Liquid Stake with compassSOL for an 7.50% APY from staking, MEV + fees

Enjoy the freedom of liquid staking in Solana Defi while delegating your stake to the high performance Solana Compass validator. Stake or unstake at any time here, or with a Jupiter swap.

Benefit from our high staking returns and over 2 years experience operating a Solana validator, and receive additional yield from priority fees + MEV tips

Earn 6.5% APY staking with Solana Compass

Help decentralize and secure the Solana network delegating your stake to us and earn an impressive 6.5% APY yield on your SOL, while supporting us to create new guides and tools. Learn more

Stake your SOL

  1. Click to connect your wallet
  2. Enter the amount you wish to stake
  3. Kick back and enjoy your returns
  4. Unstake from your wallet or our staking dashboard

Earn 6.5% APY staking with Solana Compass

Help decentralize and secure the Solana network delegating your stake to us and earn an impressive 6.5% APY yield on your SOL, while supporting us to create new guides and tools.

Learn more

Solana vs Ethereum Fee Markets | Mert Mumtaz, Dan Smith

By Lightspeed

Published on 2024-03-28

Explore how Solana's fee revenue is approaching Ethereum's, the impact of failed transactions, and the evolving L2 landscape post-EIP-4844.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

Solana vs Ethereum Fee Markets: A Deep Dive into Transaction Dynamics

The blockchain landscape is evolving rapidly, with Solana emerging as a formidable competitor to Ethereum in terms of transaction volume and fee generation. In this episode of Lightspeed, hosts Mert Mumtaz and Dan Smith delve into the intricacies of Solana's transaction ecosystem, comparing it to Ethereum's fee market and exploring the implications for both networks.

Understanding Solana's Transaction Landscape

Solana's transaction ecosystem has been a topic of intense discussion, particularly regarding the high rate of failed transactions. To comprehend this phenomenon, it's crucial to distinguish between different types of transaction outcomes.

Types of Transaction Outcomes on Solana

  1. Successful Transactions: These are transactions that execute as intended without any issues.

  2. Failed Transactions: Transactions that reach the blockchain but fail due to specific conditions not being met, such as exceeding slippage tolerance in trading operations.

  3. Dropped Transactions: These are transactions that never make it onto the blockchain, often due to network congestion or other technical issues.

Mert Mumtaz explains the nuances:

"When you see the charts on the internet that say something like here's a red chart and it says 50 to 70% of transactions on Solana fail, what that's actually saying is there's a lot of bots on Solana that try to capture arbitrage opportunities."

This high failure rate is often misinterpreted as a sign of network inefficiency or poor user experience. However, Mumtaz clarifies that these failed transactions are primarily from bots attempting to capture arbitrage opportunities, not from regular users.

The Reality of Failed Transactions

Contrary to popular belief, failed transactions on Solana are not indicative of network inefficiency. In fact, they consume the same computational resources as successful transactions:

"The fail transactions still take up the exact same path or the state take the exact same path as a successful transaction. They get executed on the validator. They consume fees. They consume block space. They go through the exact same pipelines."

This means that from a systems perspective, failed transactions contribute to the network's overall throughput and activity metrics. It's incorrect to dismiss them as "fake TPS" or irrelevant to the network's performance.

User Experience vs. Bot Activity

One of the key misconceptions about Solana's high failure rate is its impact on user experience. Mumtaz points out:

"The vast majority and I believe it's like 92% of that chart is bots. So it's actually what you're seeing is not what users are seeing."

In reality, only about 8% of user transactions actually fail, which paints a very different picture of the network's usability for regular users.

The Real Issue: Economic Incentives

The high rate of failed transactions points to a more fundamental issue: the economic incentives for bots to spam the network. Mumtaz explains:

"The actual problem that's going on that infer from that chart is that spamming the chain costs the arbitrage bots little to nothing, so they will keep doing it."

This highlights the need for adjustments in Solana's fee mechanism to create better incentives and potentially reduce unnecessary network congestion.

Dropped Transactions: A Separate Concern

While failed transactions are often misunderstood, dropped transactions represent a genuine user experience issue on Solana. These occur when transactions never make it to the blockchain, often due to networking layer problems.

