1. Solana Ecosystem Overview
Solana has attracted the attention of institutional investors as SEC-registered Osprey Funds readied a private SOL fund for accredited investors and BridgeTower Capital’s provided a $20m venture fund to bootstrap Solana projects. This comes after Solana Labs raised $314m in private token sales led by a16, Polychain capital, Alameda Research amongst many other top-tier firms.
With the floodgate of new institution money opened, SOL has gained the spotlight in crypto as prices run up by more than a 1000% in 2021 alone. In this article, we explore Solana’s infrastructure, ecosystem, the potential that lies ahead as well as price valuation today.
2. Review of Solana (SOL)
While every other L1 chain attempts to be the next “Ethereum killer” through “x” optimization features, Solana differentiates itself by setting sights on much bigger dragons. They are benchmarking the network’s performance against financial giants like Nasdaq, VISA and their next phase is to onboard billions of users for mass adoption.
In comparing the viability and potential of an L1 chain, I would like to use the analogy of a bustling city where the land is the L1 platform, the buildings are the dApps, the property developers are the super shady coders, citizens are the users, and the currency its native token.
The land is without doubt fertile as it is a high-performant scalable chain processing 65,000/Txs at an average cost of $0.00025. On the infrastructure layer, you have 3 plumbing pipes, liquidity, data, and storage.
Serum allows applications to pull liquidity from it using a Central-Limit Order Book (CLOB) model allowing for fast settlement & trading transactions. Pyth bridges real-world data into the Solana blockchain that updates every 400ms as compared to Ethereum’s 15 seconds. Arweave provides permanent metadata storage for Solana’s applications.
While it might not be a city filled with skyscrapers yet, developer interest has been strong as Solana organized multiple back-to-back hackathons this year such as Solana season, Solana India and the upcoming Ignition workshop. As 50% of each transaction fee is burned, the name ignition suggests that a massive amount of SOL tokens would be burned as network activity skyrockets.
3. Why is Solana price going up?
Prices of SOL started moving from the new inflow of institution money since July, many retail crypto users caught wind and begin bridging over to Solana to ride the trend. During the same period, a flurry of dApps, including those from the hackathons also launched their mainnet and this creates a powerful feedback loop that sent SOL price up exponentially where rising prices attracts higher TVL and vice versa.
Adding on to the price momentum is Solana’s low circulating supply in the market as 58.2% of SOL are staked out of 293.4m circulating supply, or 74.7% if we include total supply and foundation stake.
At present, 80% of Solana’s TVL comes from DEXes & yield aggregators like Saber, Sunny & Raydium. Saber offers correlated liquidity pairs with minimal impermanent loss (similar to curve), Raydium is the 2nd largest DEX (similar to Uni/Sushi) after Saber, offering a wider variety of token pairs, dual-farms and IDO launchpads. And Sunny is a yield aggregator which leverages Saber LP tokens to farm yields.
The next upcoming DeFi play on Solana should see the DeFi building blocks starting to come together as money markets dApps start entering the space. Major ones to look out for include Solend, Port Finance and Everlend and also derivative leverage products like Parrot Finance, Marinade and Apricot which allows for higher capital efficiency & composability within the DeFi ecosystem.
Apart from the above DeFi applications, Solana is also riding on the NFT waves with popular projects like Degen Ape Academy, SolPunks & Aurory. This has contributed to the spike of transaction volume on Solana’s network as Arweave traffic gateway requests have quadrupled.
Solana nets its first million-dollar NFT sale for the 13th rarest Degen Ape #7225 possibly marking the start of a new trend on Solana for the wealthy. Other big names with Degen Ape NFTs include KSI & Steve Harvey.
Next, an indirect catalyst but not to be ignored is Sam-Bankman-Fred’s position of power & influence. The 29-year-old billionaire settled on Solana as the answer for building large-scale financial applications after FTX built bots to stress-test the network speed, capacity & enterprise scalability. SBF is a strong backer/advocate of Solana and his wall-street quant background has helped him to gain the trust and support of big institutional players.
Even though FTX does not contribute to Solana’s transaction activity, it is the go-to platform CEX bridge between the fiat world and Solana’s ecosystem of SPL tokens. With FTX’s recent $900m raise and multi-million-dollar marketing deals with major sports/e-sports brands/athletes/celebrities, the exchange will certainly bring in new money inflow, both retail and institutions, into the Solana ecosystem.
