Compiled by Liu Jiaolian
Overnight crypto market is under pressure. Mt.Gox distribution continues to advance. [“7.30 Teaching Chain Internal Reference: Graphical Introduction to Mt.Gox Distribution”] can be used as a reference. Affected by this, the market is unable to attack. BTC temporarily retreated to 66k on standby. Today, Teaching Chain will talk to you about the track of the new public chain.
As early as the end of last year, in response to Messari's research report that was bearish on ETH and bullish on SOL, Jiaolian pointed out that this was one of the self-rescue actions of Wall Street capital after the FTX crash in 2022. Why? Because these institutions were fooled by SBF (founder of FTX ), who was white-skinned and naturally trusted by them, and invested heavily in Solana . As a result, FTX (the exchange founded by SBF) was taken away by CZ ( Changpeng Zhao of CZ ) during the 2022 bear market, which directly led to the loss of many assets of the "FTX system"!
Take Solana, one of the locked-in assets, for example. It dropped from a peak of nearly $260 in October 2021 to less than $8 in December 2022! The maximum drop was as high as 97%!
This made the US institutional investors who were trapped extremely frustrated. They immediately came up with two countermeasures:
First, launch retaliatory actions. Using the system of American capital influencing politics, promote the joint law enforcement of the Ministry of Justice, CFTC, and the Ministry of Finance, "invite" CZ to the United States, fine and sentence him. CZ was forced to leave Binance, which he founded. Binance is regulated by the US Treasury Department. This happened in November last year (2023). The revenge was obtained in less than a year, which deeply reflects the "advancedness" of the capitalist system - once the boss (capital) speaks, the employees (US government) are really good at execution! This section of grudges will not be mentioned for the time being.
Second, launch a self-rescue operation. How to save yourself? Of course, it is to jointly sit in the market, concoct good news, and raise the price of the currency. The strategy concocted by Wall Street capital is to crown Solana with the crown of the king of public chains on Ethereum. By March of this year (2024), taking advantage of that wave of copycats, SOL has successfully soared to $210, compared with less than $8 in December 2022, an increase of 25 times. During the same period, ETH only rose from $1,070 at the end of 2022 to $4,090 in March 2024, an increase of only about 4 times.
Let's recall why few people are talking about Solana online. It is not a decentralized blockchain because it needs a centralized sequencer at its core to work. Why did Rune Christensen, the founder of Maker, challenge Vitalik Buterin, the founder of Ethereum, last year and say that Solana is better than Ethereum? Why did Messari, a leading crypto investment research institution, openly criticize Ethereum (ETH) and praise SOL in its research report last year? Why did the saying "Solana flips ETH" become popular on platforms such as Twitter?
As of today, the last day of July 2024, Solana has ranked among the top 5 cryptocurrencies by market capitalization, with a market capitalization of nearly $84 billion. Ethereum’s market capitalization is over $396 billion. Although there is still an order of magnitude gap in size, there are already many people and many voices in the market who are encouraging the ignorant leeks to believe in stories like “Solana is the next Ethereum” and “Solana will definitely surpass Ethereum”.
Remember, in the financial market, what you see is often what others want you to see. The falseness of the appearance is often proportional to the loudness of the optimistic voice. Does Solana really have the potential to surpass Ethereum and become the next king of public chains? Or on the contrary, is Solana's prosperity an artificial illusion, is it the emperor's new clothes?
Below, Jiaolian compiled Flip Research’s research report “SOL – The Emperor’s New Clothes” and shared it with you for inspiration.
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Lately, my Twitter timeline has been flooded with SOL bullish posts mixed with memecoin scams. I started to believe that the memecoin supercycle is real and that Solana will surpass Ethereum as the main L1. But then I started digging into the data, and the results were worrying to say the least… In this post, I present my findings and why Solana might be a “house of cards” (referring to the game of capital and power).
First, let’s look at the concise statement by netizen Nachi that supports SOL:
[Teaching link note: Netizen Nachi’s comments on Niu SOL are mainly as follows:
I saw @BanklessHQ's recent report about $SOL being 83% off $ETH and was totally shocked by the mispricing of Solana vs ETH. Even Solana is my largest position.