Mumtaz elaborates on the cause:

"On Solana, the blocks are built continuously, meaning there's a block leader that says, 'Hey, send me all your transactions now.' And that's what happens. There is no like discrete auction that takes place."

This continuous block building process can lead to situations where higher-fee transactions are dropped in favor of faster bot transactions, creating a suboptimal experience for users.

Addressing the Networking Layer

The Solana team is actively working on improving the networking layer to address the issue of dropped transactions. Mumtaz mentions:

"There are quite a few fixes going live. Actually, some minor patches going live pretty regularly as well. Some of them even running on the GEO client, which doesn't need the odds of clients."

These improvements aim to create a more reliable transaction inclusion process, potentially reducing the frequency of dropped transactions.

Slippage and User Behavior

Another factor contributing to failed transactions on Solana is the issue of slippage, particularly in the context of meme coin trading. Dan Smith explains:

"We have these like 200 plus million dollar beam coins that are sitting on like sub two million dollars of liquidity. And so you have extreme volatility in the prices of these tokens, extreme volatility."

This volatility, combined with low liquidity, often leads to transactions failing due to exceeding slippage tolerances. Users have adapted by setting higher slippage tolerances, but this can lead to suboptimal trade execution.

Solana's Unique Meme Coin Landscape

The meme coin ecosystem on Solana differs significantly from Ethereum's:

"If you look at the liquidity profile of Solana, meme coins relative to something like an ETH main net meme coin, it is like it's completely different."

This difference in liquidity profiles contributes to the higher volatility and increased likelihood of failed transactions in Solana's meme coin markets.

The Role of Applications in User Experience

Mumtaz emphasizes that while blockchain infrastructure plays a crucial role, application-level decisions also significantly impact user experience:

"I think there's a lot of, maybe compared to like web2, I think there's a lot of blame on the underlying web3 system itself, the blockchain, as opposed to like any sort of criticism on the app layer."

He argues that applications have more control over user experience than is often acknowledged, and improvements at this level could mitigate some of the issues users face.

Solana's Fee Revenue Growth

One of the most striking developments in recent months has been Solana's rapid growth in fee revenue. Dan Smith presents data showing that Solana's daily fee revenue is now only a few multiples away from Ethereum's:

"Solana has had insane fee growth driven by insane usage and activity growth. There's more protocols building on Solana now than ever. There's more users on Solana now than ever. There's more activity in general."

This growth challenges the long-held narrative that Solana would never generate meaningful fees due to its low-cost structure.

The Ultrasound Money Narrative

The hosts discuss the "ultrasound money" narrative often associated with Ethereum and how Solana's fee growth challenges some of its key assumptions. Mumtaz points out:

"Solana actually has a fee burn, right? Or a token burn and like it like went up exponentially. And I was like, this is like ultrasound, salami, whatnot."

He notes that many people were unaware that Solana burns half of its priority fees, similar to Ethereum's fee burning mechanism.

Potential for Solana to Overtake Ethereum in Fees

Given the current trajectory, Mumtaz suggests a possibility that was once considered unthinkable:

"I do think actually long term as the, the mechanisms of Solana changed because it's kind of up in the air right now. Like there's different key mechanisms that we deal with. I do think it's possible that Solana could flip Ethereum and fees are revenue generated."

This potential flip in fee revenue would represent a significant shift in the blockchain ecosystem and challenge many long-held assumptions about network value and sustainability.

The Impact of EIP-4844 on Ethereum and L2s

The conversation shifts to recent developments in the Ethereum ecosystem, particularly the implementation of EIP-4844 (also known as proto-danksharding). This upgrade has had significant implications for Layer 2 (L2) solutions built on Ethereum.

Dan Smith highlights an interesting observation:

"Zero X Osprey, a great friend of both of ours, I believe. He's been doing these like daily segments. Shoot, I'll try to find this and actually tweet it or post it up. But he's been posting how, so base of all the Altuz base has seen the most increase in activity since 4844 went live."

This increase in activity on Base (Coinbase's L2 solution) post-EIP-4844 implementation has led to some unexpected outcomes, particularly regarding transaction fees.

