Why I’m Betting Big on Solana: A Deep Dive

When I joined BlockFi, there was one chain that everyone raved about.

We were planning for a future with crypto embedded in everything we did. We needed a chain that would scale to the tens of thousands of customers using our crypto credit card and the hundreds of thousands using our yield products.

A chain everyone felt confident could secure the millions of dollars in order flow on our exchange and the billions in lending that ran thru our system.

We needed a tech that was ready for institutional money and consumer volume.

And that chain wasn't Ethereum.

It was Solana, and today SOL is my largest bag.

Solana is like Ethereum, but cheaper and faster

Solana is a smart contract platform, similar to Ethereum.

Like Ethereum, Solana allows developers to build dApps on top of the network (dApps are "decentralized apps" -- apps built on blockchains).

There are silly apps for meme coin gambling, sophisticated apps for trading all sorts of assets, and applications that you'd never even know were using blockchain under the hood (like for buying rare liquors and loyalty points in a restaurant).

Unlike Ethereum, using Solana is crazy cheap and fast — like 5,000x cheaper and 900x faster. We're talking pennies per transaction and execution speeds on par with Visa or MasterCard.

The Scalability Trilemma

How is Solana so much faster and cheaper than Ethereum? Like everything in life, it's all about tradeoffs.

The Scalability Trilemma is a fundamental tradeoff in blockchain design. There are three major priorities when building blockchain systems: decentralization, security, and scalability. You need all 3, but when you turn up the dials on one, you have to dial them back on another.

Decentralization ensures that no single entity has control over the network, security protects the network from attacks and fraud, and scalability allows the network to handle a large number of transactions without failing.

Ethereum is designed to maximize security and decentralization at the expense of scalability.

Solana chose a different path, optimizing for security and scalability over decentralization. This means it relies on fewer but more powerful computers (nodes) to run the network. These high-performance nodes allow Solana to process transactions very quickly and cheaply.

Solana can process 65,000 transactions per second (TPS), settle those transactions in 1-5 seconds, and do it at a cost of a penny or less.

For context, Visa claims a capacity of 24,000 TPS, but on average only requires 1,700 TPS to service the bazillion Visa cards in circulation globally.

How does Solana make economic sense?

Low fees, it turns out, are a big competitive advantage and drive a lot of market share.

Imagine this user experience, which is 100% real and happened to me and anyone else in crypto before 2023. You have $100 to put into crypto. You head over to Uniswap and click to buy it. Unfortunately, there’s alot of network traffic for some reason and fees are high.

The transaction fee (called “gas”) comes back at $50. Five. Zero. Dollars. To buy $100. Not good. And that’s a gentle example. I’ve seen much worse. Complicated actions in DeFi could run you a few hundred.

That sucks. No one is going to use that for any consumer reason.

Now, think for a second about some of the use cases that are unlocked when high fees and slow tx's become free and instant:

The improvement in user experience is a massive unlock for crypto. Just look how the cumulative fees on Solana exploded during this year's meme coin tomfuckery (chart below). Thousands of meme coins trading millions of times per day at just a few pennies per transaction. It adds up!

Daily fee’s on Solana have exploded from about $35,000 per day last June to $1.8 million per day now. That’s a 5,000% increase year over year.

MEV - The other red meat

Fees are not the only way that a protocol can make money. There's also MEV.

MEV, or Miner Extractable Value (some call it "maximum extractable value"), is the extra profit that miners (or validators in proof-of-stake systems like Solana and Ethereum) can make by reordering, including, or excluding transactions within the blocks they produce.

Huh? Wut? Yeah. MEV is complicated. Think about it like this:

You, a degenerate crypto addict, want to use Solana to YOLO your spouse’s life savings into $WIF because that dog is so gd cute in that hat. After you click "BUY" and before your $WIF shows up in your wallet, your transaction goes thru a series of steps where it is received, prioritized, assigned to a block, processed, validated, and settled. Lots of moving parts.

MEV is the litany of ways that validators can monkey with that process to extract value. It's not apples-to-apples, but it's kinda sorta like how banks, merchants, and credit card companies coordinate to extract money from transactions when you tap your card at the store.

