Solana: Hidden concerns beneath the surface prosperity
Original title: SOL- The Emperor's New Clothes
Original source: Flip Research
Original translation: Daisy, MarsBit
SOL-The Emperor's New Clothes
My timeline has been filled with $SOL nonsense mixed with memecoin subterfuge lately. I started to believe that the memecoin supercycle was real and that Solana would replace Ethereum as the main L1. But then I started digging into the data, and the results were worrying to say the least… In this article, I present my findings and why Solana might be a house of cards.
First, let’s look at the bull case, which is briefly explained as follows:
Compared with ETH plus L2s, there are four different statements on the indicator:
1. High percentage of user base
2. Corresponding increase in fees
3. High DEX trading volume
4. The proportion of stablecoin trading volume has increased significantly
User base comparison:
The following is a comparison between the ETH mainnet and SOL (only the mainnet is compared, because the vast majority of fees after Dencun come from the mainnet, source: @tokenterminal):
On the surface, SOL’s numbers look good, with daily active users (DAU) exceeding 50%. 1.3 million transactions, while ETH has 376,300. However, when we add the number of transactions into the mix, I noticed something odd. For example, on Friday, July 26, ETH had 1.1 million transactions and 3.763 million DAUs, with an average of about 2.92 transactions per user per day. However, SOL had 282.2 million transactions and 1.3 million DAUs, with an average of 217 transactions per user per day. I think this may be due to low fees, allowing for more trades, more frequent compounding of positions, increased arbitrage bot activity, etc. Therefore, I compared it to another popular chain, Arbitrum. However, Arb only had 4.46 transactions/user on the same day. Looking at other chains gives similar results:
With the number of users higher than ETH, I checked against Google Trends which should be fairly inconclusive on the value per user:
ETH is either on par with SOL or ahead of SOL. This is not what I would expect given the DAU difference, plus all the hype around the SOL memecoin trend. So what is going on?
DEX Volume Analysis
To understand the transaction count discrepancy, it helps to look at Raydium’s LPs. Even at first glance, it’s clear that something is amiss:
At first I thought this was just fake trades on low liquidity honeypot LPs to lure out the odd memecoin degenerate, but looking at the chart it’s much worse:
Each of these low liquidity pools is a project that has struggled in the last 24 hours. Using MBGA as an example, in the last 24 hours, 46,000 trades occurred on Raydium, with $10.8M in volume, 2,845 unique wallets buying and selling, and over $28,000 in fees. (Note that a similarly sized legitimate LP, $MEW, generated only 11.2K trades) Judging by the wallets involved, the vast majority appear to be bots in the same network, with tens of thousands of trades. They independently generate fake volume, with random amounts of SOL and transactions until a project is completed, then move on to the next one. In the last 24 hours, there were over 50 carpets with over $2.5M in volume on Raydium Standard LP, generating a total of over $200M in volume and over $500K in fees. Orca and Meteora appear to have far fewer carpets, and I had a hard time finding any carpets with any meaningful volume on Uniswap (ETH). Clearly, Solana’s carpet is deeply problematic, with multiple implications:
· Given the abnormally high transaction-to-user ratio and the number of fake/scam transactions on-chain, it appears that the vast majority of transactions are non-organic. The highest daily transaction-to-user ratio on the main ETH L2 is 15.0x, on Blast (where fees are similarly low, and users are farming Blast S2). As a rough comparison, if we assume the true SOL transaction-to-user ratio is similar to Blast, that means over 93% of transactions (and fees) on Solana are inorganic.
· The only reason these scams exist is because it is profitable to do so. Therefore, users are losing an amount at least equal to the fees incurred + transaction costs, which is in the millions of dollars per day.
· Once it becomes unprofitable to deploy these scams (i.e. when actual users get tired of losing money), you would expect most trading volume and fee income to decline.
· So it looks like users, organic fees, and dex volume are all grossly inflated.
