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Ever since its inception, Solana has promised to be the Ethereum killer by providing superior speed and scalability through its blockchain. 🚀
But is that claim accurate? Can Solana actually become a solid network, and can its $SOL token reflect the potential adoption of the Solana blockchain? 🤔
Today, we’re diving into the world of tokenomics and using onchain data to chart the path for future exploration of a blockchain that technically has the potential to onboard the first billion people in web3. 🔢
Is $SOL a good investment and something to hold onto long-term? That’s what we are answering in today's PRO report.
Of course, for $SOL to be a legitimate investment, the Solana blockchain must be a long-term success in terms of its activity and use cases.
In case you missed our deep dive on Solanas Activity from a few weeks ago, check out the PRO report here. 👀
As for today, our mission is to leave you with a clear and comprehensive overview of $SOL. 💪
We’ll provide solid starting points regarding its utility, its impact on Solana's future growth, and the possible red flags 🚩, by covering:
The supply and demand dynamics of $SOL
$SOL’s initial launch and future unlocks
$SOL’s price evolution
And much more…
Yes, all those nerdy but crucial elements that can make the difference between a life-changing investment and a pocket-burning sh*tcoin. 🔥
Before we do anything else, let’s remind ourselves what tokenomics are and why they’re important.
Token” + “economics” describes the supply and demand characteristics of a digital asset. 💱
Although Solana is a coin – native to its blockchain – we reserve the right not to butcher our tongues with the term coinenomics, which I might have just… coined. 🤷
By understanding tokenomics, we can understand who is buying and who is selling – which helps us more accurately predict the most likely trajectory of an asset, before aping into it.
And as a quick refresher, here’s what the law of supply and demand tells us:
Buyers > sellers, price ⏫
Buyers < sellers, price ⏬
Furthermore, researching a token’s tokenomics is particularly important to determine whether or not the token will capture the underlying growth of the protocol.
If we take Uniswap as an example, we can see that on the protocol level, it is doing very well – there are many users and the fees that Uniswap generates are only growing.
However, if we look at the $UNI token price, we see a very different picture:
But why is that happening? Because the revenue of Uniswap is not shared with $UNI holders. The tokenomics aren't designed to resemble the performance of the application (yet).
We wrote more about how that works here: How To Invest In Application Tokens Successfully.
Ideally, the tokens we invest in should reflect the performance of the underlying protocol/application. That way, we can simply analyze the product and invest based on that.
But it’s not that easy in crypto. And that’s why we can’t stress the importance of looking at tokenomics enough. 👀
Let’s do that for Solana today by starting to look at its supply. 👇
A key thing to note here is that Solana doesn’t have a capped supply, just like how Ethereum doesn’t either.
Solana issues new $SOL consistently (just like Ethereum) and that’s why its circulating supply is continuously inflating. I’ll explain why it does this and if it’s sustainable below.
At the time of this writing, Solana’s total supply is 552 Million $SOL. ~73% of the total supply is currently in circulation.
But as I mentioned earlier, these numbers change constantly because of Solana’s issuance rate, which is currently at 6.06% – meaning that around 91,300 $SOL is put into circulation each day. ➕
Now, if we’ve learned anything from our post-Covid time it’s that inflation is bad. Especially when it’s as high as 6%. It doesn’t sound sustainable. 😬
However, Solana doesn’t plan to sustain a 6% inflation forever. We’ll talk about that in just a second. But first, let’s see why there’s so much $SOL put into circulation every day.
To secure its blockchain, Solana relies on a proof-of-history consensus mechanism, which is fancy for proof-of-stake + making sure validators’ computer times are matching. ⏰
Similar to Ethereum, validators need to stake their tokens in order to secure the network. For their contribution, they get rewarded $SOL (all of which is newly minted).
And that’s where inflation comes from for Solana. Let’s dive into that a bit more.
Security is a top priority for any blockchain. 🔗
This is achieved by compensating those who secure the network, like validators in Solana's case, or miners for Bitcoin.
Regardless of the method, blockchains need to pay for their security.
To fund this, blockchains sell block space, allowing users certain actions in exchange for gas fees – and that’s the business model of blockchains.
In Solana’s case, their business model isn’t working so well.
