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The infrastructure is finally there to enable applications that actually scale. A significant breakthrough has been achieved by enabling application engineers to focus exclusively on application development, rather than being distracted by infrastructure-related concerns, which had previously hindered the progress of builders on the Ethereum platform.

Solana offers a considerable advantage in terms of throughput, which is expected to result in a steadily increasing share of industry activity over the next three to five years. Furthermore, Solana's integrated system provides a streamlined development environment, where builders are not required to contend with the complex, lower-level infrastructure issues that are currently prevalent on the Ethereum Virtual Machine.

BEGINNINGS

In 2022, the potential of Solana was still largely theoretical. Although the platform boasted impressive throughput capabilities and a dedicated community of builders, it had yet to demonstrate significant real-world adoption. As a result, investors were primarily making decisions based on the strength of the community, which comprised builders, investors, businesses, and the underlying technology.

Few anticipated the rapid acceleration in activity that Solana would experience, with the platform now rivaling, and in many cases surpassing, Ethereum across various metrics. Historically, Solana was perceived as a secondary option for NFTs, utilized when Ethereum's high costs made it inaccessible. The platform was often maligned, with concerns surrounding its limited developer base, associations with Sam Bankman-Fried, and intermittent downtime.

Solana is starting to surpass Ethereum on metrics like revenue, in the sense of transactions, and it's been doing so for a while. But as these metrics become more and more apparent, we are going to just see more capitulation among investors and a repricing should happen.

Solana's success can be attributed to its ability to provide developers with a streamlined platform for building applications. By offering a lightning-fast smart contract platform and abstracting away complexity, Solana enables engineers and founders to focus on developing apps and achieving product-market fit

NEW MEGA TRENDS

Since 2018, the cryptocurrency industry has witnessed the emergence of three significant macro trends. The first trend was the rise of stablecoins, which introduced a new paradigm for price-stable digital assets.

The second trend was the growth of DeFi (Decentralized Finance) and the concurrent validation of the Ethereum platform, which substantiated the viability of smart contract-based ecosystems. Currently, a third mega trend is unfolding, characterized by the ascendance of Solana and the proliferation of applications being developed on its platform.

STABLECOINS

In each instance where a mega trend has emerged in the cryptocurrency industry, a distinct inflection point has marked the trend's transition from nascent to established. In the case of stablecoins, this inflection point occurred when the transaction volumes of stablecoins on the Ethereum platform surpassed those of Ethereum itself. This milestone indicated that stablecoins had become the preferred medium for transacting value among users, with applications including inter-exchange transfers, early DeFi adoption, and emerging market usage.

Upon reaching this juncture, it became evident that a fundamental shift was underway in the on-chain economy. The blockchain was no longer solely a platform for exchanging ETH; rather, it had evolved into a network capable of supporting fiat-pegged assets. This transformation occurred between mid-2019 and early 2020, as stablecoins began to consistently outpace Ethereum in transaction volumes on its own platform. The subsequent growth of the stablecoin market has been remarkable, with the current supply exceeding $170 billion and continuing to expand on a weekly basis.

Given the trajectory of the stablecoin market, it appears likely that the trend will persist, particularly as the traditional economy becomes increasingly financialized through blockchain-based infrastructure. A prime example of this phenomenon is Tether, a company that generates substantial profits each quarter by virtue of its position as one of the largest holders of US Treasury securities. As the cryptocurrency asset class continues to mature, it is reasonable to anticipate that stablecoins will reach trillion-dollar market capitalizations, underscoring their growing importance in the global financial landscape.

DECENTRALIZED FINANCE

In mid-2020, a significant inflection point was reached, as the aggregate transaction volumes on the Ethereum platform, encompassing both stablecoins and ETH, exceeded those on the Bitcoin network. This milestone, which occurred during the first and second quarters of 2020, signaled the emergence of a thriving on-chain economy on Ethereum.

Notably, this economy was expanding at a rapid pace, ultimately surpassing Bitcoin in terms of transaction volumes. Prior to this point, Bitcoin was widely regarded as the sole use case for blockchain technology, primarily employed as a store of value. In contrast, Ethereum was often viewed as a platform for speculative activities, such as initial coin offerings (ICOs) and other dubious pursuits.

However, following this inflection point, the narrative surrounding Ethereum underwent a significant shift. The platform experienced its most substantial bull market to date, accompanied by a pronounced surge in decentralized finance (DeFi) activity. On-chain decentralized exchange (DEX) volumes skyrocketed, and a growing number of assets were committed to smart contracts, a metric referred to as Total Value Locked (TVL).

TVL serves as a barometer of user confidence in the Ethereum ecosystem, as it represents the aggregate value of assets entrusted to smart contracts for storage and utilization. The increasing TVL underscores the expanding trust and reliance on the Ethereum platform, as users demonstrate their willingness to commit assets to these decentralized protocols.

If you're comfortable to store your own wealth in a smart contract, that probably means you think it's secure.

SOLANA

We are currently witnessing a similar phenomenon with Solana, as the platform begins to rival, and in some cases surpass, Ethereum in various key metrics. One such metric is the new economic value metric, which aggregates transaction fees and MEV (Maximal Extractable Value) revenue. This metric is difficult to manipulate, as it reflects the actual costs incurred by users to transact on the network. Notably, users are willing to pay comparable, if not higher, fees to utilize Solana compared to Ethereum.

The demand for blockspace on Solana is evident, despite some market participants attributing this activity to wash trading. However, it is essential to recognize that users are ultimately paying to transact on the network, thereby generating value for the ecosystem. A similar trend is observed with memecoins, which, when combined with the aforementioned argument, suggests that the market has forgotten the true nature of DeFi summer.

DeFi summer was not a utopian era of on-chain banking for the unbanked, but rather a period of intense speculation and yield farming among DeFi assets. Critics, particularly those in the Bitcoin community, argued that Ethereum was merely a platform for speculative activities, devoid of genuine use cases.

Fast forward to the present, and a similar narrative is unfolding, albeit on a different blockchain. Many are skeptical of the activity on Solana, dismissing it as mere speculation and wash trading. However, the signal lies in the location of this activity, which is taking place on Solana due to its ability to provide the necessary throughput and latency for trading to thrive.

A prime example of this phenomenon is Pump.fun, a platform that has achieved remarkable growth, becoming the fastest-growing application in the crypto economy by revenue. Its ascent to $50 million in revenue was unprecedented, and it is likely to reach $100 million in the near future, potentially within a few weeks.

DeFiLlama - 14th August 2024

Why is this significant? The fact that developers can build an application on Solana and generate $50 million in revenue within 6 months, with the potential to reach $100 million in 8 months, serves as a powerful signal to attract new developers to the platform. Such substantial revenues are only possible when there is a high level of activity within the ecosystem.

To clarify, we believe that over time, the more speculative, casino-like applications will eventually be priced out as more sustainable use cases emerge within each ecosystem. This is a crucial point that is often overlooked when solely focusing on the current memecoin activity, rather than examining the other developments taking place beneath the surface on Solana.

It is essential to recall that DeFi Summer was characterized by a period of frenzied speculation, with users rapidly switching between various food tokens. This experimentation and excitement ultimately drew attention to Ethereum, sparking widespread interest in the platform. Builders had been working tirelessly throughout 2018, 2019, and 2020, waiting for a catalyst to propel Ethereum into the spotlight.

Regardless of whether the current activity is speculative or not, the adage "where attention goes, dollars go" holds true. Presently, attention is focused on Solana, primarily due to its ability to reduce friction and make experimentation easier. This is what is attracting builders to the platform, which is a promising development for the long-term prospects of Solana.

Lightspeed.