From syncracy Written By Ryan Watkins

In Q4’23 Syncracy released a public thesis on Solana. In it we argued that SOL was severely mispriced at 13% of Ethereum’s valuation given its industry-leading scalability, unique integrated design, and growing developer traction. At the time, the case for Solana was mostly qualitative as the data confirming that thesis was still emerging. The argument essentially boiled down to Solana offering a rare opportunity to own a foundational project, at a distressed valuation, that unlocked new possibilities at a scale comparable to Bitcoin and Ethereum. In other words, while the Solana story was undeniably exciting, it was driven more by potential, than momentum.

Fast forward a year, and the data tells an even more compelling story. As the ghost of FTX faded into memory and industry tailwinds strengthened following the Bitcoin ETF launch, Solana’s onchain economy surged with activity. With advantages in speed, latency, cost, and mobile accessibility, Solana quickly became the center of retail trading activity, as well as the emerging DePIN and Payments sectors. Today, Solana rivals Ethereum across nearly every meaningful economic indicator, and SOL trades at 33% of Ethereum’s valuation, having risen 18x from its bear market low. 

The question now is: where does Solana go from here? Although SOL is becoming a consensus bet among industry insiders, with many viewing it as the leading competitor to Ethereum, we believe the broader market is still underestimating Solana’s true potential. The argument naturally begins with Solana’s technical architecture, which provides structural advantages in performance and composability – advantages that will likely compound as Solana infrastructure continues advancing. However, this argument is not what we aim to flesh out below as it's been well covered both in our original Solana thesis and elsewhere. Instead, we turn our attention to Solana’s accelerating fundamentals and emerging network effects, which we believe provide the strongest case for SOL from here on out.

In essence, Solana’s growing ecosystem of assets, applications, businesses, and users is becoming a compounding superstructure, positioning Solana to be a secular winner of the cryptoeconomy. Over time these growing network effects will weigh more than Solana’s technical advantages and become its most important driver of value creation. We believe this case is revealed through the data we share below.

Follow the Data, Follow the Money

Solana is eating market share from Ethereum. This is no longer conjecture, it is abundantly evident in the data. As cyclical tailwinds strengthened over the past twelve months, Solana became the industry’s home for retail financial activity. The primary attributes that positioned Solana to capture this relative to peers were its fast transactions, low-cost asset creation, and seamless mobile access. These continue to be important advantages given that almost every use case for blockchains is derivative of sending, exchanging, and intermediating the relationships between assets.

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The headline metrics from this chart are real economic value (REV) and total application revenue (TAR) which combined provide one the strongest indicators of value creation. REV is the most direct measure of demand for blockspace as it represents fees paid to validators for their services. While this metric should not be used as a basis for valuation, it is a strong indicator of a blockchain’s financial health. In a similar vein, TAR is the most direct measure of demand for blockchain applications as it represents fees paid to protocols for their services. These fees accrue to token holders and application builders as opposed to blockchain validators, and they provide a strong indicator of a blockchain’s economic output. As Solana’s economy continues expanding both these metrics should increase over time.

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As mentioned previously, the primary driver of this activity has been Solana’s financial sector. In particular, Solana has become the epicenter of an onchain mania, with users creating and trading memecoins en masse. This trend has emerged for a handful of reasons, ranging from a revolt against overpriced venture backed assets to a disinterest in application tokens which are generally richly valued and unexciting. However, the most salient reason is that the history of the cryptoeconomy is simply a history of speculation. This phenomenon of onchain speculation is exactly what happened during the birth of DeFi on Ethereum in 2020 as well. In either case what’s important is that experiments are conducted and infrastructure gets tested. After all, if the industry’s north star is to shift the global financial system onto blockchains, these networks need to be battle tested. The most positive sign we’re making progress is that decentralized financial infrastructure is already eating share from centralized financial infrastructure within the cryptoeconomy.

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With this in mind, it should come as no surprise that Solana ecosystem applications are thriving. As shown earlier, for the first time ever last month, Solana applications are collectively generating more revenue than Ethereum applications. The leading applications on Solana by revenue center around trading, with non-trading related financial applications in the long-tail. Many of these applications are growing significantly faster than their counterparts on Ethereum given they’re riding powerful tailwinds on Solana. While Ethereum currently has more diversity within its highest revenue generating applications, we expect Solana to catch up quickly as both its non-trading financial applications and non-financial applications like DePINs continue to ramp.