L2 Fee Dynamics Post-EIP-4844

The hosts explain that L2 fees consist of two components:

  1. The cost of posting transaction data to Ethereum L1
  2. A throttling mechanism based on L2 activity

While EIP-4844 was expected to significantly reduce the first component, the second component has become more prominent, leading to higher than expected fees on some L2s.

Mumtaz comments on this development:

"Base, I believe the fees were upwards of $9 because of the execution. Not the blob. It's right, 4-4-4 went live. Okay, great. But now the bottleneck is somewhere else and we actually said that that would be the bottleneck this whole time."

This outcome highlights the importance of execution efficiency in addition to data availability improvements.

The Blob Market and Data Availability

The hosts discuss the current state of the "blob market" introduced by EIP-4844. Dan Smith provides some statistics:

"Right now we're seeing on the order of about one, then one, right around one, one blob per block. And you can see who's been posting them when they're posting them, the frequency of that and the amount that they're paying."

He notes that while Ethereum has generated nearly a million dollars in blob space revenue in about a week and a half, competing data availability solutions like Celestia have seen significantly more data being posted at much lower costs.

Solana's Position in the Scalability Race

The conversation turns to how Solana compares to Ethereum's post-EIP-4844 scalability. Dan Smith references a calculation by the founder of Monad:

"He did the math and TLDR is 4844 supports roughly 300 transactions per second across every L2 that can's connected to it. And I think that assumes like perfect efficiency on blob sharing, which is like not how it really works. But let's assume that it is for a second. Solana's TPS is much higher than that."

This comparison suggests that Solana's current throughput, even when considering only successful transactions, is comparable to the theoretical maximum that Ethereum's L2 ecosystem could achieve with EIP-4844.

The Future of L2s and Rollups

The hosts speculate on the future of the L2 ecosystem, with Mumtaz suggesting that Coinbase's success with Base might inspire more entities to launch their own rollups:

"I think people are now going to point to Coinbase and they're going to say, 'Hey, look at this L2. They're making so much money. Why don't we also do this?'"

However, he expresses concern that this proliferation of L2s might not lead to immediate improvements in user experience and could potentially benefit general-purpose L1s like Solana in the long run.

The Importance of Execution

Both hosts emphasize the critical role of execution in the success of blockchain networks. Mumtaz reflects on the insights of Ethereum researcher Dankrad Feist:

"It turns out he was right. But also not only just execution of the VM, but actually executing as an ecosystem to keep kind of getting there in the same."

This underscores the importance of not just technical execution, but also ecosystem development and user adoption.

Convergence of Narratives

The hosts note how many blockchain narratives have converged over time, with different approaches potentially leading to similar end states. Mumtaz reflects:

"I think it's been interesting how so many of the narratives have kind of converged and the path dependence leads to some short term narratives that don't actually hold weight long term."

This observation suggests that while short-term debates and competition between different blockchain approaches may seem significant, the long-term trajectories of successful networks may be more similar than currently perceived.

Solana's Unique Value Proposition

Throughout the discussion, several key strengths of Solana emerge:

  1. High Throughput: Solana's ability to process a large number of transactions, even when considering only successful ones, positions it well in the scalability race.

  2. Low Fees: Despite the growth in fee revenue, Solana maintains relatively low transaction costs for users.

  3. Rapid Finality: The quick transaction finality on Solana makes it particularly suitable for certain use cases, especially in the realm of payments and decentralized finance (DeFi).

  4. Growing Ecosystem: The increasing number of protocols and users on Solana indicates a healthy and expanding ecosystem.

  5. Adaptability: The Solana team's ongoing efforts to address network challenges and improve performance demonstrate the platform's commitment to evolution and enhancement.

Conclusion: A Dynamic Landscape

The conversation between Mert Mumtaz and Dan Smith reveals a blockchain ecosystem in constant flux, with Solana making significant strides in adoption, fee generation, and overall network activity. While challenges remain, particularly in the realm of transaction reliability and user experience, the trajectory of Solana's growth and the ongoing improvements to its infrastructure paint a promising picture for the network's future.

