located with the CeFi exchanges, and each market maker has an identically-length fiber optic cable connecting their server to the exchange. Exchanges execute trades in microseconds, so market makers can know their risk exposure in real-time, with high precision.
Decentralized Finance (DeFi) exchanges - like Drift, Phoenix, Clearpools, Raydium and Orca - on the other hand, have far less determinism than CeFi exchanges, because:
1) The Solana network leader constantly rotates
2) The final settlement time increases due to the need for global validators to reach consensus
As a result, market makers cannot know their risk exposure with the same precision in real-time. In many cases, market makers may leave stale prices on the blockchain order book, which others can then exploit.
Therefore, DeFi spreads are typically larger than CeFi spreads.
Let's look at how these systems are evolving to deliver a better experience for both makers and takers.
Makers - Narrowing Spreads Through Conditional Liquidity
Things are changing. DFlow has quietly launched Conditional Liquidity (CL) on Solana. As the name implies, conditional liquidity is liquidity that is only available if the taker order meets certain pre-defined conditions. In the context of this piece, the key condition is toxic vs. non-toxic order flow.
How does CL work? CL stipulates that liquidity can only be extracted for a given unit if the taker is endorsed by a known front-end application. This includes wallets like Phantom, Backpack, Solflare, and Fuse, as well as front-ends like Drift, Kamino, Jupitar, and DFlow's own. This mechanism guarantees that bots cannot consume the CL, since bot orders are not endorsed. This is a huge win for MMs, as it effectively ensures they won't get run over even if their quotes are delayed by a few seconds.
While CL is a novel mechanism, it is directly inspired by widely adopted practices in TradFi. Robinhood is a pioneer in this regard. Robinhood has consistently provided their customers with prices better than the national best bid and offer (NBBO) on the NYSE and NASDAQ. They have proven this price improvement over trillions of dollars of transactions over the past decade. This makes sense, because market makers have strong statistical reasons to believe the average toxicity of Robinhood users is lower than trading directly on the NYSE or NASDAQ. In short, who would you rather trade against: Joe watching YouTube videos, or Citadel?
CL lets MMs know they are not facing the well-known Citadel.
For more background on how order flow segmentation can deliver better prices for retail traders, you can read here.
The advantage of DFlow CL is that it combines the benefits of TradFi and cryptocurrencies. It can provide tighter spreads for retail clients like Robinhood, and offers real-time, permissionless access and open auditability of the blockchain.
CL is an emerging concept. However, we expect it to become the dominant paradigm for on-chain liquidity provisioning in the coming years, as market makers hate being deceived by stale quotes. Market making is fundamentally about pricing based on the maximum available information. Market makers (whether passive or active) have no reason not to incorporate more information (i.e. conditional liquidity) into their pricing.
The DFlow CL implementation on Solana is currently 100% open-source and charges no fees or taxes. The GitHub repository is available.
Since the introduction of the xyk Automated Market Maker (AMM) by Uniswap in late 2018, conditional liquidity has been the most important functional improvement in DeFi. With its adoption, it will reshape all discussions in DeFi around UX, spreads, MEV, and more.
To reiterate, CL will enable market makers to provide tighter quotes for retail users. We hope this benefits market makers, users, SOL, and the Solana ecosystem.
Takers - Utilizing Alpha by Reducing Latency
Financial markets should incorporate all publicly available information into asset prices. They usually do. However, price discovery for most assets happens on a single server in one location, while the information affecting the price is generated all over the world.
The TradFi market microstructure is designed around low-latency traders hoping to co-locate with the matching engine.
If you as a retail trader observe an event happening in Singapore that will affect the price of TSLA, you still have to send the information to a market maker located in New Jersey. This is fundamentally unfair to the taker and unnecessary for the market maker.
The first correct insight to this problem is that the observer of that information should be able to place an order to validators located in Singapore, not New Jersey, based on that new information. That market participant should be rewarded for being the first to observe that information and adding the order to the global order book at the fastest speed.
Today, Solana, like other leading blockchains, has only a single Leader at any given time. But this is about to change, as Solana is moving towards Multiple Concurrent Leaders (MCL).
Under MCL, there will never be just two Leaders, but dozens. With MCL, participants observing real-world information can and will incorporate that information into asset pricing faster.
The key to optimizing price discovery is not reducing the latency of a single matching engine by a nanosecond, but pushing price discovery to the edge, allowing people all over the world to get updated price information.
Counterintuitively, decentralization enables takers to minimize the latency of their trades, thereby maximizing the propagation of information in financial markets.
By definition, decentralized price discovery is superior to centralized price discovery. The world is large and diverse.
Horizontally Scaling the TAM...
From the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, most major global exchanges trade one asset class (e.g., stocks or commodities). But blockchains reveal a reality: all units of value (currencies, commodities, equities, derivative positions, debts, meme coins, governance tokens, utility tokens, NFTs, etc.) can be represented as standardized tokens on permissionless blockchains.
Currently, most assets traded on blockchains are blockchain-native assets. That is, they are natively created and issued on-chain. This includes DeFi tokens, DePIN tokens, NFTs, and more. But an increasing number of assets are being issued on-chain that represent TradFi assets, including US stocks, bonds, real estate, US Treasuries, mezzanine debt, and more.
