Should SOL be Trading at a 70% Discount to ETH?

In January 2023, solana was trading at a 97% discount to ether's market capitalization, but this gap has narrowed to a 70% discount over the past two years. Despite the decreasing discount, solana is starting to rival ether in terms of on-chain activity and network usage metrics, raising questions about whether the market is still dislocated, says Michael Nadeau.

Nov 27, 2024, 4:19 p.m.

Solana was trading at 97% discount to ether’s market cap in January of 2023 – a clear market dislocation that has closed significantly over the last two years.

Today the gap has closed to a 70% discount.

However, solana is starting to challenge ether in terms of on-chain activity and important network usage KPIs.

Which begs the question: Is the market still dislocated?

In this short piece, we explore this key question with relative analysis across four key data points. Let’s dive in.

1. Network Fees

Data: Artemis, The DeFi Report, Gas Fees Only (does not include MEV). Please note that we’ve included the following L2s in the comps data: Arbitrum, Base, Optimism, Blast, Celo, Linea, Mantle, Scroll, Starknet, zkSync, Immutable, and Manta Pacific.

L2s create new demand for Ethereum L1 block space and increase the network effects of ETH the asset. Therefore, we include them in our comp analysis for solana.

In Q2, solana did $151M in fees: 27% of ether + the top L2s.

Fast forward to the last 90 days and the ratio has jumped to 49%.

2. DEX Volumes

Data: Artemis, The DeFi Report

Solana did $108B in DEX trading volume in Q2: 36% of ether + the top L2s.

Over the last 90 days, solana has done $153B in DEX trading volume: 57% of ether + the top L2s.

3. Stablecoin Volumes

Data: Artemis, The DeFi Report

Solana did $4.7T in stablecoin volume in Q2: 1.9x that of ether + the top L2s.

Over the last 90 days, solana did $963B of volume: 30% of ether + the top L2s.

Why the drop?

We think this drop is mostly due to bots/algorithmic trading that was juicing the numbers in Q2.

Furthermore, only 6% of Solana’s stablecoin volumes are peer-to-peer transfers per Artemis. On Ethereum L1, this figure is closer to 30% – an indication that ether is used more for non-speculative activity than solana.

In terms of stablecoin supply, solana has just 4.1% of ether + the top L2s on-chain value today, up from 3.5% at the end of Q2.

4. Total Value Locked (TVL)

Data: Artemis, The DeFi Report

Solana ended Q2 with $4.2b of TVL: 6.3% of ether + the top L2s.

Solana’s TVL is currently $8.2b: 12% of ether + the top L2s.

In summary, based on 90-day performance, solana now has:

1. 49% of ether’s fees (up from 27% end of Q2)
2. 57% of ether’s DEX volumes (up from 36% end of Q2)
3. 30% of ether’s stablecoin volumes (down from 190% in Q2)
4. 4.1% of ether’s stablecoin supply (up from 3.5% end of Q2)
5. 12% of ether’s TVL (up from 6% end of Q2)

We think the on-chain data points to a fair re-pricing of solana’s valuation relative to ether.

With that said investors should consider qualitative differences between the two networks as well as potential upcoming catalysts as we head into year-end and 2025.

Michael Nadeau

Michael Nadeau is the founder of The DeFi Report, a research service and educational newsletter focused on value accrual within the Web3 tech stack. He is also a strategic adviser to multiple start-ups in the digital asset space. Prior to starting The DeFi Report, he was the director of ecosystem strategy at Inveniam, a digital asset firm helping owners and managers of private market assets prepare for tokenization. Before joining the Web3 space, he spent 12 years in traditional finance at a family office, Boston Properties and MIT Investment Management Company.