As the broader blockchain space continues to evolve, with developments like EIP-4844 reshaping the Ethereum ecosystem, Solana's unique approach to scalability and performance positions it as a strong contender in the race for blockchain dominance. The convergence of narratives and the emphasis on execution over mere technical specifications suggest that the future of blockchain technology will be determined not just by theoretical capabilities, but by practical implementation and user adoption.

As both Solana and Ethereum continue to develop and refine their approaches, users and developers alike stand to benefit from the increased competition and innovation in the space. The coming months and years will likely see further developments in fee markets, scalability solutions, and user experience improvements across the blockchain landscape, with Solana well-positioned to play a significant role in shaping the future of decentralized technologies.

Facts + Figures

  • Solana's daily fee revenue has grown to within a few multiples of Ethereum's, challenging previous assumptions about its fee generation potential.

  • Approximately 92% of failed transactions on Solana are attributed to bot activity, primarily for arbitrage purposes.

  • Only about 8% of user transactions on Solana actually fail, indicating a better user experience than often perceived.

  • Solana burns half of its priority fees, similar to Ethereum's fee burning mechanism.

  • EIP-4844 (proto-danksharding) on Ethereum supports roughly 300 transactions per second across all connected L2s, assuming perfect efficiency.

  • Solana's current throughput, considering only successful transactions, is comparable to the theoretical maximum that Ethereum's L2 ecosystem could achieve with EIP-4844.

  • Base, Coinbase's L2 solution, has seen the most increase in activity since EIP-4844 went live.

  • Post-EIP-4844, some L2s have experienced higher than expected fees due to execution costs rather than data availability costs.

  • Ethereum has generated nearly a million dollars in blob space revenue in about a week and a half since EIP-4844 implementation.

  • Celestia, a competing data availability solution, has processed significantly more data than Ethereum's blob space but at much lower costs, generating only about $10,000 in revenue over six months.

  • Approximately 15 rollups are actively posting data to Celestia, far fewer than the "world of a million rollups" envisioned by its creators.

  • Solana's meme coin ecosystem features tokens with market caps exceeding $200 million but liquidity of less than $2 million, leading to extreme price volatility.

  • During Solana's "inscription season," user transaction throughput reached over 2,500 TPS with an 80-90% success rate.

Questions Answered

What causes the high rate of failed transactions on Solana?

The high rate of failed transactions on Solana is primarily due to bot activity, particularly arbitrage bots attempting to capture trading opportunities. These bots submit multiple transactions, knowing that only one will succeed, leading to a high failure rate. However, these failed transactions still consume network resources and contribute to overall network activity.

How does Solana's fee revenue compare to Ethereum's?

Solana's fee revenue has grown significantly and is now only a few multiples away from Ethereum's daily fee revenue. This growth challenges the previous narrative that Solana would never generate meaningful fees due to its low-cost structure. The increase in fee revenue is attributed to the growing number of protocols, users, and overall activity on the Solana network.

What is the impact of EIP-4844 on Ethereum and its L2 ecosystem?

EIP-4844, also known as proto-danksharding, has increased data availability for Ethereum L2s, potentially supporting up to 300 transactions per second across all connected L2s. However, it has also revealed that execution costs on L2s can still lead to higher than expected fees. The upgrade has sparked increased activity on some L2s,

particularly Base, Coinbase's L2 solution.

How does Solana's transaction throughput compare to Ethereum's post-EIP-4844 capacity?

Solana's current transaction throughput, even when considering only successful transactions, is comparable to or exceeds the theoretical maximum that Ethereum's L2 ecosystem could achieve with EIP-4844. This puts Solana in a strong position in terms of scalability, especially given that Ethereum's figures assume perfect efficiency across all L2s.

What are the main differences between Solana's and Ethereum's meme coin ecosystems?

Solana's meme coin ecosystem is characterized by tokens with high market caps but relatively low liquidity. For example, some meme coins on Solana have market caps exceeding $200 million but liquidity of less than $2 million. This leads to extreme price volatility and a higher likelihood of failed transactions due to slippage. In contrast, Ethereum's meme coins often have higher liquidity relative to their market caps.

How does Solana address the issue of dropped transactions?

