Original author: @Flip_Research, Twitter
Original title: "SOL- The Emperor's New Clothes"
Original translation: zhouzhou, BlockBeats
Editor's note: This article deeply explains Solana's potential problems. Although its user base and transaction volume seem to be better than Ethereum, in-depth analysis shows that most of the transaction volume may come from brush and runaway projects, leading to a false prosperity. Through detailed data analysis of user activity, DEX transaction volume, MEV phenomenon, etc., the author points out that SOL's indicators are exaggerated and the on-chain ecology faces serious fundamental problems.
Recently, my social media timeline has been filled with bullish arguments about $SOL and propaganda for some altcoins. I began to believe that the altcoin super cycle really exists and that Solana will surpass Ethereum and become the main first-layer (L1) blockchain. However, when I dug deeper into the data, the results were troubling… In this post, I’ll share my findings and why Solana might be a house of cards.
First, let’s look at the bull case clearly articulated by @alphawifhat:
Four key data comparisons with ETH and L2:
High user share
Relatively higher fees
Higher decentralized exchange (DEX) trading volume
Significantly higher stablecoin trading share
Here is a comparison of the user base of ETH mainnet and SOL (only mainnet data is compared, because after the Dencun upgrade, most of ETH’s fees come from the mainnet, data source: @tokenterminal):
Four key data comparisons with ETH and L2:
High user share
Relatively higher fees
Higher decentralized exchange (DEX) trading volume
Significantly higher stablecoin trading share
Here is a comparison of the user base of ETH mainnet and SOL (only mainnet data is compared, because after the Dencun upgrade, most of ETH’s fees come from the mainnet, data source: @tokenterminal):
SOL User Base and Transactions
On the surface, SOL's numbers look impressive, with over 1.3 million daily active users (DAUs) compared to 376,300 for ETH. However, when I factored in the number of transactions, something strange occurred.
For example, on Friday, July 26, ETH had 1.1 million transactions, corresponding to 376,300 DAUs, or about 2.92 daily transactions per user. However, SOL's numbers were 282.2 million transactions, corresponding to 1.3 million DAUs, meaning each user averaged 217 transactions per day.
I thought this might be due to SOL’s low fees, allowing users to make more trades, adjust positions more frequently, increase arbitrage bot activity, etc. But when I compared it to another popular chain, Arbitrum, I found that Arbitrum’s per-user transaction volume was only 4.46 on the same day. Looking at the data for other chains also yielded similar results:
Given that SOL has more users than ETH, I checked Google Trends, which should be relatively neutral on the value per user.
It turns out that ETH is either on par with SOL or ahead in terms of trend. This is not what I expected, after all, SOL’s daily active users are so different, coupled with the recent hype around the SOL altcoin craze, so what exactly happened?
To understand the difference in trading volume, it is instructive to analyze Raydium’s liquidity pools (LPs). Even at first glance, it is clear that something is amiss:
At first, I thought this was just wash trading through low-liquidity "honeypot" liquidity pools (LPs) to attract the occasional altcoin speculator, but a closer look at the charts shows that the situation is far worse than I thought.
Every low-liquidity pool project has run away in the last 24 hours. Take MBGA as an example. In the past 24 hours, there were 46,000 transactions, a trading volume of $10.8 million, 2,845 unique wallets participating in buying and selling, and generated more than $28,000 in fees on Raydium. (By comparison, a similarly sized legitimate liquidity pool, $MEW, generated only 11,200 transactions)
Looking at the participating wallets, the vast majority appear to be bots belonging to the same network, making tens of thousands of transactions. They independently generate fake volume with random amounts of SOL and random numbers of transactions until the project goes bankrupt, then moves on to the next target.
In Raydium’s standard liquidity pool, over 50 projects have gone bankrupt in the past 24 hours alone, with over $2.5 million in volume, generating a total of over $200 million in volume and over $500,000 in fees. Orca and Meteora have significantly fewer runaway projects, and there are almost no runaway projects with substantial volume on Uniswap (ETH).
It’s clear that the scams on Solana are very serious, with multiple implications:
1. Given the abnormally high percentage of users transacting, and the number of wash trades and scams on the chain, the vast majority of transactions are not organic. On the main ETH L2, the highest daily transactor ratio is Blast (which also has lower fees and users are also farming Blast S2), with a transactor ratio of 15.0x. As a rough comparison, if we assume that the real SOL transactor ratio is similar to Blast, this means that more than 93% of transactions (and corresponding fees) on Solana are inorganic.
2. The only reason these scams exist is that they can make a profit. Therefore, users are losing at least an amount equal to fees and transaction costs every day, which cumulatively amounts to millions of dollars.
3. Once these scams are no longer profitable (i.e. when actual users get tired of losing money), most trading volume and fee income are expected to drop significantly.
