W3A PRO | Is Solana the Next Big Thing?

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What a year it has been for Solana. 🤩

Just over 1 year ago, Solana had a “near-death experience” with the collapse of FTX, the main investor across the ecosystem.

The price of $SOL dipped as low as $8 in January of this year.

Since then, it has risen 335% 410% 520% 550% YTD, making it the best-performing asset in the world in 2023 🤯
(every time I come back to edit this report, I have to increase the YTD % because SOL is absolutely rocketing!)

What a ride! 🎢

Interestingly, we wrote a PRO report on January 12, 2023 right after $SOL’s price collapse.

In that report, we suggested that Solana was following in the footsteps of Ethereum in its first bear market of 2018/19.

For those that weren’t around, Ethereum also had a near-death experience during its first bear market, where its price collapsed and everyone called for its death. 

$ETH later recovered and went from $85 to $5000 over the next 3 years.

In that report, our prediction was that if the Solana community could band together and continue to ship and improve the tech, then the price of $SOL should do the same as $ETH did.

Check out the incredible similarities between $SOL and $ETH after their respective first bull runs and collapses.

Unbelievable how similar the chart pattern is over their first cycles.

For context, if we zoom out on the ETH chart further, we can see what happened in Ethereum’s next cycle (2020 - 2023)…

A 3.5x from the previous cycle's all-time high!

So, is this what’s in store for SOL this coming cycle or is Solana a 1 hit (cycle) wonder, like almost every other fast and cheap alternative L1 that launched over the years (ie. EOS, Terra Luna, etc.).

In this report, we are going to answer that question by diving into 3 areas:

1. Upgrades to Solana’s Tech: Are the devs still shipping?

2. Onchain Metrics: Does Solana still have users?

3. $SOL Economics and Value Accrual: Is $SOL sustainable? 

Solana is one of the most highly discussed blockchains in the industry right now, but if you look on X or YouTube, you’ll notice mixed reviews.

Ethereum maxis will tell you that the tech doesn’t work or that $SOL doesn’t accrue value, while Solana maxis will tell you that $SOL is the best thing since sliced bread & that Ethereum is now useless and $SOL is going to 100x from here.

For the most part, people have no idea what they’re talking about and love to get loud on social platforms to promote their bags. 

But let’s forget all of that jargon and take a look under the hood to understand what’s really happening here. 👀🔛⛓

Upgrades to Solana’s Tech 🚀

Solana is attempting to do something that no one has done before: create a blockchain that provides consensus at the speed of light. ⚡

While Solana is well known for being extremely fast and cheap, it hasn’t done so without its own challenges.

Solana’s blockchain previously suffered from frequent outages, which simply is not acceptable for a decentralized technology at the bottom of the tech stack (relied on by users, apps, and other technologies on top of it).

In terms of upgrades, we’ll touch on:

1. The Solana Outages 🔌

2. Firedancer: From 60k to 1.1 Million in TPS 💨

3. Compression NFTs: Mint 1 Million NFTs for < $100 🗜

Solana Outages 🔌

First off, the Solana outages are old news and I think something that needs to be laid to rest.

Yes, it had its problems in its first few years of existence, but which technologies don’t? This is all part of building something new and innovative. 

The core Solana team has worked hard to upgrade the chain and prevent outages from occurring in the future.

It appears they have done so successfully, as they have not seen an outage since February 2023.

This isn’t to say that Solana's struggles are behind them yet, so this is still something to keep an eye on, but if they can get through the next bull run with exponentially more traffic without outages, then things are looking good on this end.

I think this is something we need to put in the past, just like we did with the Ethereum hard fork after the DAO hack.

Firedancer: 60k TPS to 1.1M TPS 💨

At Breakpoint this month - Solana’s big conference - the Jump Trading team announced the launch of the Firedancer testnet, a new Solana validator client that has the potential to take Solana from 60k transactions per second to 1.1 million transactions per second.

If this works, this would be a massive innovation and upgrade to Solana and the blockchain industry at large.

The fastest blockchain currently is SUI, with a theoretical throughput of 120,000 TPS. With Firedancer, Solana would be 10x that!

For more context, Visa requires about 25k TPS for its entire network while Twitter needs around 24.5k.

Solana would be able to power much of the financial system and the largest internet platforms combined at these speeds.

It’s important to note two more things here:

1⃣ How Solana Scales

Because of the way Solana is built, it scales as hardware scales. More GPUs = more capacity for Solana. 

Something a lot of people are missing when they look at Solana’s validator costs and scale currently is the idea of Moore’s Law.

Moore’s Law is the observation that the speed and capabilities of computers will double every 2 years, something that has consistently happened for more than 5 decades.