Solana currently recorded $553,000 in revenue the past month. With their daily expenses being $1.7M, it’s clear that they operate at a huge loss – $47 million in the past month to be exact.
For perspective, Solana’s revenue is 70 times less than what Ethereum currently generates. 🤯
Paying validators from the revenue that Solana generates isn’t enough to incentivize validators to stick around for long. Therefore, they need to subsidize these security fees by issuing new currency ($SOL).
And that leads to a high inflation rate on Solana – remember that this is a requirement right now. If validators don't get paid, they won't secure the network and the network becomes obsolete. 🫠
To solve this problem, Solana needs more transactions to happen on their blockchain, as this would bring more revenue for them.
However, something we need to understand is that all gas fees don’t end up in Solana’s pockets. Here’s how Solana’s fee mechanism is designed.
50% of every transaction fee is burned (we’ll talk about burning soon)
50% is awarded to the validator who processed the transaction
Through this mechanism, Solana is both rewarding its validators (keeping the network secure) and burning $SOL (ideally, aiming to lower the supply).
So, attracting more users, who pay fees (or incentivizing the current users to make more transactions) would both increase the rewards for the validators and decrease the supply increase of $SOL
With this plan in mind, Solana aims to reduce its inflation by 15% each year, until the final 1.5% inflation terminal rate, in 2031.
Effectively, Solana is betting on its future potential to attract users by subsidizing their security costs now and hoping that each year as they lower their issuance rate, it will be made up for by an increase in users/activity.
But how many new transactions would Solana need now to achieve profitability in their security?
If we look at the amount of fee payers (active users) over the last month, we can see that the numbers have hovered around 100k, with occasional spikes, as you can see on the chart below.
But the revenue brought in by the ~100k fee payers is not near enough for Solana’s inflation to drop.
And realistically, you can’t expect these 100k users to do much more than they’re currently doing. Therefore, Solana needs to attract more active users.
If we do some math, in order for Solana to reach a 0% inflation rate, they need to either:
Keep the 100k gas payers and increase their gas fees by 82x
Keep the gas fees as low as they are, but increase the number of gas payers to 8.2M
But increasing gas prices (1.) would make the blockchain unappealing and attracting 8M+ fee payers (2.) is easier said than done.
For now, this is outrageous, to say the least, and we can’t expect the inflation on Solana to drop significantly any time soon.
But at least we now know that Solana needs more users in order to become a sustainable blockchain… cool! 👍 But what’s the demand for Solana? Why would anyone use this blockchain?
We’ll talk about that in a minute. But first, let’s talk about Solana’s burning mechanism.
Burning is crucial for any blockchain with an inflating supply – it’s what takes tokens out of circulation, thus keeping the supply from increasing endlessly.
This is an important component of a blockchain’s long-term sustainability because the more scarce a token becomes, the more potential it has to go up in price. And the more the token is worth, the more secure the underlying blockchain becomes. 🚀
For Solana, I mentioned that 50% of each transaction fee is burned. But because the gas fees on Solana are fractions of a penny, the burning isn’t very significant.
If we look onchian, we can see that Solana burns around 2,000 $SOL per epoch right now!
Solana Epoch: This is a set period during which the schedule for validators (who confirm transactions) is determined and during which stakers get rewarded.
1 epoch = 2.5 days.
So, right now, Solana burns around 886 $SOL per day. At this rate, they’re burning around 320k $SOL per year, which represents 0.08% of the current circulating supply.
This isn’t much at all, but as the activity on Solana rises (potentially), the burning will be more and more significant.
To summarize the supply side of Solana, we must say that inflation is high, but it has a plan to decrease that by 15% a year.
At its current inflation rate, and even at its end terminal rate of 1.5%, $SOL’s tokenomics are far from sustainable.
But, that doesn’t mean it can’t be at some point. It took Ethereum 7 years to create sustainable tokenomics through user adoption and making changes to the protocol and its tokenomics.
The same can turn out to be true for Solana, who is only 3 years old and is still figuring out how to get more people to use the blockchain.
So the next question is... Can Solana create enough demand to increase its revenues enough to make $SOL sustainable?