Based on the second quarter performance, Solana has
50% of ETH+L2 users
27% ETH+L2 Fees
36% of DEX trading volume
190% of ETH+L2 stablecoin trading volume
Today, SOL’s DEX volume surpasses ETH’s volume. Even taking ETH+L2 into account, it has risen from 36% to 57% in just a few weeks.
SOL's DEX trading volume will sooner or later overtake ETH+L2s and memecoin, and memecoin is the best PMF (teaching chain note: refers to products that meet market demand) in this cycle, and there are other indicators
However, SOL’s market cap is still only 20% of ETH’s and growing rapidly, which is completely moronic in traditional valuations, coupled with catalysts like Firedancer and possible ETF approval early next year.
……】
There are four different dimensions for comparing ETH+L2 indicators:
1. High user base ratio
2. Proportionately higher fees
3. DEX has large trading volume
4. Stablecoin trading volume accounts for a significantly higher proportion
1. Comparison of user groups:
The following is a comparison between the ETH mainnet and SOL (only the mainnet is compared, because most of the fees come from the mainnet after Dencun, source: @tokenterminal):
ETH user base + on-chain transactions (tx)
SOL user base + on-chain transactions (tx)
On the surface, SOL’s numbers look pretty good, with over 1.3 million daily active users (DAU) compared to ETH’s 376,300. However, when we add tx counts into the mix, I notice something odd.
For example, on Friday, July 26, ETH had 1.1 million transactions and a DAU of 376,300, which is about 2.92 transactions per user per day. On the other hand, SOL had 282.2 million transactions and a DAU of 1.3 million, which is a whopping 217 transactions per user per day.
I thought this might be due to low fees allowing more trades, more frequent compounding of positions, more arbitrage bot activity, etc. Therefore, I compared it to another popular chain, Arbitrum. However, Arb only had 4.46 user visits on the same day. Looking at other chains, the results are similar:
Given that the number of users is higher than ETH, I checked against Google Trends which should be fairly irrelevant to the value per user:
ETH has been either on par or ahead of SOL. This is not what I would expect given the difference in DAUs, plus all the hype around the SOL memecoin trend. What is going on?
Subtitles in the picture: The secrets to getting rich quickly are all written in the Criminal Law.
2. DEX transaction volume analysis
To understand the discrepancy in deal count, it’s instructive to look at Raydium’s LPs. Even at first glance, it’s clear something is amiss:
At first I thought this was just a low liquidity wash trade on the honeypot LP to attract the odd memecoin degen, but looking at the chart it looks much worse:
Every low liquidity pool is a project that has rugged out in the last 24 hours alone. In the case of MBGA, there were 46,000 trades, $10.8 million in volume, 2,845 buys/sells from different wallets, and over $28,000 in fees on Raydium in the last 24 hours. (Note that a similarly sized legitimate LP $MEW only generated 11,200 trades).
Looking at the wallets involved, the vast majority appear to be bots in the same network, with transactions in the tens of thousands. They independently generate fake transaction volumes, randomly generating SOL amounts and transaction times until a project has problems, then move on to the next project.
In the past 24 hours, there were over 50 projects with >$2.5M in volume on Raydium’s standard LP, generating a total of over $200M in volume and over $500K in fees. Volume on Orca and Meteora appears to be much lower, and I struggled to find any meaningful volume on Uniswap (ETH) for these runaway projects.
It’s clear that there are huge problems with projects running away on Solana, with various impacts:
Given the abnormally high transaction-to-user ratio, and the number of wash trades/washes on-chain, it seems likely that the vast majority of transactions are unnatural. On the main Ethereum L2, the highest daily transaction-to-user ratio is 15.0x that on Blast (which also has low fees and users are all on Blast S2). As a rough comparison, if we assume the true SOL transaction-to-user ratio is similar to Blast, this would mean that over 93% of transactions (and by extension, fees) on Solana are unnatural. The only reason these scams are running is to be profitable. Therefore, the amount of money users are losing must be at least equal to the fees + transaction costs incurred, which is in the millions of dollars per day. Once deploying these scams becomes unprofitable (i.e. actual users get tired of losing money), you see that most of the volume and fee revenue drops. It seems likely that users, true fees, and DEX volume are all grossly inflated.