I’m not the only one to come to these conclusions, @gphummer recently posted something similar:
MEV on Solana
MEV on Solana is in a unique position. Unlike Ethereum, it does not have a built-in mempool; instead, people like @jito_sol created (now deprecated) extra-protocol infrastructure to emulate mempool functionality, allowing MEV opportunities such as front-running, mezzanine attacks, etc. Helius Labs put together an insightful article detailing MEV: https://www.helius.dev/blog/solana-mev-an-introduction The problem with Solana is that the vast majority of tokens traded are extremely volatile, low-liquidity memecoins, and traders often set trade slippage to>10% to ensure successful execution. This provides a profitable attack surface for MEV to extract value:
If we look at the profitability of block space, it’s clear that most of the value is now coming from MEV Tip:
While this is “real” value in the strictest sense, MEV will only be implemented as long as it is profitable, i.e. as long as retail continues to imitate (and net lose money on) the meme. Once the meme starts to cool, MEV fee revenue will also collapse.I’ve seen a lot of SOL papers discussing how infrastructure builds will eventually rotate out, like $JUP, $UN, etc. This is very likely, but it’s worth noting that they are less volatile, more liquid, and simply don’t offer the same MEV opportunities. Experienced players will be incentivized to build the best infrastructure to take advantage of this situation.As I dug, some sources mentioned rumors of these players investing in controlling mempool space and then selling access to third parties. But I was unable to confirm this information. However, there are some clearly perverse incentives here - by directing as much memecoin activity as possible to SOL, it allows savvy individuals to continue to profit from MEV, insider trading of said memes, and SOL price appreciation.
Stablecoins
Speaking of stablecoin volume + TVL, here’s another oddity. Volume is significantly higher than ETH, but when we look at @DefiLlama stablecoin data, ETH has $80B in stablecoin TVL, while SOL only has $3.2B. I think stablecoin (and more broadly) TVL is a much harder metric to manipulate than volume/fees on low-fee platforms, and just shows how much skin is in the game. Stablecoin volume dynamics highlight this - @WazzCrypto noticed the sudden drop in volume after the CFTC announced its investigation into Jump:
Retail Value Extraction
Carpets and MEVs aside, the outlook for retail remains bleak. Celebrities are choosing Solana as their chain of choice, but the results are not promising:
Andrew Tate’s DADDY is the best performing celebrity token with a -73% return. The other end of the boxing skill spectrum isn’t much better:
A quick search on X also reveals evidence of rampant insider trading and developers dumping on buyers:
But Flip, my timeline is full of people making millions trading memes on Solana. What does that have to do with what you’re saying?
I simply don’t believe KOL posts on X are representative of the broader user base. With the current frenzy, it’s easy for them to get into a position, promote their token, profit from their followers, and repeat the process. There’s definitely survivorship bias here — the voices of the winners are far louder than the losers, creating a distorted view of reality. Objectively speaking, retail investors seem to be losing millions of dollars every day to scammers, developers, insiders, MEV, KOLs, and that’s not even taking into account that most of what they’re trading on Solana is just memes with no substance to back it up. It’s hard to deny that most memes will eventually go to $floor.
Other Considerations
Markets change rapidly, and when sentiment changes, factors that were once blind to buyers become clear:
· Poor chain stability, frequent outages
· High transaction failure rate
· Unreadable browsers
· High barrier to development, Rust is far less user-friendly than Solidity
· Poor interoperability compared to the EVM. I believe that having multiple interoperable chains competing for our attention is much healthier than being tied to a single (fairly centralized) chain.
· The likelihood of an ETF is low from both a regulatory perspective and a demand perspective. This article itself highlights why institutional demand will be low in Solana’s current state. @malekanom also highlighted a few points that I think are relevant from a traditional finance perspective (along with @0xmert): · Emission is up to 67,000 SOL/day ($12.4M) · There are still 41M SOL ($7.6B) locked in the FTX Estate sale. 7.5M ($1.4B) will unlock in March 2025, with an additional 609K ($113M) unlocked each month until 2028. Most tokens appear to be purchased at around $64 per coin
Conclusion
As usual, those selling picks and shovels are profiting from the Solana memecoin craze, while speculators are being ripped off, often unknowingly. I believe that commonly quoted metrics for SOL are grossly overstated. Additionally, the vast majority of organic users are losing on-chain funds to bad actors at a rapid rate. We are currently in the mania phase, and retail inflows are still outstripping outflows from these sophisticated players, which is bullish. Once users become exhausted from continued losses, many of these metrics will quickly collapse. As mentioned above, SOL also faces some fundamental headwinds that will become prominent once sentiment shifts. Any price increase will exacerbate inflationary pressures/unlocks. Ultimately, I believe SOL is overvalued from a fundamental perspective, and while existing sentiment + momentum may drive price 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 a material position in SOL. Many of the points I make above are my own speculations and are not factual. My assumptions and conclusions may be wrong. Always exercise caution - this is not financial advice.
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