$SOL serves multiple purposes in the Solana ecosystem, including staking, governance, and most importantly, as the required payment for gas fees during any interaction with dApps on the Solana blockchain.
But for $SOL to have a purpose, the Solana blockchain needs to be popular. Why would it be popular?
The core of Solana’s product-market-fit is its ability to scale many transactions very cheaply.
In 2021, when NFTs became popular, the gas fees on Ethereum reached more than $100 for a single transaction… not very feasible!
That’s when Solana became popular, because it could settle the same amount of transactions Ethereum could, for basically $0.
Solana then experienced a huge influx of new users during the NFT hype cycle.
At the moment, the main reason people use Solana is still the low gas fees and high transaction speed.
However, due to the rise of Layer 2s in the Ethereum ecosystem, Solana is seeing some serious competition, with many developers and users moving back over to Ethereum.
But despite the outflow of devs and users, there’s still demand for Solana.
A main factor: staking.
If you own $SOL, you can stake it to earn a ~7% APY – as mentioned before, this reward is covered by Solana from inflation.
Due to the tempting rewards, there are 665,637 stakers right now who together stake a whopping 70% of all circulating supply of Solana is currently staked.
The barrier to stake $SOL is very low. If you decide to secure the Solana blockchain, you need to stake a minimum of 0.002281881 $SOL, and you’re not required to lock your tokens for any period of time, so there’s virtually 0 constraints in staking on Solana.
But staking is not all there is to it… $SOL holders are incentivized to hold their tokens to vote on certain decisions happening onchain in DAOs for example – and this is super popular on Solana.
If we look at the onchain transactions, we can see that there’s around 2.6 Billion transactions happening on Solana daily.
But if we remove transactions that are meant for voting (governance), the numbers look extremely different – around 200 Million transactions per day, right now.
Please remember that this activity is inflated at the moment, as we discussed in our Solana activity report from a few weeks ago.
Now that we understand the revenue and expense dynamics of Solana as well as the supply and demand of $SOL, it’s also important to look at the demand side of a token based on its current holders/investors and its future unlocks (the ability for investors to sell their vested tokens).
To understand what’s on the horizon for Solana, let’s reflect on how they launched, back in 2020.
Solana became public in March 2020, but fundraising started as early as 2018. The funds mostly garnered from VC investors like Coinbase Ventures, Pantera Capital, Alchemy Ventures, and Alameda Research totaled an estimated $25M between 2018 and 2020.
When $SOL launched, the token was distributed in the following way:
If you look closer at the allocation chart above, you’ll see that most $SOL went to the core team in one way or another. Founding sale, Foundation & Team, all sound like they’re the same to me. 😅
By holding these tokens, the Solana team had the opportunity to raise more funds by selling $SOL privately – which they did.
For example, In June 2021, Solana Labs sold $314 Million worth of $SOL, to a group of funds led by Andreessen Horowitz and Polychain Capital. Source.
And that’s how they raised considerable amounts of capital to sustain both their blockchain, their team & the grants they’re giving away to developers.
But that’s not all… If we look at the initial coin allocation, we can see that 48% went to insiders:
At the peak, the Solana market cap was over $70 Billion – if the team held (and had access) to that many tokens, it’s safe to assume that they sold some of these tokens during the bull market – which allowed them to sustain themselves throughout the current bear market.
Now, keep in mind that most of the tokens that were distributed privately to all these insiders and VC funds, were locked.
Context: Locking tokens is a common strategy in financial markets to incentivize long-term commitment from stakeholders like founders, team members, and early investors, including Venture Capitalists (VCs).
So let's take a look at how many tokens are still currently locked up and how that may affect $SOL in the future.
In terms of market capitalization, as of June 2023, Solana sits around $10B, representing a dramatic -92% drop from its market cap ATH of +76B hit in November 2021.
The reason that $SOL has been hit so drastically is due to Alameda Research’s and FTX’s heavy involvement in the $SOL token.
Alameda Research, Sam Bankman Fried’s trading firm, held over 13% of Solana’s total circulating supply when they went bust together with FTX in November 2022.
Keep in mind that some of those holdings are still locked and can’t be sold. 🔒
If we look onchain, we can see that ~61 Million $SOL are currently locked. That represents around 15% of the entire circulating supply.