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There’s never been a better time to build an application on Solana as outcomes for builders expand in both scale and speed. The defining protocol of Solana’s rise over the past year, Pumpdotfun, became the fastest growing application in the history of the cryptoeconomy, reaching $100 million in revenue in 217 days. Today Pump is generating $348 million in run-rate annual revenue making it the industry’s leading application by revenue. While memecoin trading may ultimately be nothing more than a blockchain native form of gambling, the rise of Pump provides an important signal for builders on Solana.

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First and foremost Pump is a powerful signal to developers to build on Solana. If simple contracts for minting arbitrary tokens can generate $100 million in revenue in just 7 months, imagine the potential for more complex, widely appealing applications. Additionally, in-demand user experiences are now viable on Solana, with applications like Pump acting as Trojan horses for consumer adoption and storing wealth onchain. When millions download Phantom on their mobile devices to trade on Solana, it’s likely they’ll explore beyond memecoins as the ecosystem continues to grow. With practically zero upfront costs for launching applications – developers just write code, deploy it, and let users cover operating costs through gas fees – it's not hard to imagine a continued explosion in compelling onchain experiences.

If Pump alone is not convincing, consider Solana’s nine application unicorns. Notably, four of these unicorns – Helium, Render, IoNET, and Grass – are non-financial applications in the DePIN sector, which may have the most potential for real world impact in the near-future. Some of these valuations are of course speculative, but many are driven by the fact that they’re generating real revenue. This can partially be seen in the revenue data shared above, and is further underscored by the fact that Solana-based applications are capturing an increasing share of the network’s global fee pool. This is an important sign, because as Microsoft founder Bill Gates once said with respect to successful platforms, “a platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.”

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Solana’s industry leading DePIN sector is notable for a number of reasons. The big idea is that by crowdsourcing capital expenditures, settling transactions onchain, and spreading responsibilities across many independent operators, DePINs can create more scalable, efficient, and resilient infrastructure. The impact is already evident: Hivemapper, for instance, has mapped 28% of global roads in less than two years at a fraction of Google’s cost, while Helium has built a 20,000 device mobile network providing offload coverage to two of the top three U.S. wireless carriers. From collapsing home internet costs to orchestrating distributed AI workloads, Solana’s DePIN sector is rapidly demonstrating product-market fit in a way that even laymen can understand. As the sector continues to accelerate, it increases the likelihood of more extreme upside scenarios versus Ethereum, given DePIN’s potential to transcend the circularity of most applications in the cryptoeconomy and deliver tangible real world value.

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Solana as a Compounding Digital Superstructure

Five years ago, Syncracy’s Head of Research, Wilson Withiam, wrote a prescient thesis about blockchain flywheels. In it he argued that composability accelerates innovation within blockchain ecosystems by enabling developers to build on each others’ code like lego blocks and leverage existing user bases for growth. Today, this thesis is realized in Ethereum and Solana, which both derive their growth from intricate webs of assets, applications, businesses, and users.

The birth of these ecosystems begins with a groundbreaking innovation that expands the boundaries of what’s possible. For Ethereum, it was the promise of decentralized applications and the advent of smart contracts. For Solana, it was the vision of a decentralized Nasdaq, delivered through a high-performance, parallelized system. These breakthroughs gave each platform an early advantage, equipping developers with the tools to create novel user experiences and unlock compounding innovation.

As these ecosystems reach critical mass, the flywheel effect takes hold. Developers building on one another’s work transform blockchains into digital superstructures, where individual lego blocks combine to generate value far greater than the sum of their parts. This dynamic creates powerful network effects for blockchains despite their open source nature. While competitors can fork code, they cannot copy the emergent properties of a blockchain entering its compound growth stage. 

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While Ethereum currently outpaces Solana in institutionalization, developer activity, and total assets stored onchain, we believe Ethereum’s early advantages are beginning to erode. For example, Ethereum’s regulatory moat that positioned it to be the first asset beyond Bitcoin to get an ETF, was significantly weakened with the outcome of the recent U.S. presidential election. With SOL being the third largest asset in the cryptoeconomy behind BTC and ETH, it is now the most likely next ETF candidate to be approved in 2025. Similarly while Ethereum had a five year head start on Solana, the developer gap continues to close as the Solana opportunity becomes increasingly apparent as demonstrated in the prior section.

