The continuous surge of Solana: Market speculation and the battle of public chains

Author: Ryan Watkins, Messari

Translator & Editor's Note: Xu Xiaopeng, Mint Ventures

"This chain is not used at all. Compared to Ethereum, the valuation of this ghost chain is absurd."

------ A comment on Twitter

Sometimes people forget that the market is forward-looking. But before we delve into the valuation of smart contract platforms, let's first understand some background.

Today, smart contract platforms have once again become the center of speculation, but this time it's a bit different. Unlike the speculative wave for smart contract platforms in previous cycles, today's smart contract platforms are no longer just the idea of a "world computer"; they are active ecosystems composed of users, capital, and applications, collectively driving trillions of dollars in economic activity. Ethereum is leading in this regard, now holding over $700 billion in assets, with quarterly trading volumes exceeding $2.5 trillion, and running thousands of decentralized applications. In return, Ethereum's market capitalization recently reached a historic high of $450 billion.

However, Ethereum is not alone in this surge.

As Ethereum reaches a critical point in its scalability roadmap, its performance is struggling to meet the growing user demand, opening a window of opportunity for other public chains. With promises of scalability, competitors to those smart contract platforms have begun to take action, attracting users to their own chains through user experience optimization and various incentive policies. As Ethereum's gas costs continue to soar, the activity on these competitors' chains has significantly increased. Unsurprisingly, as Ethereum's dominance is challenged and questioned, speculators are buying tokens from these competing platforms.

Trends in Market Capitalization Share of Public Chain Platforms

However, as many have pointed out, price movements do not always represent value. Even with a significant increase in activity among Ethereum's competitors, they still represent only a small fraction compared to Ethereum. So small that you start to wonder: Is the valuation of these public chains reasonable? Why do some competitors' tokens have market capitalizations that are a double-digit percentage of Ethereum's, yet their relative activity percentage is only in single digits?

Editor's Note: The "activity" referred to here is more about the volume of funds and activities in on-chain applications, rather than active addresses, transaction counts, and other activity metrics. Otherwise, BSC's active address count and transaction numbers have already far exceeded those of Ethereum, and Polygon's transaction counts are also higher than Ethereum's.

Valuation 101

First, there is currently no consensus valuation model for smart contract platforms. The native tokens of these platforms have multiple intrinsic properties that make them different from any assets that existed before. In many ways, they are similar to currencies, as they serve as the primary means of value storage and transaction medium in their economic ecosystems. In other ways, they resemble equities, as investors have claims on the fees earned from processing transactions. In yet other aspects, they are like commodities, as they are essential resources for the operation and computation of on-chain smart contracts. This combination of intrinsic properties allows them to transcend the value of three traditional asset classes and provides diverse intrinsic motivations for their valuation uplift. But it also makes them extremely difficult to value, especially considering that these projects are still in their early stages and face uncertain futures.

Nevertheless, investors are still attempting to conduct absolute and relative valuations of these assets through a combination of quantitative and qualitative approaches. They agree on one thing: whichever smart contract platform ultimately prevails will be worth a lot of money (trillions of dollars).

The Intrinsic Value Triangle of Public Chain Tokens

At the most basic level, investors assess assets based on two things: fundamentals and investment willingness.

Fundamentals typically involve quantitative factors (KPIs): such as total value locked, transaction amounts, and fees; qualitative factors include: competitive advantages, developer interest, and community levels, among others. The assessment of these fundamental elements is based on historical data on one hand and forward-looking predictions about potential on the other. Historical performance provides a sense of where things have come from, while future performance offers a sense of where things might go. The market is always forward-looking, and the future value that an asset will create is the core driver of its valuation.

Editor's Note: KPIs stands for Key Performance Indicators, which are core evaluation criteria for the performance of a system or individual.

Investment willingness also involves both quantitative and qualitative dimensions. It determines how much investors are currently willing to pay for the fundamentals over the next "X" years. This is more of an art than a science and is influenced by the prices of reference assets (relative valuation), macroeconomic conditions, market sentiment, narratives, memes (which have a significant impact), and more.

So how should these be applied to investments in smart contract platforms?

Do you remember the quote I mentioned at the beginning regarding smart contract platforms?

"This chain is not used at all. Compared to Ethereum, the valuation of this ghost chain is absurd." A comment on Twitter said this.

