Print PDF

Is Solana overtaking Ethereum?

Digital Nugget

Ethereum’s strategic pivot reprioritising their roadmap to focus on scalability of the mainnet and enhancing the user experience has led to a 5-10 percent outperformance of Ether over Solana. However, sentiment on Ethereum remains poor for now despite Ethereum’s continued leading position and still superior revenue generation.

Protocol fees and revenues: ratio of Ethereum/Solana

Source: Token Terminal

The market has focused on Solana’s greater transaction volumes and its recent dominance in fee generation. However, protocol revenues continue to substantially lag Ethereum (with the exception of the brief period around the issuance of the Trump family tokens on Solana).

Solana tokens have a similar problem to Ether

Layer 2s cannibalising Ethereum’s revenues and growth has been one of the key criticisms levelled at Ethereum after the mainnet’s transaction volumes failed to grow following the Dencun upgrade which lowered costs for Layer 2s. This has led the market to see Ether as less valuable.

At the same time, a comparable issue affecting the value of the Solana tokens is overlooked. Although Solana’s market share in Layer 1 fee generation has overtaken Ethereum over the last few months, most of the fees are paid to validators and do not grow the value of the Solana token. In fact, when it comes to revenues, Ethereum still exceeds Solana 2-2.5x.

Admittedly, tokenomic models are easier to modify than the scaling strategy. Additionally, most protocol layer tokens trade at enormous multiples of current revenues, with the assumption that growth is expected to occur far in the future, and the long-time horizon offers plenty of opportunities for adjusting the tokenomics. Having said that, for now Solana does not appear inclined to drive more value to the token as a proposal on adjusting the inflation rate which would have had a similar effect was conclusively voted down recently.

Solana’s revenues are less stable

While Solana’s revenues are roughly half of Ethereum’s, its market capitalisation is only a third. This suggests more room for Solana to outperform – especially with the tailwind of a better narrative and sentiment. However, the market has always assessed Solana’s revenues as less stable, being highly concentrated in the memecoin sector, and this will limit outperformance as it could be argued that the differential in valuation is accounted for by this difference in revenue sources.

Solana’s recent progress in DeFi TVL market share, and any future market share gains in more stable revenue sources such as tokenisation, stablecoins, AI related applications would allow Solana to continue to gain on Ether.

Relative trends

Ethereum still maintains a dominant market share in the use cases that are showing traction and have the support of governments, regulators, and traditional financial institutions such as tokenisation, stablecoins and DeFi.

Its market share in tokenised assets has grown recently to 57 percent, with Ethereum based Layer 2 ZKsync holding a further 20 percent. BlackRock’s leading tokenised money market fund BUIDL has 93 percent of its assets on Ethereum, and BlackRock emphasised the value they see in its “decentralization, credibility and security.”

Despite many tokenised products also available on Solana, its market share remains below 3 percent.

Although Ethereum’s stablecoin market share has declined year-to-date, it remains above 50 percent, and while Solana doubled its market share, it still remains just above 5 percent.

Solana has made the most convincing headway in DeFi TVL, with its market share vs Ethereum moving from 9.5 percent vs 63.5 percent to 11.5 percent vs 55 percent since the beginning of the year.

Sentiment

The narratives continue to strongly favour Solana despite the reshuffle of the Ethereum foundation, the pivot on its development roadmap and the recognition of the need to adjust its go-to-market strategy and to clarify and articulate the value proposition.

Nonetheless after the sustained underperformance of the last two years, a technical reversal of the trend is possible and the recent strategic pivot at Ethereum may provide narrative support.

Outlook

Sentiment aside, we believe the medium-term outlook will primarily be shaped by traditional financial institutions’ platform choices to bring their product offerings.

In this regard, we do not yet see convincing signs that Solana would be the preferred choice as Ethereum’s security, stability and longevity are highly prized.

Additionally, network effects in crypto are very hard to overcome – just as they are in other tech fields such as social media. Up to now, all “Ethereum killers” have failed to encroach on Ethereum’s dominance and despite several of these projects bringing brilliant innovations, addressing real challenges such as scalability or interoperability, most have faded away until now.

Summary

Ethereum’s 2-year long underperformance vs Solana has been temporarily arrested since the strategic pivot on the development roadmap. Ethereum’s medium to long term fundamental advantages also remain in place for now, despite some meaningful gains by Solana, while the token value continues to be supported by revenues running at double the rate of Solana’s revenues.

Read next article

Local restrictions – Provision of cross-border services

It looks like you are using a computer with an IP address located outside of Switzerland.
If you are located in Switzerland, please click “Continue” to access the Sygnum Bank AG (Sygnum) website.

If you are not located in Switzerland, please read below.

This website and the information contained herein are addressed solely to persons residing or domiciled in Switzerland.

Sygnum is a regulated bank supervised by the Swiss Market Financial Authority (FINMA). The products and services on this website are authorised in Switzerland. Sygnum cannot promote its products and services in other countries where it is not authorised by the supervisory authority of that country to do so.

If you click on “Continue” to visit this website, you confirm that you have read and understood the above and you are visiting this website on your own initiative without any active promotion or solicitation from Sygnum.

RETURN CONTINUE

Investor qualification

The following content is available to qualified investors. Please confirm your details below to visit this page, or please see our other digital asset updates here.

Qualified investor - As defined in Art. 10 (3) ff. of the Swiss Collective Investment Schemes Act. In particular, natural persons who have the knowledge required to comprehend the risks of the investments based on their individual education and professional experience or based on comparable experience in the financial sector and hold liquid assets of at least CHF 500,000.

A US Person is defined as (a) an individual who is a citizen or resident of the United States for federal income tax purposes; (b) a corporation, partnership or other entity created or organised under the laws of or existing in the United States; (c) an estate or trust the income of which is subject to United States federal income taxes regardless of whether such income is effectively connected with a United States trade or business.

Disclaimer:

The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorization or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

Mandatory fields

Security alert

Stay alert to fraudulent communications. Sygnum will never post messages on social media or private messaging applications regarding Sygnum banking access or logins. If you have concerns, contact us.

Close