We can and should expect Solana’s hardware to continue to scale and eventually lower in price too. 

The founder of Solana, and some of the initial team came from Qualcomm, so hardware is their bread and butter. 

This was their expectation from the beginning of building Solana’s architecture.

2⃣ Solana’s Still New

The second thing to remember is that Solana is still very new. It’s only 3.5 years old at this point. 

There is still SO much potential for improvement here and the deep research on Solana’s architecture has only just begun.

Ethereum launched back in 2015 and only in the last few years did its true potential start to come to life:

• Its scaling solutions (L2s) launched late 2021 and are still being tested and improved now.

• The merge from PoW to PoS happened just last year.

• EIP 1559: The Burn, launched in 2021, helping $ETH become a deflationary asset.

We should expect numerous upgrades to Solana in the coming years too.

Finally, Firedancer is not just about scale, it also significantly improves the security and decentralization of Solana.

Firedancer is the second validator client for Solana, which means that if all validators running the current client were hacked or the code had a bug and it went down, anyone running the Firedancer client would keep the chain running with no outages.

Ethereum leads the way here for blockchains with 7 different validator clients, which has saved Ethereum from going down multiple times in the past. 

I can’t stress enough how important this is to Solana's security.

Firedancer is projected to launch in the summer of 2024, with at least two other Solana Validator clients in the works currently as well.

For anyone who says Solana is not sufficiently decentralized and Ethereum and Bitcoin are, just remember that it took many years for those chains to get to where they are today too.

Compression NFTs 🗜

There are many other big upgrades that have happened or are soon happening on Solana, but I’ll leave you with this final one: Compression NFTs.

Solana now has the ability to mint 1 million NFTs for about $100 in fees. This is absolutely unheard of for any blockchain. 

This is orders of magnitude cheaper than any other blockchain and it turns the cost of minting NFTs into essentially nothing.

This unlocks new blockchain use cases that were previously not possible, creating Solana’s newest marketing campaign: “Only Possible On Solana”.

This is a killer narrative in my opinion, because it's easy to understand and is actually true.

Here’s a few examples of what apps are already doing with compression NFTs:

1. Dialect uses compressed NFTs for in-chat sticker packs, enabling users to mint and share stickers directly within their messaging platform. These compressed NFTs significantly reduce minting costs, making NFT sticker sharing on a large scale almost cost-free. (Over 2.3 million mints to date).

2. Helium (A Wi-Fi hotspot network) migrated to Solana by minting each hotspot as an NFT. These NFTs also enabled token-gated experiences, making the migration economically viable and seamless. (Over 990k mints to date).

3. DRiP empowers creators to offer free digital gifts and reward fans with unique collectibles as NFTs. (Over 50 million mints to date).

Ok, it’s pretty clear the devs are doing things! Solana is evolving into a legitimate and leading blockchain. But what about the onchain metrics?

Are people really using Solana?

Solana Onchain Metrics ⛓

Let’s start this section off with a bit of context. It's the middle of November 2023 and we are just finally seeing the light at the end of the tunnel of a 2 year long bear market.

To answer the question above, almost no one is using any blockchain at the moment, in comparison to typical apps online. 

The entire onchain world across the entire ecosystem is likely below 1 million humans, and no chain has seen significant growth this year.

Most “spiked” numbers you see from L2s and other chains are existing users moving from one chain to another, airdrop hunters, or fake users. 

All that said, let’s see what we can take from looking onchain with Solana.

Transactions have just started to pick up with the recent price increases, though not by a meaningful amount.

Active wallets have also just recently seen a tick-up, though have been in a downtrend all year.

And trading volumes on Solana haven’t seen much growth either until recently. Keep in mind this metric is highly impacted by price increases. 

$SOL and other tokens on the network have increased 2-3x in the last few weeks, which is likely the reason for the recent spike in volumes.

As I said, we should limit our expectations for user adoption during the bear market, though now that we are entering the bull, these numbers should begin to pick up further. 

If not, that would be a cause for concern.

One other area that we can look into onchain is the developer output. Are people at least building on Solana?

If we look at daily new programs (i.e. apps), which doesn’t include NFT or Token mints, we can see that there has been a steady deployment of new programs on Solana even throughout the bear market.

In terms of active programs (people actually using the application deployed), we are seeing a recent increase, likely as a result of the most recent $SOL price explosion.

There has been a recent surge in new tokens being minted on Solana too.

Though NFT mints on Solana have been down bad all year with no recent resurgence.

But what the chart above misses is the new token standard of cNFTs (compression NFTs).

Below, we can see that there are 10s of millions of cNFTs being minted every month since the summer. 

While it hasn’t led to a lot of new users or activity yet, the fact that this is possible is still pretty incredible.