I’m not the only one to come to these conclusions, @gphummer recently posted something similar:
[Teaching Chain Note: Netizen ghpummer said: Many so-called "researchers" are boasting that SOL has surpassed ETH in DEX trading volume. Let's take a deeper look. These numbers are incredibly suspicious and suggest wash trading/marketing deception, which is not surprising for a chain that initially became popular with the help of SBF. 】
3. MEV on Solana
MEV (Miner Extracted Value) on Solana is in a unique position. Unlike Ethereum, it does not have a built-in mempool; instead, players like @jitoo_sol created (now abandoned) extra-protocol infrastructure to simulate mempool functionality, thus providing opportunities for MEV, such as front-running, sandwich attacks, etc. Helius Labs has a detailed introduction to MEV here:
https://www.helius.dev/blog/solana-mev-an-introduction
The problem with Solana is that the vast majority of tokens traded are meme coins with extremely high volatility and low liquidity, and traders often have to set a slippage of more than 10% to successfully execute transactions. This provides a very lucrative attack surface for MEV to gain value:
[Note from the Teaching Chain: What netizen Ben said is: In the past 1-2 months, the infamous sandwich robot arsc on Solana has earned more than 30 million US dollars! ]
If we look at the profitability of block space, we see that most of the value now comes from MEV oil and water:
[Teaching Chain Note: Netizen Dan Smith said: Solana generated a total of $5.5 million in fees yesterday, the highest in the past three months
58% of value comes from MEV tips, 37% from priority transaction fees
Most activity comes from spot DEX trading]
While this is strictly “real” value, MEV will only be conducted while it is profitable, which is to say, as long as retail investors continue to “All In” memecoins (and make a net loss). Once memecoins start to cool, MEV fee income will collapse as well.
I see a lot of SOL posts talking about how they will eventually move to infrastructure investments like $JUP, $JTO, etc. This is very likely, but it is worth noting that these tokens, with their lower volatility and higher liquidity, simply do not offer the same MEV opportunity.
Sophisticated players have an incentive to build the best infrastructure to exploit this situation. During my research, some sources mentioned rumors that these players invested in controlling mempool space and then sold the rights to third parties. However, I was unable to confirm this information.
There are some clearly perverse incentives here - by moving as much Memecoin activity as possible to SOL, it allows wily people to continue to profit from MEV, the Memecoin insider trading discussed above, and the price appreciation of SOL.
4. Stablecoins
Speaking of stablecoins’ trading volume + TVL (total locked value), there is another strange phenomenon. The trading volume is obviously higher than ETH, but when we look at @DefiLlama’s stablecoin data, ETH has $80 billion in stable TVL, while SOL only has $3.2 billion.
I think stablecoin (and more broadly) TVL is a less scalable metric than volume/fees on low-fee platforms, and shows how many players are in the game.
This is highlighted by the volume dynamics of stablecoins — @WazzCrypto noted that once the CFTC announced they were investigating Jump, volumes suddenly dropped:
【Teaching Chain Note: What netizen Wazz said is: Ever since Jump was investigated by the U.S. Commodity Futures Trading Commission (CFTC), the chart of Solana stablecoin trading volume has literally become a horizontal line. It is a big mystery what caused this situation...】
5. Extracting the Value of Leeks
Apart from running away and MEV, the outlook for retail investors remains bleak. Celebrities chose Solana as their preferred chain, and the results were not optimistic:
[Teaching Chain Note: This table shows the astonishing decline of “Celebrity Coin” issued on Solana]
Andrew Tate’s “DADDY” was the best performing celebrity coin with a return of -73%.
A quick search on Twitter reveals evidence of rampant insider trading and developers dumping tokens on buyers:
One might ask: But my Twitter timeline is full of people making millions trading memecoins on Solana. What does that have to do with what you’re saying?