Only a few months ago, MEV on Solana was miniscule compared to Ethereum. Basically zero. A rounding error.

That's no longer the case.

In early May, Solana MEV actually exceeded that of Ethereum for the first time.

Low fees drives user growth and MEV drives the economics

Let's recap:

• Solana is crazy cheap and crazy fast.

• Dev’s like that because it unlocks better use cases and biz models.

• Users like that because there are now cooler apps, doing cooler things, at reasonable costs.

This makes Solana a better ecosystem and attracts more users. The cheaper fees and faster transactions are a competitive advantage. You see the flywheel starting to turn here?

To keep it going, Solana (and its competitors) will continue working to drive down fees. Lower fees, better experience, more users, bigger pie, lower fees, better experience…..

Because the flywheel is powered by UX improvements from low fees, over time we should expect the price of fees to approach zero.

• If fees approach zero over time (seems likely to me), MEV becomes the primary economic engine of the protocol

Solana has demonstrated it can generate plenty of MEV for it's validators, already exceeding Ethereum on high traffic days. If the cost of transactions continues to decline (which it will — Solana is preparing to launch an upgrade this year that will reduce fees and increase TPS even more), Solana’s economics will be fine.

And it will continue to grow because its fast, cheap, and has better apps.

Risks

Rapid fire:

Regulatory - Every token faces this, but Solana especially so. By prioritizing scalability over decentralization, SOL is at higher risk of being deemed a security (decentralization is key consideration in the Howey Test wrt crypto tokens). That would be bad, but I dont think catastrophic.

Competition - There's a ton of competition catching up to Solana. The Ethereum layer 2 ecosystem is on fire right now with Base, Arbitrum, and Optimism leading the way. There are dozens of others nipping at their heels.

Plus, there's the next generation Layer 1 chains like Sui, Sei, Monad, Aptos, BeraChain, and more. These all take new technical approaches to solve the Scalability Trilemma, lower fees, speed up transactions, and each will be fighting tooth and nail for your attention and liquidity.

Technology - Solana has a history of bugs that take the network down for extended periods of time. It's happened so much that at this point the market largely shrugs it off. However, it is the kind of thing that can crush short term momentum (this happened in early April of this year - network congestion slowed down the network and caused a ton of failed transactions. Took the wind right out of the sails — absolute momentum crusher).

Market Risk - Markets are fickle. There's always risk that the sentiment will turn and your coins will lag. This happened to Ethereum this year (until the ETF approval anyway), and ETH's price trailed the market. Crypto is a herd mentality, which is great when things pump but terrible when they dump.

Bullish Solana

The hottest projects in crypto today are by and large on Solana (WIF and the rest of the memes, Jito, Jupiter, Pyth, Helium, Blackbird, et al).

Solana has the attention and the price action. This ecosystem is driving the narrative.

The token price has shown massive convexity both last cycle ($3 to $300 in less than a year) and already this cycle (25x from the FTX bottom to the March '24 high).

And the fundamentals make sense for a sustainable economic model for the future.

As a comp, Ethereum's market cap today is 5.8x higher than Solana. Ethereum is still much larger than Solana, but Solana is growing very fast.

Solana doesn't have any scary token unlocks to crush our gains from the supply side either.

I see so much upside in this token. It's my largest single token and my largest ecosystem concentration.

Solana is ranging around $170 recently. I plan to take profit incrementally between $500 and $1,000.

Portfolio Update

Last week I mentioned Robinhood as a stock to bet on the broader impacts of an Ethereum ETF. Right on queue, HOOD announced the acquisition of BitStamp this week, one of the oldest crypto exchanges. If you liked Robinhood as a crypto play last week, you should love it this week (I do not own HOOD).

This week I bought ONDO on momentum in my systematic portfolio. Ondo is a project on Ethereum that helps bring real world assets (think financial assets like treasuries/bonds) on-chain. Ondo's performance over the past few weeks stands out in the sea of chop and it triggered a buy signal on my trend filter.

I also reduced my TIA position further this week as I continue to scale that position down as part of my dynamic portfolio allocations.

Market Vibes