Solana has experienced a spectacular last 20 months as it begins to eclipse Ethereum across several onchain metrics. Growing consensus on its long-term survival has led many to suggest it’s still underappreciated compared to Ethereum and could one day flip the second-largest cryptocurrency. I dive into why there could be room for both and why Solana could have more upside.
Disclaimer: Employees of Collective Shift hold material amounts of the cryptocurrencies discussed in this article. See our Trust & Transparency, which is updated weekly, for more details on team member holdings.
Key Takeaways
- Solana is overtaking Ethereum across several important metrics, but not all of them.
- There could still be room for both in the crypto ecosystem, especially as they promise different things and solve blockchains differently.
- Solana could have a higher upside (and risk) while showing strength following the latest crypto sell-off.
- Don’t count Ethereum out; it remains highly demanded.
- How much ETH vs SOL you hold will depend on your appetite for risk.
Contents
Summary
We have seen a stunning reversal since the FTX bottom in November 2022, which marked a 90% drawdown of SOL.
When I first wrote my article, many dismissed Solana as ‘dead’ and ‘centralised’—but now Solana has become consensus, and there are growing conversations about whether it will flip ETH and leave it in its dust. The attention is not surprising—after all, we have posted to members throughout the last 12 months about why it was too early to write off Solana.
For some, it comes down to first mover vs. second mover. It’s easy to forget that first movers rarely win over the long term.
So, will Ethereum be blown away? Will it be the ‘Blackberry’ to Solana’s ‘iPhone’ moment, where Solana becomes the dominant L1?
I’ve summarised the article’s key findings in a simple table below for those who want a snapshot of the analysis below.
| Metric | Winner |
|---|
| Network uptime | Ethereum |
| Market cap weighting and upside | Solana |
| Upgrade catalysts | Solana |
| Stablecoins | Ethereum |
| TVL | Ethereum |
| DEX volume | Tie |
| Daily addresses | Solana |
| User experience | Solana |
| Network effects | Ethereum |
| Fees | Ethereum |
| Total Economic Value | Tie |
Rise Of Solana
There’s significant controversy about Solana potentially overtaking Ethereum, with some suggesting it has eclipsed it across the board.
While others may argue about the “legitimacy” of the users and metrics, Solana is beating or overtaking Ethereum across a few metrics—but as I cover later, Ethereum still reigns supreme in others.
Total DEX volume
Solana has become the home for retail users and a growing amount of DeFi activity.
Solana’s decentralised exchange (DEX) volume dominance surpassed that of Ethereum, Base and BNB Chain, hitting a new all-time high of 42% in combined 24-hour DEX volume.
Solana was only ~2% of Ethereum DEX volume throughout 2022 and 2023; however, since the start of the year, DEX volume has exploded, eclipsing Ethereum for the first time in July.
It’s controversial because Solana sees more volume per dollar of TVL, but much of this volume is on Raydium, which has been linked to many scam activities and possible wash trading.
For example, according to the Lightspeed newsletter, one memecoin had $45 in liquidity but over $20M in daily volume.
Wash trading is a practice whereby one entity will move crypto between wallets it controls to give the illusion of organic trading. A quick Telegram search revealed multiple Solana “volume bots” that promise to artificially inflate the volume for certain tokens.
Blocksapce profitability
No better metric shows the rise of Solana than increasing profitability. While other metrics, such as volume, can be misleading, profitability is difficult to game. On the other hand, Ethereum, although still profitable and in demand, has plateaued.
Total economic value
Another high-signal metric Solana challenges and sometimes beats Ethereum in is Total Economic Value, a measure created by Blockworks that measures transaction fees plus MEV. It has beaten Ethereum multiple times in the last month.
Daily Active Addresses
Solana also outpaces BNB Chain, Ethereum and its L2s in daily active addresses. Since the start of the year, Solana has been trending higher, more than tripling active addresses on the network.
User Experience
Arguably, this is where the most significant difference is.
Solana is subjectively the best user experience for someone completely new to crypto. Its design means users don’t have to jump from different L2, toggle different networks, or have different versions of ETH (or SOL) sitting in their wallet. It’s just easy. (As I cover later, Ethereum does have plans to improve user experience.)
New tokens appearing on DEXes: New tokens appearing on DEXes showcase Solana as the chain of choice for retail/token creators. (Worth noting, the rise in this metric is thanks to the launch of an app called Pump.Fun, which makes it simple to create new tokens).
Ethereum Still Reigns Supreme
Despite the momentum behind Solana, Ethereum ultimately still leads across a few critical metrics.
Total Value Locked (TVL)
Solana’s TVL continues to rise, hitting a 931-day high of $5.7B. However, Ethereum’s TVL of $46B still dwarfs Solana’s.
Stablecoins
Solana has yet to attract substantial stablecoin growth. Ethereum remains number one, with a 48% market dominance in the category, compared to 2% for Solana.
