From a valuation perspective, why is VanEck so optimistic about Solana?

Original Title: VanEck's Base, Bear, Bull Case: Solana Valuation by 2030

Original Authors: Patrick Bush, Matthew Sigel, VanEck

Compiled by: Karen, Foresight News

• In this study, we simulate a scenario where Solana is the first blockchain to host an application with over 100 million users.
• We assume that the take rate of SOL is only 20% of ETH's, and due to fundamental differences in community ideology, its market share is less than half of ETH's.
• We see a reliable path for SOL token holders to achieve $8 billion in revenue by 2030.

Table of Contents

• Solana's Approach: Usability
• Solana vs Ethereum: Ideological Comparison
• Solana's Cost and Revenue Challenges
• Overview of Solana Valuation Scenarios in 2023
• Projected Transaction Landscape for Solana by 2030
• Solana's Potential: Risks and Rewards

The purpose of Smart Contract Platforms (SCP) is to host applications that allow users to engage in efficient, uncensored economic activities while minimizing third-party rent extraction from these activities.

Despite the current diversity of blockchains, the user base for all blockchains is small compared to users conducting transactions off-chain. There are approximately 5.5 million active unique addresses on smart contract platforms daily, with about 44 million active unique addresses monthly.

However, this data likely greatly exaggerates the number of users, as many users control multiple addresses. Even when taking these figures at face value, they are still relatively low compared to the 2 billion users interacting with Facebook daily and the 431 million users using PayPal monthly.

The slow pace of blockchain adoption is due to some cumbersome issues with using blockchains, and there is still little that can be done on-chain beyond value exchange and speculation.

To achieve widespread adoption of cryptocurrency and expand its $1.3 trillion market cap, there needs to be real appeal for those who are neither decentralized extremists nor libertarian zealots; in other words, a killer app is needed.

In this way, the blockchain hosting that killer app will gain tremendous benefits from the activities generated by that app. In this study, we simulate a scenario where Solana becomes the first blockchain to host a single application that attracts over 100 million users.

SCP Monthly Active Users

Solana's potential begins with its founding team combining radical experimentation with applied science to greatly enhance the scalability of the blockchain.

While other blockchains have chosen clever paths to circumvent the limitations of distributed ledgers, Solana has opted to push the technical feasibility issues to the limit and then think backward from there.

The Ethereum ecosystem and many other blockchains have chosen a modular vision, where different blockchains focus on the core functionalities of Layer 1 chains.

On the other hand, Solana has been working to optimize every component of its blockchain, striving for higher transaction throughput and extreme efficiency.

As a result, Solana has a significant advantage in blockchain processing capability compared to its traditional competitors. More importantly, Solana has translated its pioneering spirit into an ecosystem philosophy of risk-taking and technological optimism.

Solana has spawned various fascinating experiments, including blockchain phones, NFTs containing applications, and consumer-facing products like decentralized maps and automotive data collection.

Compared to other ecosystems, project builders on Solana are more focused on creating things that could have a substantial impact on everyday life.

Solana's Path: Usability

The probability of a blockchain network hosting the next "killer app" depends on the chain's ability to make the app's use fast, convenient, and accessible. The stronger this ability, the better the environment for users to rely on.

The key question is how to measure a blockchain's capability and translate it into usability. A commonly used metric—transactions per second (TPS)—is an inadequate measure that is easily manipulated.

In reality, blockchain teams can improve this metric through various tricks, including changing the amount of data contained in each transaction, abandoning transaction ordering, and limiting the parts of the ledger that transactions can modify.

In fact, the best metric for truly measuring blockchain capacity is not TPS but data throughput.

Data throughput involves the blockchain receiving, processing, and ordering data, then reaching consensus on the impact of that data on the blockchain ledger.

Data throughput is determined by measuring the amount of data the blockchain can receive and apply within a certain timeframe.

Currently, Solana's data throughput exceeds that of any other existing blockchain. In fact, Solana's data capacity surpasses that of most planned blockchains, and Solana's next major software upgrade—Firedancer—is expected to increase Solana's current capacity tenfold. While we cannot determine how much data the blockchain hosting the next killer app will need to handle, we can imagine that over 100 million users will push the blockchain's scalability to its limits.