I simply don’t believe that KOLs’ posts on Twitter are representative of the broader user base. In the current frenzy, it’s easy for them to enter a niche, promote their tokens, profit from their followers, and repeat over and over again. There’s definitely survivorship bias at work here — the winners are far louder than the losers, creating a distorted perception of reality.
Objectively speaking, retail investors are being ripped off by scammers, developers, insiders, MEV, KOLs, and that’s not even taking into account that most of what they’re trading on Solana is memecoins that aren’t backed by anything real. It’s hard to argue with the fact that most memecoins will eventually go the same way as $boden (ie: go to zero).
6. Additional Considerations
Markets are fickle, and when sentiment changes, factors that were once blind to buyers come into focus:
Poor chain stability, frequent interruptions High transaction failure rate Unreadable block explorer High threshold for development, Rust is far less user-friendly than Solidity Poor interoperability compared to EVM. I think it is healthier to have multiple interoperable chains competing with each other, rather than being constrained by a single (fairly centralized) chain. The likelihood of an ETF is low from both a regulatory and demand perspective. The post itself highlights why institutional demand will be low in Solana's current state. @malekanoms also highlights a few points that I think are relevant to traditional finance (plus @0xmert's rebuttal):
【Teaching link note: Netizen Omid Malekan said:
ETH is a high-quality liquid asset (HQLA) in cryptocurrencies
In anticipation of the launch of the ETH ETF, I wrote a small paper explaining what HQLA is, why we need a digital native HQLA, and why ETH is the most likely candidate asset. My analysis compares it to BTC and SOL.
Here is a summary:
Why HQLA?
HQLA is a concept from traditional finance, used in banking regulation. It refers to assets that have almost universally recognized value and deep liquidity — assets that banks can safely hold and sell in a pinch without affecting the market. I apply this concept loosely to cryptocurrencies because this asset is something we can use to build a whole new decentralized financial system.
Native digital HQLA means better decentralized stablecoins, safer credit, and more trusted derivatives. My analysis explains why this can’t be a dApp token, a centrally issued stablecoin/RWA, or an L2 token. The best candidate is the native coin of L1.
Why not Bitcoin?
BTC is the most valuable and liquid asset in crypto, but you can’t do a whole lot with it. There is no native DeFi or alternative assets like stablecoins on the chain. The only way to use it as collateral is to escrow it or bridge it to another chain, both of which introduce new risks and somewhat defeat the purpose.
Maybe with the introduction of new contracts or L2, things will change, but I doubt it. The soul of BTC lies in fulfilling another purpose, which is to become the HQLA of traditional finance.
ETH vs. SOL
The Solana network has many attractive features. But it is not the same thing as SOL (the asset). From an economic perspective, SOL has weak fundamentals and is therefore a medium-quality asset.
First, SOL ownership is concentrated, thanks to its youth, multiple rounds of venture capital, grants to labs and foundations, and the fact that it launched with staking (i.e. PoS). Concentration reduces liquidity. ETH had a modest funding round a few years ago, gave only a small amount of money (by current standards) to the foundation and founders, and had many years of PoW (proof of work, i.e. computing power mining) before the merger.
Second, SOL has a relatively high inflation rate of over 5%. The inflation rate will eventually decrease, but the supply will grow by 25% before the inflation rate stabilizes at 1.5%. During this period, the capital cost of SOL in DeFi will be high.
DeFi always tends to use native assets - LST (liquidity staking token) itself brings risks - but using native SOL in DeFi means giving up high staking returns. If DeFi wants to attract capital, it must compete with staking.
This means that SOL has a high nominal interest rate. ETH, on the other hand, is close to deflation, with a nominal interest rate close to zero. You can already see this in action: currently, it costs almost three times as much to borrow SOL on Kamino as it does to borrow ETH on AAVE.
Third, high nominal interest rates lead to more staking. To avoid dilution, SOL owners would be silly not to stake, but this would hinder liquidity. Solana's staking participation rate is more than double that of Ethereum. Ethereum holders don't miss out on much by not staking. This means there is always more ETH freely circulating in the market than SOL.