Network Uptime
Ethereum remains the most battle-tested smart contract platform, with 100% uptime.
It’s no secret that Solana has had performance issues over the journey, which are still hanging over the network. On Aug. 9, Solana validators had to issue an emergency “patch” to fix a critical bug, which did not result in any downtime.
However, these issues are getting less frequent. Since Jan. 2023, Solana has had two network outages—one in Feb. 2023 that lasted 19 hours and a five-hour outage in February this year.
For some, any downtime is unacceptable, but if Solana can overcome this, it will only strengthen the case for SOL.
Network Effects
Perhaps the biggest reason Ethereum reigns supreme is its vast network effects. We’ve seen this through the above TVL and stablecoin metrics, but they are even more powerful when examining other key areas, such as developers or support of the Ethereum Virtual Machine (EVM).
Network effects are more pronounced when considering Ethereum’s vast network of L2s and projects built on top. L2s are surging in activity with millions of active addresses, an additional ~$9B worth of stablecoins (almost triple that of Solana) and $35B TVL.
Fees
Looking purely at fees paid, Ethereum still remains number one, although Solana has started to close the gap since May.
For these reasons and lowering Ethereum sentiment, ETH feels like it is becoming underappreciated. In the article below, I explain why Ethereum is still worth attention.
SOL Could Have More Upside
Despite the continued dominance of Ethereum in the above key metrics, there’s no denying that Solana is making up ground.
Rather than focusing on whether Solana will flip Ethereum, a better way to look at it is whether SOL has a higher upside. Below are some reasons SOL could have a much higher upside than ETH.
#1. SOL is underrepresented and has a smaller market cap
Despite SOL dominance (i.e. Solana’s market cap as a percentage of total market cap) currently being at record highs of 3.64%, there could still be room to grow as it is still a minimal weighting of total market cap.
SOL also trades at 20% of ETH’s market cap despite catching up across many core metrics.
Solana launched in 2020; it is an entire market cycle behind Ethereum—which went live in 2015—and, therefore, much earlier along its development cycle.
SOL is also underrepresented in total digital asset fund flows in global exchange-traded products (ETPs)—with only $1.4B in such products compared to $12.3B for ETH. (Adjusting for market cap weightings, this ratio of AUM is skewed far more toward ETH, representing an opportunity for SOL as more ETPs presumably become available.)
#2. A possible ETF tailwind
Solana might be next in line for a spot ETF. If granted one in the next 12 months, it could have less sell pressure than BTC or ETH due to the small amount of SOL in the Grayscale Solana Trust.
Although hopes of an ETF remain slim, BlackRock Chief Investment Officer ruled out a Solana ETF, citing “no demand”.
#3. Big upgrades
Solana has a bigger pipeline of upcoming upgrades to capture attention. Ethereum has passed a few of its biggest-ever upgrades (the Merge, the Burn, etc.), with Ethereum co-founder Vitalik Brutein saying major upgrades are behind it, and any further upgrades will be more gradual and smaller in nature or complexity.
On the other hand, Solana will receive one of its most extensive upgrades with Firedancer, which means there is no single point of failure. Further upgrades, such as optimising Solana’s fee model, are also possible.
#4. Upside driven by strong relative strength
The SOL/ETH ratio—a measure of the value of SOL to ETH— has reached a new all-time high.
Likewise, in the latest sell-off, SOL has bounced much higher than other leading L1s, including ETH.
Why There Might Be Room For Both
It might seem like I’m fence-sitting, but stick with me. It might not be a case of one or the other, and having both could make sense.
Solana and Ethereum as hedges
Both are designing blockchains in very different ways. Solana wants to keep everything in one layer, whereas Ethereum embraces an ecosystem of layered networks.
- If Ethereum’s approach and network effects prove too strong, Solana might struggle.
- If Solana’s approach can scale while providing a smooth user experience and Ethereum’s complexity is too burdensome, Ethereum might struggle.
Currently, Ethereum is also experiencing concerns about value accrual to ETH. Some are concerned that its ecosystem of L2s will spin off as their own blockchains, become less ETH-aligned and reduce the economic activity on Ethereum. All this means less value is captured for ETH.
Signs of hope for ETH
Ethereum has reduced onchain fees for L2s and tackled some of its biggest challenges (i.e. The Merge); the big focus will be abstracting the current clunky and convoluted user experience—Vitalik believes we will be “surprised” at how quickly this gets solved. Solana again presents a hedge that Ethereum cannot, but if it does and users don’t realise they’re using a blockchain or an L2, Solana’s current lead might be irrelevant in the long term.
All about your appetite for risk
How much ETH vs SOL you hold will depend on your own appetite for risk.
As I have explained, SOL might have a higher upside and is showing more strength compared to Ethereum, but this carries increased risk. It is hard to fade Ethereum’s network effects and legitimacy, so despite historically low sentiment, ETH remains highly demanded and a staple in the crypto ecosystem.