Data Throughput Comparison MB/S

Solana leverages this data throughput capability to address user concerns. Compared to most other chains, Solana can provide relatively quick feedback to users because it can continuously process transactions.

Take Ethereum as an example; Ethereum aggregates user-submitted transactions into a waiting area called the mempool. Then, Ethereum validators (block builders in the new paradigm) select and order transactions from the pool based on the price provided by each transaction. Every 12 seconds, transactions are executed, and blocks containing these transactions are transmitted to other nodes in the Ethereum network. Thus, Ethereum processes transactions at discrete time intervals.

This method of processing transactions is much slower than Solana's, leading to longer wait times for users. On Ethereum, users must wait for the entire process to complete before knowing whether their transaction has been completed. Typically, this takes several minutes.

In contrast, Solana begins processing transactions immediately, with processing times of about 2 seconds.

Applications on Solana

To enhance user experience, Solana has also created a novel feature called "native fee markets."

If we compare the blockchain to a data pipeline from users to the blockchain ledger, Solana's native fee market is essentially an internal sub-pipeline that allows information to flow from different users to multiple parts of the ledger simultaneously.

This addresses a core issue with Ethereum and other blockchains, as overuse of one application on Ethereum's pipeline slows down all other applications.

For example, on Ethereum, if many users attempt to mint an NFT, the resulting congestion will prevent other users from borrowing on AAVE. In the context of a killer app, users need to be able to continuously interact with the blockchain.

In contrast, Solana can use the native fee market to segment these different pipelines and charge different prices based on demand. Even if one application is experiencing high load usage, many other applications can still access Solana.

This is particularly important because the functionality of a killer app may depend on simultaneous interactions with many different applications.

Moreover, the ability to adjust the native fee market to price different types of transactions may be key for Solana to adjust prices based on usage. This could enable Solana to price differently based on the economic value of each transaction.

The native fee market may allow killer app developers to more accurately assess their costs.

Solana vs Ethereum: Ideological Comparison

Solana was built by engineers from Qualcomm, who applied their expertise in enhancing mobile network capacity to create a high-performance blockchain.

The core principle of the Solana team is to build a network that assumes consumer-grade computing power grows with Moore's Law, and network bandwidth expands accordingly. Thus, Solana's design aims to leverage hardware advancements more directly than its competitors.

We view this as an optimistic mindset, believing that progress will continue into the future. The core belief of the Solana team is that block space (i.e., the amount of data suitable for storage on-chain over a period) should be very cheap. In their view, this allows software engineers and entrepreneurs to cheaply test new use cases for the blockchain. This sharply contrasts with Ethereum's perspective. In Ethereum's paradigm, success depends on ETH as the primary (and only) collateral to secure all blockchains.

Solana's original vision was to become a "decentralized Nasdaq." While this view still holds potential, the launch of compelling non-financial consumer applications like Hivemapper, Render, and Helium has broadened the perception of Solana's capabilities.

The Solana team's open attitude towards innovative technology applications is commendable. They have attempted to bring the blockchain to mobile phones through SMS or the Solana mobile stack, enabling developers to create blockchain applications for mobile devices. Solana's experiments even led them to create phones optimized for blockchain use. Although Solana phones have been criticized for distracting from Solana's core mission, they demonstrate Solana's desire to address fundamental core user issues. It is this commitment to consumers that has helped Solana partner with Shopify, Visa, and Google to explore new use cases for Solana and drive the growth of its ecosystem.

Solana Developer Market Share

Solana's Cost vs Revenue Challenges

Solana's focus on cheap block space, experimentation, and cutting-edge technology is not without drawbacks. While providing cheap block space fosters ecosystem growth by offering projects and users a nearly cost-free sandbox environment, we must remember that providing this block space still incurs costs.

In the past 30 days, Solana generated $1.26 million in fee revenue, but during the same period, the cost of securing its blockchain through inflation of SOL to pay validators was $52.78 million.

While Solana is not at risk of collapse in the short term due to a lack of "profitability," in the long term, the cost of ensuring security must be met by organic SOL demand for the Solana blockchain.

This is because Solana's validators sell their portion of inflation tokens to cover their daily operating costs, including hardware, labor, and connectivity costs (in this calculation, we ignore voting costs).