Solana is actively working on improving its networking layer to address the issue of dropped transactions. This includes implementing patches and updates to the Solana client software. The team is also exploring changes to the economic incentives and block building process to reduce the likelihood of transactions being dropped, especially during periods of high network congestion.

What is the "ultrasound money" narrative, and how does it relate to Solana?

The "ultrasound money" narrative is primarily associated with Ethereum and refers to the idea of a cryptocurrency with low or negative inflation due to fee burning mechanisms. Interestingly, Solana also implements a fee burning mechanism, burning half of its priority fees. This challenges the notion that the ultrasound money concept is unique to Ethereum and suggests that Solana could potentially achieve similar economic properties.

How might the proliferation of L2s impact the blockchain ecosystem?

The success of L2s like Base may inspire more entities to launch their own rollups, potentially leading to a fragmented L2 ecosystem. While this could increase overall network capacity, it might not immediately improve user experience due to the complexity of navigating multiple L2s. This situation could potentially benefit general-purpose L1s like Solana, which offer high throughput and low fees without the need for additional layers.

What role do applications play in blockchain user experience?

Applications built on top of blockchain networks play a crucial role in user experience, often more significant than commonly acknowledged. While underlying blockchain infrastructure is important, application-level decisions regarding things like slippage tolerance, transaction retry mechanisms, and user interface design can greatly impact the overall user experience. Improvements at the application layer could mitigate some of the issues users face, even on networks with technical challenges.

How does Solana's approach to scalability differ from Ethereum's?

Solana takes a different approach to scalability compared to Ethereum. While Ethereum focuses on a layered approach with L2 solutions and data availability improvements like EIP-4844, Solana aims to scale its base layer through high-performance consensus mechanisms and continuous technical improvements. Solana's approach allows for high throughput and low fees directly on the base layer, without the need for additional scaling solutions.

On this page

Related Content

The Return Of Meme Coin Mania | Mert Mumtaz, Dan Smith

Explore the resurgence of meme coins, Solana's MEV challenges, and Ethereum's scaling solutions in this in-depth analysis of the latest crypto trends.

Solana's Emergence as a Payments Hub | Roundup

Explore Solana's growing prominence in crypto payments, featuring Visa's USDC settlement, Shopify integration, and the evolution of DeFi on the blockchain.

Solana Changelog Jul 3 - RPC Deprecations, Actions, and Blinks

Explore Solana's latest developments including RPC method deprecations, new Actions and Blinks features, and upcoming changes to compute unit charging.

Has Solana Earned The Hype? | Mert Mumtaz, Garrett Harper

Explore Solana's recent surge, its technological advantages over Ethereum, and the potential for breakthrough applications in this in-depth analysis from Lightspeed podcast.

Solana Staking Rewards Calculator

Calculate your potential earnings when staking on the Solana network

Breakpoint 2023 Highlights

An overview of Solana's achievements and the future of decentralized networks presented at Breakpoint 2023.

Breakpoint 2023: How Helium Migrated to Solana

The migration of the Helium network to Solana blockchain.

Breakpoint 2023: Auditor's Panel

Insights from leading blockchain auditors on the importance of security in the Solana ecosystem.

Breakpoint 2023: NFT Past & The Future

Max Zhuang, CEO of Sniper Labs, discusses the evolution of NFTs and Sniper's role in the growing market.

Breakpoint 2023: Youth in Web3

Exploring the journey, challenges, and advice of young professionals in the Web3 ecosystem.

How to Instantly Unstake + Withdraw SOL from Solana Staking

Learn how to unstake SOL from Solana staking and withdraw your SOL from Solana staking.

Validated | Why Crypto Needs a Mobile Revolution

Explore how mobile-first apps like Dialect are driving crypto adoption, the impact of state compression, and why chat could be the gateway to Web3.

Breakpoint 2023: DeFi is Broken. How to Fix It on Solana

Eugene Chen of Ellipsis Labs discusses DeFi's drawbacks and proposes solutions on Solana.

Solana vs Ethereum: Two Paths, One Endgame | Jon Charbonneau

Explore the convergence of Solana and Ethereum scaling strategies, the future of rollups, and the importance of social layers in blockchain ecosystems.

How Much Do Solana Validators Make?

Curious about how Validators work on Solana?