If we look deeper, we notice that 71.4% of the total locked tokens are owned by Alameda.
So, in terms of future token unlocks, Alameda’s holdings represent the biggest concern.
The big spike that you’re seeing on the chart below represents Alameda’s scheduled unlock of 7.5 Million $SOL, in March 2025.
But that’s not all that’s on the horizon. The biggest token unlock coming from Alameda's side is scheduled for September, 2025 — 27.5 Million $SOL. 🤯
And, as you can see above, there’s also a scheduled unlock of 8.3 Million $SOL scheduled for August, 2025.
Now… Due to Alameda’s insolvency, it’s likely that they’ll be forced to sell these tokens once they’re unlocked (but we don’t know for sure).
Regardless, the selling pressure caused by these tokens is notable, since it represents more than 70% of all locked tokens.
And that's not all. If we exclude Alameda’s token unlocks, we can see that there’s significant unlocks coming in 2025.
The 3 spikes on the chart above represent ~4.6 Million $SOL – all being unlocked in 2025.
So, to recap, 2025 will be a BIG year for token unlocks on Solana. But, if our theory is correct, and we’re heading into a bull market this year or early next year, then these token unlocks might not have a significant impact on $SOL’s price in the upcoming bull cycle.
But one thing’s for sure. As the locked $SOL hits the market, we can expect significant selling pressure.
Unless Solana figures out a more sustainable business model by then – that may incentivize people to keep their $SOL instead of dumping it on the markets.
But only time will tell… So let’s focus on the now. What’s the takeaways for you today?
As we can see, the future of Solana and $SOL is not without its challenges.
There's the pressing issue of sustainability. At present, the tokenomics of Solana are not sustainable due to the high inflation rate, low gas fees & insignificant burning of the $SOL token.
On top of that, we have the impending token unlocks in 2025 – most of which will likely be sold, causing significant selling pressure on the $SOL token.
Moreover, Solana's losing market share in its battle with Ethereum and its Layer 2s. As L2s become more popular, they are increasingly attracting developers and users away from Solana.
But it’s not all gloomy for Solana. Despite its challenges, we must remember that Solana has only been around for 3 years. Most businesses aren’t profitable after only 3 years.
Additionally, in its short time around, Solana has managed to build a very exciting community – something that will help them come back stronger from this bear market.
Now, let’s zoom out and remember that we expect billions of people to be active in web3. Right now there’s a few million.
As the migration from online to onchain intensifies, it’s safe to assume that every blockchain will get its piece of the pie. While we still believe that Ethereum will be the settlement layer of the internet, we recognize the potential for Solana.
So, even though it’s looking bad for Solana right now, it doesn’t mean it will a few years from now, especially after getting the token unlocks out of the way.
The most important factor that Solana needs to address is their product-market-fit. Why should anyone use Solana?
Regardless of what the answer is (NFTs, gaming, etc…), Solana needs to find it and double down on it. Right now, they’re competing against Ethereum and I can’t see them winning the battle in the long-term.
So, should you buy $SOL?
Because the token is down 90%+ from ATH, I must say that it’s tempting to scoop up some tokens.
While tokenomics are a concern long-term, it’s likely that Solana will be here for years to come. And once the bull market comes back, I expect $SOL to do very well – especially if the bull run is in full force before those unlocks hit the markets.
But long-term, the tokenomics and lack of users remain a concern. If not addressed, then $SOL isn’t a good long-term bet.
With that said, if you’re looking to allocate to $SOL, I suggest you keep in mind the portfolio structure we talked about in our ‘A Framework To Successfully Invest In Web3’ PRO report.
Keep 80% (or more) in Bitcoin and Ethereum and allocate only 20% of your portfolio to application tokens and/or alternative blockchains, like Solana.
$SOL is a risky bet, but it remains an asset that can bring you significant rewards in the upcoming bull market.
$SOL has been beaten up from the fallout of FTX and the SEC securities concerns, which means there is no better time to buy than now (other than the last few months, of course!)
I do think it will do well in this bull market, but afterward, it’s tough to say. We’ll keep an eye on things and see how the development of the ecosystem performs.
Until then, it’s a buy for me, however, proceed with caution…
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Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
See you soon. ✌️
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.