Solana Revenue Fees vs Costs

We estimate that the total non-blockchain costs of running 1,977 Solana validator nodes are $11.8 million per year, not including labor. Therefore, we view this figure as the minimum estimate of annual SOL token sell pressure.

In terms of revenue, half of the revenue fees ($630,000) are burned, representing buying pressure for the SOL token (the other half is distributed to validators and stakers and is offset by potential sales).

Based on this simplified buying and selling pressure, we must exist in a net imbalance state of -$11.17 million, representing the buying pressure that must offset the collective selling pressure of validators.

In reality, the selling pressure from Solana validators has been offset by speculative capital.

Thus, before Solana's fee revenue improves, Solana as an ecosystem relies on the continuous influx of new speculative capital to operate in its current state.

The long-term pricing of Solana block space and the cost of using Solana is another tricky issue. A major problem with an overall chain like Solana is the difficulty of extracting value from users and returning it to token holders.

This model exists because Solana prices its transactions based on the required computation, total demand for computation, and congestion in the area where that computation is applied.

While pricing resources makes economic sense from the perspective of Solana's ability to allocate its network resources, it is illogical from the perspective of effectively pricing various user operations.

For example, sending a trade order to the Chicago Mercantile Exchange (CME) is essentially free.

However, the CME and other similar exchanges charge traders fees upon trade execution, and they may even adjust the fee amount based on whether the trade was executed after "actively accepting" another order or after another order "accepted" it. Similarly, on a platform like Twitter, posting is free, but if users choose to promote posts or target other users, higher fees will apply.

Isolated, this pricing may be less than ideal from the perspective of value extraction, but it is not irrelevant.

However, with thousands of blockchains in existence, each tailored to specific use cases, each blockchain may be able to extract value for token holders more effectively.

If a weak SOL price leads to Solana's security budget falling below its demand, this could threaten Solana's economic sustainability.

Similarly, from a resource perspective, blockchains will want to ensure that their limited resources are allocated to economically beneficial activities.

If resources are mispriced, the blockchain could be flooded with economically harmful activities, regardless of whether these activities are segmented by Solana's native fee market. This situation has already occurred, leading to more disruption for more legitimate use cases. Likewise, with Solana executing hundreds of transactions per second, low-value arbitrage trades flood the network. The native fee market may alleviate this issue, but whether this improvement is sufficiently adaptive if Solana's usage accelerates significantly remains to be seen.

We greatly appreciate Solana and its team's vision and experimental spirit, but its architecture has led to adverse outcomes that affect Solana's technical stability.

Although Solana achieved 100% uptime after a series of significant network upgrades in March 2023, it had previously experienced several downtimes that completely halted network functionality.

Between January 2022 and February 2023, Solana experienced interruptions in 7 out of those 13 months. The most recent interruption occurred on February 25, 2023, lasting nearly 19 hours.

The core reason for this downtime and other past issues lies in the experimental system that Solana is running.

Solana's consensus mechanism has not been formally validated, and due to the massive amount of data the system processes, it is impossible to predict potential future failures in Solana's design.

While Solana has implemented many improvements for mitigation, the design of Solana may lead to future complexities that cannot be predicted before issues arise. Therefore, the Solana team still considers the chain to be in a "beta" state, as future network failures may be caused by unforeseen reasons.

Given Solana's complexity and the volume of data it processes, resolving these issues may take a considerable amount of time.

Clearly, this situation is unacceptable for financial and non-financial enterprises that may wish to deploy on Solana. The unpredictability of Solana's uptime is part of the reason for Solana's lower TVL (Total Value Locked) compared to its peers in the decentralized finance space.

Although the Solana team has implemented what they believe are important fixes, network vulnerabilities will remain an issue for the foreseeable future, and the introduction of the new design Firedancer may even increase the likelihood of irreconcilable problems occurring.

SCL Weekly Active Developer Market Share

Finally, we raise some questions about Solana's ability to attract developers to its ecosystem. Due to the complexity of the Solana Virtual Machine (SVM) and Solana's intricate design, creating applications on Solana is a challenging task.