Developer metrics look great, which is generally a leading indicator for user metrics. 

As we move further into the next crypto bull cycle, it will be important to watch user growth and activity to understand if what Solana is building is actually working.

Let’s assume that it is working and it will onboard many millions onchain. Is Solana an economically viable ecosystem? 

Solana Economics & Value Accrual 💰

One of the main critiques of Solana, especially from the Ethereum maxis is that Solana economics are not sustainable, meaning Solana is creating more $SOL tokens through inflation than it is burning.

This means that it’s subsidizing its security, rather than paying for it through network activity-based revenues. Before I comment on this, let’s quickly take a look at the numbers.

Solana is currently generating $100k+/day in fees (aka revenues). With about 50% being burned and 50% going to the validators securing the chain. 

Don’t let this chart fool you though, the only reason it’s up so much this year is because Solana fees are paid in $SOL, whereas this chart is showing the USD amount. 

Fees in $SOL terms have not changed much, considering transactions have not increased significantly, however the price of $SOL has increased 4x this year, so of course, the USD denominated fee revenue has too.

On the expense side, Solana is spending $9.8 million/day to secure its network, which of course also increases as the price of $SOL increases.

On a weekly basis, Solana is $24.5 million in the hole.

So the question is: If Solana plans to remain a super cheap blockchain, is it possible for the economics to ever become sustainable? Let’s take a look…

On the supply side, Solana does have a clear plan to lower its inflation rate. Below is the proposed inflation schedule.

Solana started at 8% inflation, is currently sitting at 5.7% and plans to end at 1.5% around 2030.

Let’s do some quick napkin math here: at 1.5% it would drop Solana’s daily expenses from $9.8 million/day down to $2.5 million/day. 

This still leaves a deficit of around $2.4 million/day and would mean that Solana needs to at least 24x its fees to breakeven.

Essentially, Solana will need to 24x its daily transactions, without increasing costs to the user (as that would go against Solana’s value prop of cheap fees). 

But actually, Solana’s goal is to be the cheapest and fastest blockchain in existence, so it’s likely that Solana continues to upgrade its chain to provide even cheaper fees to the end user (ie. Firedancer, cNFTs, etc.). 

This means that overtime, it’s likely that this will need to be much higher than 24x.

A 24x on transactions in the next 7 years? That seems easily doable to me. I could see that happening just in the next cycle. 

Heck, a 50-100x over the next few years shouldn’t be too difficult once the masses make their way onchain.

I’m sure there are more complexities than what I’ve just shared above (this is just napkin math), but ultimately, I don’t think it’s a stretch to say that if Solana can onboard millions to billions of people onchain then it could become profitable.

Remember, it took Ethereum 8 years to become a profitable blockchain with sustainable economics. Solana is only 3.5 years old!

Is Solana Legit?

So, back to the question from the start. Is Solana a legit contender for smart contract platforms and will it reach new all time highs like Ethereum and Bitcoin did last cycle?

It’s impossible to predict prices, but it’s pretty clear that Solana has a lot going for it. Solana appears to have a strong developer community, next gen technology that is continuing to improve at scale and a clear path to sustainability.

Solana is taking a different path than Ethereum, focusing on scaling the base layer chain rather than scaling through layers. Each architecture has its pros and cons and I think both are needed for a future world where everything moves onchain.

The key question for Solana is if it can truly scale at a low cost. Its current TPS of 60k and Firedancer’s expected TPS of 1.1 million are theoretical.

Neither have ever actually been achieved on a live blockchain, so these are not yet certainties, they are assumptions.

That said, if Solana can achieve this, then it may very well become one of the most important technologies in web3, alongside or potentially even above Ethereum or Bitcoin.

During this cycle there will be many narratives created around Solana, some good and some bad, some true and some false. 

The same happened (and is still happening) to Ethereum since it launched. 

The key is to not fall into these narrative traps from X and YouTube. Instead, look under the hood and do your own research… or let Web3 Academy do it for you!

As for what will happen with $SOL’s price? 

Stay tuned! In a few weeks, I’m sharing a price predictions PRO report looking at various strategies to estimate this cycle's top price for some of the best assets in crypto.

As we’re entering a new bull market, I think it’s essential for everyone to have realistic expectations of what’s ahead, to not get caught up in the hype once everybody FOMOs in.

As a PRO member, you’ll have a front row seat to everything that’s actually going on in web3, and together, we’ll make the most out of this crazy bull run that’s ahead of us. 

Give me a LFG reply to this email if you’re excited. 💪

Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤

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ABOUT THE AUTHOR

Kyle Reidhead

• Founder of Web3 Academy and Impact3

• Find him on Twitter

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