4. It appears that users, true fee income, and DEX trading volume are all greatly exaggerated.
I am not the only one to come to this conclusion, @gphummer recently expressed a similar view:
Solana’s MEV is in a unique position. Unlike Ethereum, Solana does not have a built-in transaction pool (mempool); instead, projects like @jito_sol once (now abandoned) created extra-protocol infrastructure to simulate transaction pool functionality, thereby providing MEV with opportunities such as front-running, sandwich attacks, etc. Helius Labs wrote an insightful article details about Solana’s MEV.
The problem Solana faces is that most of the tokens traded are ultra-volatile, low-liquidity altcoins, and traders often set slippage of more than 10% to ensure smooth execution of trades. This provides an attractive attack surface for MEV to extract value from:
If we look at profitability in blockspace, it’s clear that the majority of value is currently coming from MEV tips:
While this is technically considered “real” value, MEV will only be executed when profitable, i.e. as long as retail investors continue to participate (and net lose) in altcoin trading. Once the altcoin craze begins to cool, so will MEV fee income.
Many arguments I’ve seen about SOL mention that there will eventually be a shift to infrastructure projects like $JUP, $JTO, etc. While this shift may indeed be on the horizon, it’s worth noting that these tokens, with their lower volatility and higher liquidity, clearly do not offer the same MEV opportunities.
Sophisticated actors are incentivized to build the best infrastructure to take advantage of this situation. In my in-depth research, several sources mentioned rumors of these actors investing in control of trading pool space and subsequently selling access to third parties. However, I was unable to verify this information. However, there are some clear skewed incentives at work - by directing as much altcoin activity as possible to SOL, this allows certain sophisticated individuals to continue to profit from MEV, as well as conduct insider trading on these altcoins and benefit from SOL's price increase.
Another oddity emerges when it comes to stablecoin trading volume and total value locked (TVL). Stablecoins have significantly higher trading volume than ETH, but when we look at @DefiLlama's stablecoin data, ETH's stable TVL reaches $80 billion, while SOL is only $3.2 billion. I think stablecoin (and more broadly) TVL is a less manipulable metric than volume and fees on low-fee platforms, and shows the exposure of participants in it.
The dynamics of stablecoin trading volume further emphasize this point - @WazzCrypto pointed out that when the CFTC announced it was investigating Jump, trading volume suddenly dropped.
Avoidance and MEV, the outlook for the retail market remains bleak. Celebrities have chosen Solana as their chain of choice, but the results have not been great:
Andrew Tate’s DADDY was the best performing celebrity token, but still posted a -73% return, and at the other end of the boxing skill spectrum, things were just as bad:
A quick search on X also shows evidence of rampant insider trading and developers dumping tokens on buyers:
My timeline is full of people making millions trading altcoins on Solana.
I don’t think KOL posts on X are representative of the wider user base, it’s easy for them to get into a position in the current frenzy, promote their token, profit from followers, and repeat. There is definitely survivorship bias here - the winners are far louder than the losers, creating a distorted perception of reality.
Objectively, retail investors are losing millions every day to scammers, developers, insiders, MEV, KOLs, etc., not to mention that most of the tokens they trade on Solana are just altcoins with no real backing. It’s hard to deny that most altcoins will eventually go the way of $boden.
Markets are fickle, and when sentiment turns, factors that were once blind to buyers become apparent:
· Poor chain stability and frequent failures.
· High transaction failure rate.
· Block explorers are difficult to read.
· High barrier to entry in development, Rust is much less user-friendly than Solidity.
· Poor interoperability with EVM. I think it would be healthier for multiple interoperable chains to compete with each other, rather than being restricted to a single (relatively centralized) chain.
· Low likelihood of an ETF, both from a regulatory and demand perspective. @malekanoms also points out a few points that I think are relevant from a traditional finance perspective (plus a rebuttal from @0xmert):
· High emission of up to 67,000 SOL per day (~$12.4 million).
· 41 million SOL (~$7.6 billion) are still locked in the FTX legacy sale. 7.5 million (~$1.4 billion) will be unlocked by March 2025, with an additional 609,000 (~$113 million) unlocked each month until 2028. Most tokens can be purchased for around $64 each.
As usual, shovel and hammer sellers are profiting on the Solana altcoin craze, while speculators are often unwittingly losing, and the commonly cited SOL metrics are significantly inflated. Additionally, the vast majority of organic users are rapidly losing money on-chain due to the influence of bad actors. We are currently in the mania phase, and retail inflows are still outstripping outflows from these established players, creating a positive halo. Once users become exhausted from continued losses, these metrics will quickly collapse.
As mentioned above, SOL also faces multiple fundamental headwinds that will come into focus once sentiment turns, and any price increase will exacerbate inflationary pressures and unlock. Ultimately, SOL is overvalued from a fundamental perspective, and while existing sentiment and momentum may drive prices higher in the short term, the long-term outlook is much more uncertain.
Disclaimer: While I have held SOL at various times in the past, I do not currently hold any significant SOL position. Many of the views I have stated above are my own speculative opinions, not facts. I may be wrong in my assumptions and conclusions. Always do your own research - this is not financial advice.
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