In fact, for developers, building on Solana is difficult; Solana founder Anatoly has likened it to "chewing glass." Part of the reason is that Solana developers need to be familiar with Rust, a language with 2.2 million active developers, while Ethereum can attract 17.4 million JavaScript developers. Although Solana has made significant progress in creating tools to simplify development, its high requirements for programming skills have led to Solana accounting for about 6-7% of weekly active cryptocurrency developers over the past 18 months.

Given that Solana lost its largest supporter, FTX/Alameda, in November 2022, maintaining a relatively stable developer share is commendable, but there is a need to increase the total number of developers and developer market share to enhance the likelihood of hosting heavyweight applications.

Overview of Solana Valuation Scenarios in 2023

We apply VanEck's standard valuation framework to Solana, arriving at a token valuation of $335 in the baseline scenario by 2030. This estimate is based on predicting the final valuation multiple for the SOL token according to the projected real return rate.

This real return rate is calculated based on the expected cash flows returned to SOL token holders. The multiple is then applied to the final year's token FCF (Free Cash Flow) and divided by the expected number of tokens in the final year.

More specifically, in terms of revenue and cash flow, our framework first examines Solana's different revenue streams. The first is the acceptance rate of terminal market activities. We first identify the terminal markets that will utilize public blockchains like Ethereum and Solana.

The three main categories are Financial, Banking, and Payments (FBP), Metaverse and Gaming (MG), and Infrastructure (I).

Depending on the specifics, we assume that a portion of the business and its revenue will come from blockchain activities or utilize the blockchain in some way to find customers, create new products, reduce costs, or streamline backend business functions.

Since public blockchains are similar to Web 2.0 platforms like Amazon, Apple App Store, and Uber, we assume that public blockchains will take an effective take rate percentage of their total transaction value (GMV) for terminal market revenue (the conversion rate from GMV to platform revenue).

In our base case, we find that the adoption rate of blockchain activities is 1/5 of the equivalent adoption rate of Ethereum. Thus, Solana's total revenue from terminal market transactions is $2.88 billion.

Additionally, we also consider MEV as a revenue item, which effectively flows from trading entities to validators and then to token holders. We calculate MEV by estimating the total assets locked in Solana DeFi and multiplying it by the annual take rate.

In the baseline case, we find that MEV revenue in 2030 is $5.99 billion. Once we obtain the raw revenue data, we deduct the assumed tax rate and make an approximate estimate of the costs for the ecosystem's validation nodes.

2030 Transaction Revenue Estimate Assumptions

Estimated assumptions for 2030 transaction revenue in the base case

Despite the immense potential, we believe that the likelihood of Solana hosting the majority of global cryptocurrency transactions by 2030 remains lower than that of Ethereum.

The Solana network and execution engine can achieve higher throughput and unleash greater potential, but it lacks the adoption momentum of most crypto users and developers.

Currently, Solana holds a small share of the total locked value (TVL) in cryptocurrency, with only $408 billion, representing $408 million, and a low daily active user ratio, with 184,000 out of 5.5 million users.

We also believe that as public blockchains are widely adopted, new developers entering the field may not feel reliant on the existing ecosystem and may not necessarily be decentralized extremists.

Therefore, new developers joining in the future may be very interested in the next generation of blockchains that offer novel development frameworks, functionalities, and capabilities, similar to previous cryptocurrency cycles. Thus, in our baseline case, we expect Solana's adoption rate to approach 30%, which, while a significant increase compared to current data, is still far below Ethereum's baseline case of 70%.

This comparison is appropriate because the growth of the Ethereum ecosystem has a black hole-like effect, absorbing various ideas while increasing its share among blockchain developers.

It is worth noting that our price target of $11,800 for Ethereum is based on the Ethereum network achieving a 70% market share in transmitting value among open-source blockchains.

If Solana can avoid falling into Ethereum's event horizon and achieve a similar dominant position, our bullish case shows that revenue in 2030 could reach $51.8 billion, with a price target of $3,211.

In terms of value capture from terminal market revenue for blockchain adoption, we believe Solana's value capture potential is less than that of Ethereum. In our base case, we estimate that Solana's GMV value capture will be 20% of Ethereum's. We make this assertion based on the simplicity of Solana's value capture framework and founder Anatoly Yakovenko's advocacy for abundance rather than scarcity.