While a significant disparity still exists in total assets stored onchain, we similarly believe that this gap will close over time. For one, total assets stored onchain is often a lagging indicator given many of these assets are denominated in the base token (e.g ETH and SOL) anyways. Moreover, demand to store assets onchain is closely tied with a blockchain’s perceived trustworthiness – a product of its track record and security produced through decentralization. This perceived trustworthiness plays a significant role in why Solana rivals Ethereum in nearly every “flow” based metric, while Ethereum still leads by a wide margin in “stock” based metrics.

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Although Solana can only compete with Ethereum’s track record through time, it can compete with its security produced through decentralization through community building and engineering. There are two dimensions of decentralization to consider here: political decentralization and architectural decentralization. 

Political decentralization reflects the distribution of power among stakeholders. Although difficult to measure precisely, it’s evident that Solana’s reliance on Solana Labs and the Solana Foundation makes it less decentralized than Ethereum’s grassroots-driven community. Over time, we believe this gap could narrow, but some differences may persist due to divergent development philosophies. Solana’s engineering-focused ethos resembles a Silicon Valley startup, prioritizing speed and product development, whereas Ethereum’s research-driven approach resembles a democratic government, emphasizing deliberation and stability. While Solana’s "move fast and break things" mentality may lead to more instability, it may also lead to faster product evolution.

In contrast, architectural decentralization, which is quantifiable, shows Solana rapidly closing the gap with Ethereum. Solana now boasts 47% of Ethereum’s full nodes, with node operation costs only $4,000 greater. This is a key metric of decentralization, as full nodes are responsible for verifying and maintaining the state of the blockchain. The broader the distribution of nodes across independent parties, the more credibly neutral a blockchain becomes. As Solana continues to outpace Ethereum in onchain activity, its node count is likely to grow as well. The demand for nodes typically follows blockchain activity, driven by individuals, companies, and organizations that need them for operational purposes.

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As these decentralization gaps narrow and Solana’s market capitalization converges with Ethereum’s, we believe the final gap – assets stored onchain – follow suit.

The Battle for the Throne

For a long time Ethereum’s seat upon the throne has gone uncontested. While many so-called Ethereum “killers” have attempted to dethrone Ethereum through empty promises of greater scalability and superior applications, none have managed to even dent Ethereum’s market share in practice. Ethereum’s network effects have proven to be too formidable for any competitor lacking a product that was truly 10x better.

With its unique integrated design and 10x improvements in cost and scalability, Solana has built a differentiated application ecosystem capable of rivaling Ethereum. In the two years since the FTX bottom, Solana’s onchain activity has boomed, cementing its legitimacy as a serious contender to Ethereum’s throne. We believe this momentum will continue as Solana’s developer community expands and its upcoming Firedancer upgrade scales the system another 1 - 2 orders of magnitude. 

Nevertheless market participants continue to underestimate Solana’s potential, preferring the warmth of Ethereum’s consensus market leadership despite increasing evidence to the contrary. While we recognize that Ethereum and Solana’s divergent design philosophies may allow both to thrive long-term, we believe the valuation gap between them will narrow and reach parity, reflecting a more peer-like relationship. At present, Solana trades at just 33% of Ethereum’s valuation despite rivaling or even surpassing Ethereum across nearly every key fundamental indicator – a gap that makes increasingly less sense with each passing day.

As noted in our initial Solana thesis, it is not often we come across a project that unlocks new possibilities at a scale comparable to Bitcoin and Ethereum. Even rarer to come across such a project that is so clearly fundamentally mispriced while offering deep liquidity to size big into the idea.

We couldn’t be more excited to continue backing Solana as it rises from the ashes. The throne for blockchain supremacy is up for grabs.

Important Legal Notices

While this article is intended to express the views held by Syncracy Operational Management LLC (“Syncracy”), nothing in this article is intended to constitute or form part of, and should not be construed as, an issue for sale or subscription of, or solicitation of any offer or invitation to subscribe for, underwrite, or otherwise acquire or dispose of any security, including any interest in any private investment fund managed by Syncracy. Any such offer may only be made pursuant to a formal confidential private placement memorandum of any such fund, which may be furnished to potential investors upon request and which will contain important information to be considered in connection with any such investment, including risk factors associated with making any investment in any such fund. Further, nothing in this correspondence is, or is intended to be treated as, investment or tax advice.  Each recipient should consult their own legal, tax and other professional advisors in connection with investment decisions. Any investment involves the risk of a loss, including the risk of a complete loss. 

Syncracy’s views with respect to any investment, including SOL, could change at any time.  Further, while Syncracy currently holds a long position in SOL, Syncracy will not provide any recipient of this article with notice if Syncracy unwinds its position or its views change.