To make matters worse, Solana’s LST ecosystem is fragmented. Liquidity staking tokens are not as attractive as HQLAs, but people do use them, and there is a large amount of Lido stETH in Ethereum DeFi. Concentration on a single LST may be bad for the security of the chain, but it is good for DeFi. This means that assets that may be considered "too big to fail" have more liquidity.
Fourth, and perhaps counterintuitively, Solana has low transaction fees. This may be good for users, but bad for SOL fundamentals — fees are a cost to users, but also revenue for stakers. Low fees mean that most of the returns paid to stakers must come from new coin issuance, which is devaluation.
The interaction between issuance and fees determines the effective interest rate of a crypto asset (MEV also plays a role but is not included in my analysis).
ETH has a low issuance and high fees, and almost all of the fees go to stakers. This means it has a positive actual yield. In this respect, it is even better than Bitcoin. Bitcoin also has a low issuance and high fees, but both go to miners, not holders.
SOL’s real yield is almost negative. Except for peak activity periods, almost all of the gains come from increases in the money supply.
ETH also has a burning mechanism. This increases its positive real yield while also returning value to non-stakers, which reduces the incentive to stake, reduces the stake participation rate, and leads to more liquidity. Solana used to have a burning mechanism, but later decided to cancel it.
Finally, Ethereum’s high fees mean that ETH has a higher convenience yield: users will want to always hold some ETH (without staking) to pay for future on-chain gas fees, thereby increasing the available supply of ETH.
ETH has better monetary properties than SOL, and monetary properties are very important to become HQLA.
It’s a complex argument with many moving parts, but SOL’s lack of importance in Solana’s success hinders its qualification as the ultimate asset to be built on.
You can even see this in Solana culture. Even @aeyakovenko thinks cryptoeconomic security is just a meme. But if that’s true, then the foundation of the chain’s token is a meme, too.
The cycle of security -> currency value -> security is the ultimate source of value for any cryptocurrency. This is Satoshi Nakamoto’s greatest insight.
This doesn’t mean that SOL can’t appreciate or even outperform ETH, because right now in crypto, memes and momentum are more important than fundamentals.
However, these dynamics reduce the importance of SOL in a financial system that is being restructured on the basis of entirely new assets.
ETH is the HQLA of cryptocurrencies
As the market slowly realizes this, its growth rate as a DeFi coin may be disproportionate to SOL, and it may one day surpass Bitcoin in value and status. The winner-takes-all tendency in the financial field is very strong.
This analysis is a cutting edge piece of thinking, so all comments, questions, and rebuttals are welcome. Here is the full analysis:
https://omid-malekan.medium.com/eth-is-the-high-quality-liquid-asset-of-crypto-4d27ee77c127】
The maximum issuance is 67,000 SOL/day ($12.4 million). There are still 41 million SOL ($7.6 billion) locked in FTX Legacy. 7.5 million SOL ($1.4 billion) will be unlocked in March 2025, and 60,900 SOL ($113 million) will be unlocked every month until 2028. Most tokens appear to have been purchased at a price of about $64 per token.
VII. Conclusion
As always, pickaxe and shovel sellers profited from the Solana memecoin boom, while speculators got washed out, often unknowingly.
I believe that the commonly cited SOL metrics are grossly overstated. Furthermore, the vast majority of organic user funds on-chain are rapidly draining. We are currently in a mania phase where retail inflows still outweigh the outflows of these sophisticated players, creating a positive perception. Once users become fatigued by the continued losses, many metrics will quickly collapse.
As mentioned above, SOL also faces some fundamental headwinds that will come to the fore once sentiment turns. Any price appreciation will add to inflationary pressures/unlocks.
Ultimately, I believe SOL is overvalued from a fundamentals perspective, and while existing sentiment and momentum will likely drive prices higher in the short term, the long-term picture is more uncertain.
Disclaimer: While I have held SOL at various times in the past, I do not currently hold a material position in SOL. Many of the opinions I present above are my own speculations and are not facts. My assumptions and conclusions may well be wrong. This is not financial advice, please always do your own research.