Finally, the exponential price pump is also due to the cyclical trend of crypto. As the groundwork for blockchain is still in the works, money flow currently is fleeting, yield-seeking & opportunistic.
We have moved from Ethereum > Binance Smart chain > Polygon > and now funds are rotating into Avalanche, Solana, Cosmos, Terra, Fantom, Polkadot and Harmony. While Solana enjoys the fresh money for now, it remains to be seen if the momentum can sustain as BSC and Polygon sees TVL dropping by 40-50% when liquidity mining incentives and retail hype fades off the scene.
4. What’s ahead for Solana?
Looking ahead, the future roadmap for Solana looks bright as there is a Solana wormhole that allows bridging of Ethereum ERC-20 tokens and Neon Labs which plans to deploy an EVM-compatible solution on Solana. This would attract new TVL and transactions for the network as Ethereum tokens/protocols port over to take advantage of Solana’s high speed & low-cost platform
In the NFT space, Audius announced Solana NFT integration (giving more reasons for Solanians to buy & showcase their NFTs) and FTX is also planning to launch their new NFT marketplace competing with Solanart, Solsea & digital eyes.
Last but not least, a potentially promising area to look at is the play-to-earn dApps. After Axie Infinity’s success, many game projects have accelerated their developments and the few hyped ones to lookout for are Star Atlas, DeFi Land & Seed Project. If they can replicate the growth metrics of Axie Infinity, Solana could see another leg up continuing its exponential rise.
5. Solana Price Valuation
Solana has more than 10x since the lows of $20 to more than $200+ at its peak. In my opinion, the 5 main catalysts driving this run-up can be attributed to NFT hype, SBF, institutional/retail interest, the feedback loop of rising price & TVL as well as the trend of capital rotation towards L1 chains. But is this valuation justified?
Surprising to the TradFi folks, prices (purple line) in crypto do indeed follow fundamentals as we see Solana’s transaction revenue (left) & TVL growth (right) rising exponentially since August. Coming back to the analogy of a city, transaction revenue represents the velocity of money thus overall GDP, and TVL represents the population density in a country.
TVL & network fees are the ultimate KPI for evaluating an L1 chain’s fundamental performance and these two metrics will be used to gauge Solana’s absolute & relative valuation against its peers.
The first metric is Price to sales (P/S) which measures how much a project is valued in relation to its network fees generated. Price takes a fully diluted market cap and sales take a forward-looking annualized revenue based on the past 30d fees generated. We can see that the P/S ratio (grey line on the left) remains relatively stable for the past few months despite the SOL’s run up indicating that prices are running in line with network fees.
But historical comparison does not mean Solana is at fair value as the P/S ratio is about 3000x. For reference, that is about 100x higher than Ethereum’s P/S ratio of about 30.
If we take a more conservative approach and look at annualized network revenue based on the last 12 months, Solana looks even more overheated. The market is paying an extremely high premium of $11,787 for every dollar of network fee earned on Solana. This is in sharp contrast with BSC’s which generated a100x higher network fees than Solana but yet Solana’s market cap is comparatively close with BNB. This is not including BNB’s utility on the Binance CEX exchange.
As the market is forward-looking, the current valuation seems to be discounting all fundamentals of existing alternatives L1s and betting that Solana would secure the throne position for the trillion dollar market in the financial industry. While that may or may not be the case, prices do look a little ahead of the current landscape in Solana now.
Nevertheless, Solana’s TVL has shown impressive growth numbers going from $1b to $11.4b in less than 2 months. From a TVL perspective, the current marketcap looks fairly okay relative to others but TVL from DeFi Llama could be inflated from double-counting stacking dApps and TVL is a function of market prices after all. A better gauge would still be network revenue fees as that represents real economic activity.
All in all, while valuation do looks overvalued and there are potential concerns over centralization as node requirements cost increase with Moore’s Law scale, I am bullish on Solana’s tech as it is the most viable platform that is enterprise-ready for traditional financial applications at the moment. Front-run sandwich attacks are resolved by Gulf Stream’s Mempool-less transaction forwarding protocol. Scalability & security is resolved without the complexity of L2s, Sharding, state transitions, roll-ups or dispute resolutions. Gas fees are negligible and transactions are settled almost instantaneously.
At current rate of progress & development, I have no doubts that Solana will rise to become one of the largest cities with a thriving population in the crypto world in due time.
To learn more about Solana, feel free to check out my YouTube Channel on “What is Solana (SOL)? Overview of Solana Ecosystem”