Well, the reason this statement is incorrect is that, as we mentioned earlier, the market looks forward rather than backward. Speculators are not valuing Ethereum's competitors based on their current fundamentals; they are assessing them based on the fundamentals they might have in the future.

If we take Ethereum as a reference, the changes in fundamentals can be very rapid. Eighteen months ago, Ethereum settled less than $1 billion in transactions daily, held less than $20 billion in assets, and only ran hundreds of applications with active users (if the users were real). Eighteen months later, supported by the birth of breakthrough applications, growth driven by incentives, and one of the strongest bull markets in the industry's history, Ethereum's ecosystem has grown by nearly two orders of magnitude. Can Ethereum's competitors replicate this growth in the next 18 months? Or even grow faster? This is what smart contract speculators are betting on.

Mid-game Battle

With all major smart contract platforms launching their mainnets, application ecosystems are beginning to develop on each platform, and bridges for asset transfers between them are being established, the smart contract war has entered a new phase. The competitive intentions between platforms are no longer a secret, and the battle for users, developers, and capital is fierce.

Given Ethereum's years of lead and its often-celebrated developer network effects, it is not easy to capture attention from Ethereum, but competitors are implementing various innovative strategies to achieve this goal. In some cases, this includes introducing large liquidity mining incentives to encourage users to try their platforms, attempting to replicate Ethereum's 2020 "DeFi Summer" success. In other cases, public chain projects offer subsidies to developers to help their applications attract liquidity. In other aspects, they are reaching out to developer communities outside the crypto world, hosting hackathons, and providing funding for builders. In all these examples, public chains are aggressively pursuing growth. The window of opportunity remains open, even as Ethereum has also launched its suite of scalability solutions.

Let me ask again, why is all this important?

Uncertainty brings opportunity, and opportunity brings speculation. As the smart contract war begins to enter its next phase, competitors are taking risks to capture market share, the future of the industry, and trillions of dollars in market capitalization from Ethereum. In this context, it is not surprising that valuations in the smart contract space appear so exuberant. Moreover, this situation may not disappear anytime soon.

Winner Takes All?

We have been living in a multi-chain world for some time, with Bitcoin and Ethereum as the two dominant forces in the industry. As a variety of blockchains emerge across the industry, is there still room for a third force? Perhaps a fourth or fifth? Or could Ethereum potentially defeat all other public chains and even replace Bitcoin, taking the position of value storage that occupies the core of the industry? The answer depends on the ultimate specialization of blockchains and the extent to which the dominant public chain covers the blockchain landscape.

This answer will have significant implications for how the multi-trillion dollar pie will be distributed among leading public chains. The crypto economy, composed of a few dominant public chains, is not much different from the world we have today with five tech companies (Apple, Amazon, Microsoft, Google, Facebook) each valued over $1 trillion. Perhaps this model also applies to blockchains, as they are becoming increasingly easier to interoperate while also designing many features that are not present on other chains. We may ultimately find that the value created by these public chains working together is greater than the value they create individually. If this is indeed the direction of the future, then there are astonishing opportunities among Ethereum's competitors, providing even more justification for the significant speculation in the industry: a competitor not only has the potential to replace Ethereum as the top chain but may also have enough space for more than one public chain to rise to the top.

Ethereum: Valuation Magnet

In the remaining time of this bull market, Ethereum's valuation may continue to serve as a valuation magnet for competitors—a constantly changing reference market cap, representing the value of being the leading smart contract platform in the industry. Competitors will continue to price themselves relative to Ethereum based on their absolute and relative growth prospects. Similarly, as the market continues to heat up and popularity rises, investors may remain willing to pay more for this growth.

Ethereum may continue to maintain its leading position while everyone else is chasing. It may continue to be the home of all grassroots innovations. It may remain the birthplace of DeFi and NFTs. It may be the first public chain to attract institutional participation at the application level. It may be the first project to reach end-users on a large scale through integration with exchanges and brokers. In all these areas, Ethereum, with its large and diverse developer community, proven protocols, and vibrant user community, will continue to lead its competitors.

But its competitors will also keep pace. As long as the market continues to grow and that multi-trillion dollar opportunity remains, speculation will continue to be active in the core area of smart contracts.

Perhaps.