Ultimately, nearly all assets will be traded on inherently global and permissionless systems like Solana. This doesn't necessarily mean people will stop trading on the NYSE, Nasdaq, and CME, but rather that an increasing volume of trading will happen on-chain rather than in TradFi venues. This is natural, as blockchains are inherently global, permissionless, 24/7, more accessible to retail traders, and easier for developers to integrate with.
Integrating private keys and tokens into any application, whether a Telegram bot, a lightweight Android app, or a WeChat mini-program, is a piece of cake. The difficulty multiplies when interfacing with the myriad heterogeneous systems representing the global TradFi system. Their APIs are much more complex, settlement times are slow and inconsistent, and in many cases, TradFi institutions don't even face retail traders.
Because blockchains are public and permissionless, they explicitly increase participation in various forms of financial markets. Ultimately, issuers of assets don't care what rails their assets trade on. Issuers just want to ensure that anyone who wants to buy their assets can do so. Today, most company CEOs don't think issuing stock on-chain will increase their potential shareholder base, but this will change in the coming years as the global crypto user base grows from around 500 million to billions.
We not only believe that cryptocurrencies will support all TradFi assets, but we also expect it to support many new assets that were previously impossible. One of my favorite examples is Parcl, which offers perpetual contracts benchmarked to the average price per square foot of completed real estate transactions in a specific market, on a 30-day rolling basis. Parcl allows you to long Austin, short San Francisco, and use the equity value of each position to collateralize the other!
There are even teams developing products to issue NFTs representing individual bottles of whiskey, wine, and watches on-chain!
Solana's TAM is expanding in all directions. Wall Street is slowly migrating on-chain, and developers are building all new financial markets on-chain.
...And Capturing Value from Innovation
So far, this article has viewed Solana as a matching engine. But with DeFi protocols like Drift, Jupiter, Kamino, and marginfi, the Solana ecosystem can provide:
1. All imaginable financial services
2. To everyone in the world
3. With significantly reduced systemic risk through increased transparency and auditability
4. Higher capital efficiency than TradFi.
Currently, the largest DeFi primitives on Solana are 1) spot trading, 2) lending and borrowing, and 3) perpetual futures trading. These roughly correspond to 1) the NYSE/Nasdaq, 2) large banks providing consumer and prime lending services, as well as FCMs, and 3) the CME. These are just for the US. Solana is racing to provide financial services to everyone in the world.
While many Solana supporters, including Anatoly (Solana Labs co-founder and CEO) and myself, have referred to Solana as a decentralized Nasdaq, Solana and its ecosystem's TAM is far greater than Nasdaq. Solana is aiming to power all global financial services; it's far more than just a matching engine.
The incredible thing about Solana is that all these different financial instruments can natively and atomically compose with each other without the explicit approval or support of the application developers. This concept of using existing smart contracts as Lego bricks to build more useful services is what's commonly referred to as composability in the industry. This enables faster experimentation and growth, as developers can build on top of a set of base contracts, integrations, and liquidity, all of which will create value for stakeholders in the Solana ecosystem in a virtuous cycle. This means Solana-based products can innovate faster and provide better consumer experiences.
Solana itself does not provide financial services. But the stack that Solana creates supports hundreds (soon to be thousands) of financial services that facilitate trillions of dollars in risk transfer annually. While gas costs are near-zero and trending downward, Solana directly profits from the growth of these financial services through Maximum Extractable Value (MEV).
As my partner Tushar mentioned at the Multicoin Summit in 2022 and 2024, assets like Solana can be valued based on the MEV they capture. Each new financial service generates incremental MEV, and Solana can capture a portion of that. Today, over $100 million in MEV is already being generated by a single Solana application, and this is just the tip of the iceberg. In Q4 2024, the Solana network will generate over $800 million in REV (excluding SOL inflation), annualizing to around $3.2 billion. This is up from virtually $0 a year earlier. This is the case even though there are almost no TradFi assets issued on Solana, and the major DeFi protocols on Solana are relatively immature, with most having only a few years of history. Solana's TAM is growing in three dimensions: 1. DeFi protocols are maturing, adding new features and functionality, and creating more MEV opportunities. 2. Entrepreneurs are building new financial markets on-chain, such as computing, telecom, energy markets, and Blockchain-Enabled Collectibles Marketplaces (BECMs). 3. More and more assets, from memecoins to US equities, are being issued on-chain. These not only increase Solana's TAM but also reinforce each other. For example, the more assets that are issued, the more collateral is available for lending. Solana's compounding velocity is accelerating. Internet Capital Markets The Solana ecosystem is laser-focused on realizing the vision of the Internet Capital Markets. Solana is improving execution for market makers through conditional liquidity, and improving for recipients through multiple concurrent leaders. Additionally, the Solana ecosystem is horizontally expanding its TAM (by supporting a broader range of TradFi and crypto-native assets) and vertically expanding its TAM (by capturing some of the MEV from the many financial services built on top of Solana). This is a tremendous opportunity to create a global, permissionless financial system where: 1. Those with informational advantages can capture alpha across every asset class 2. While crossing the tightest spreads 3. And enjoying the lowest fees 4. With global sources of leverage, transparent and auditable in real-time 5. And maximizing capital efficiency through cross-location and cross-protocol atomic composability. This is the vision of the Internet Capital Markets. This is the vision of Solana. Original link Welcome to join the official BlockBeats community: Telegram subscription group: https://t.me/theblockbeats Telegram discussion group: https://t.me/BlockBeats_App Twitter official account: https://twitter.com/BlockBeatsAsia