The result of abundance rather than scarcity means that block space will remain cheap, leading to very low transaction costs. Mathematically, this would result in Solana's take rate on total transaction value (GMV) being approximately 0.60% for FBP, 2.00% for MG, and 1.00% for I.

Average fees per transaction for different networks over the past 30 days

The key question is, "How does Solana profit in the long term, given its low transaction pricing?" Currently, transaction prices are very small, so a large volume of transaction activity is needed to boost Solana's revenue figures.

In our baseline model, we expect annual transaction volume to reach approximately $600 billion by 2030, derived from the assumption of Solana's market share in terminal markets and the number of transactions per user. Based on these assumptions, we estimate the number of monthly active users to be 534 million.

Although in our baseline case, MEV will be Solana's most important value capture mechanism, accounting for 67.5% of total revenue, we believe that even if usage does not reach our baseline estimates, Solana still has the potential to enhance the value of its token through other means.

As we mentioned earlier, blockchains need to be cheap enough to encourage widespread use while ensuring that validators receive adequate compensation for validating the network.

Blockchains like Solana provide a security budget through inflation, which pays validators, and this inflation dilutes the shares of existing token holders to compensate validators.

Without economic activity, or if the economic activity on-chain is priced too low, relying solely on inflation to pay the security budget is unsustainable. This situation cannot continue indefinitely.

While raising transaction prices will almost certainly reduce transaction throughput, if there are economically valuable activities, it is reasonable to say that Solana should be able to effectively capture some of that value.

Additionally, Solana can reduce the effective supply of its token by increasing the amounts charged for applications, crypto wallets, NFTs, and tokens used for storing data on-chain.

On Solana, all entities deploying code to Solana or operating wallets must pay fees in SOL based on their storage size. Anyone using Solana can choose to forgo this fee by simply maintaining enough SOL in their account to cover 2 years of rent.

With storage fees at 0.00000348 SOL per byte and wallet data size at 372 bytes, each active wallet holder must retain 0.0026 SOL. Similarly, applications and token smart contracts must also maintain these storage fees.

A program like Serum, which is about 340KB in size, needs to maintain a balance of 2.4 SOL to avoid paying rent. If Solana chooses to do so, it could significantly increase these balances, effectively reducing the circulating supply of SOL.

Of course, these changes in rent and transaction costs would violate the protocol principles currently controlled by Solana's founding team. At the same time, Solana lacks a governance mechanism to regulate these decisions, but recently some validators have proposed introducing token voting governance on Solana. By 2030, we believe Solana will have already implemented governance through token voting, which will enhance the economics of the SOL token if the Solana blockchain has a vibrant ecosystem.

Solana's Potential: Risks and Rewards

Solana is indeed a very compelling project, committed to improving user experience by pushing the boundaries of blockchain possibilities, providing the necessary features for developing the next killer application.

Moreover, the Solana team is a "giant" in the field, and their non-consensus thinking has nurtured one of the most powerful blockchains currently available.

As they continue to innovate, their experimental and optimistic philosophy has permeated a small, creative, consumer-focused application ecosystem.

Most importantly, Solana's community has a strong sense of identity, which has allowed it to remain resilient in the face of significant setbacks that could destroy many other blockchain ecosystems.

Unlike Ethereum and its supporters, who focus on building modular blockchain components, Solana has chosen a different path, developing a comprehensive blockchain that integrates these components into a single data throughput machine.

This is a daunting task, and the Solana team started from a relatively disadvantaged position, having fewer developers, total locked value (TVL), venture capital funds, and foundation capital compared to EVM-compatible chains. Likewise, they still face significant challenges regarding the long-term stability of their blockchain technology approach.

Nonetheless, even using terminal market share and take rate assumptions that are far below our assumptions for Ethereum, our model generates greater upside potential for the SOL token in the baseline case. Therefore, we believe it is reasonable to assign significant weight to the SOL token in investors' portfolios.

Solana Valuation Scenarios

Top 5 Gas-consuming dApps and Most Promising dApps on Solana

Disclosure: The VanEck team holds SOL tokens and stakes in other Solana-based applications such as Hivemapper, Helium, and Render.