How to Value Solana ($SOL) - Insights from Industry Experts

In a recent episode of the Unlayered podcast, industry experts delved into the complex topic of valuing Solana ($SOL) and other Layer 1 (L1) blockchain assets. The discussion brought together perspectives from traditional finance, cryptocurrency economics, and blockchain technology to explore the challenges and opportunities in assessing the value of these innovative digital assets.

The Challenge of Valuing L1 Assets

Valuing Layer 1 blockchain assets like Solana presents a unique challenge for investors and analysts. Unlike traditional assets, L1 tokens combine properties of commodities, capital assets, and currencies. This hybrid nature makes it difficult to apply conventional valuation models.

One of the experts, Lamar, highlighted this complexity: "What's confusing is that unlike Bitcoin, they're more than just store value. They actually have protocol fees and protocol revenue." This multifaceted nature of L1 assets requires a new approach to valuation that considers various factors beyond traditional financial metrics.

The Hybrid Nature of L1 Assets

L1 blockchain assets like Solana are unique in that they encompass properties from multiple asset classes. As Dave pointed out, "These layer one assets are basically the first asset ever to encapsulate properties from all three of these asset types [commodities, capital assets, and store of value/money]."

This hybrid nature makes L1 assets challenging to value using traditional methods. An analogy provided during the discussion likened owning an L1 token to holding a share in a company like Apple, but with additional unique properties:

1. Receiving "dividends" (in the form of staking rewards or fee distribution)
2. Token burn (similar to share buybacks)
3. Requiring the token to interact with the network (like needing Apple shares to buy Apple products)
4. A flourishing ecosystem built on top of the network

This complex nature of L1 assets necessitates a multifaceted approach to valuation that considers various factors beyond simple financial metrics.

The Speculative Nature of Cryptocurrency Valuations

One crucial point emphasized throughout the discussion is the highly speculative nature of cryptocurrency valuations. Lamar noted, "These are still highly speculative assets, and these are just theoretical models to use." This sentiment echoes the experience of many long-time cryptocurrency investors who have witnessed the volatile nature of these assets over the years.

The experts agreed that current valuations are often based more on future potential than current fundamentals. As Lamar explained, "I think the majority of crypto constantly lives overvalued on current fundamentals. But the issue is that because it's such a forward-looking asset, people aren't valued on current fundamentals, they're valued on what they think it could be in five years."

Network Effects and Metcalfe's Law

One of the key factors in valuing L1 assets is the concept of network effects, often quantified using Metcalfe's Law. This principle suggests that the value of a network is proportional to the square of the number of connected users.

Dave raised an interesting question about how this applies to different L1 architectures: "Do you think that [Metcalfe's Law] gets impacted on, for example, Ethereum, where people are going to be spread across loads of different L2s and the Cosmos ecosystem, that added friction?"

Lamar responded by highlighting a potential issue with Ethereum's approach: "I don't think there'll be a ton of network effects on Ethereum. I think it's very possible in five or 10 years. No one is really on base Ethereum other than the high network individuals that are collecting art or some of these, the whales, as you call them, the Bakken people will be on L2s."

This perspective suggests that Solana's single-chain approach might have advantages in terms of network effects and user experience, potentially leading to stronger value accrual for the SOL token.

The Importance of Adoption and Scalability

Throughout the discussion, the experts emphasized the critical role of adoption and scalability in determining the long-term value of L1 assets like Solana. Lamar drew parallels between L1 blockchains and early-stage startups, suggesting that the focus should be on growth and adoption rather than immediate profitability.

"I think what that does is it removes the network effects of that. And it purely relies on, can you get a ton of L2s to adopt and have those network effects? And that's where the L2s will kind of see value. All Ethereum cares about is those L2s are paying us the settlement layer money," Lamar explained, highlighting the potential limitations of Ethereum's approach compared to Solana's focus on scalability and low fees.

Solana's Approach to Scalability and Adoption

The experts praised Solana's focus on scalability and low transaction fees as a strategy to drive adoption. Dave noted, "Solana remains at sub one cent transactions and hopefully, order of magnitude lower than that, I think it's got a real chance to be used by enormous amount of people in the world. And that's how you accrue that money, monetary premium."

This approach aligns with the goal of onboarding millions of users to the blockchain ecosystem. By prioritizing low fees and high throughput, Solana positions itself as a platform capable of supporting mass adoption of decentralized applications (dApps) and financial services.

The Role of Transaction Throughput

One of the key metrics discussed for valuing L1 assets was transaction throughput, measured in transactions per second (TPS). Dave highlighted the potential for Solana in this area: "Kevin Bowers, the lead and fire dancer on the validated pod the other day... said that basically Slanner right now at 10,000 TPS, it's interesting. It's quite interesting for some financial applications. Put another note on that 100,000 TPS. It doesn't change it that much. He said, put another one or two naughts on top of that. So we're talking million, 10 million TPS."

This level of throughput could potentially enable Solana to support a wide range of applications, including high-frequency trading and other demanding financial use cases. The ability to handle such high transaction volumes could be a key factor in Solana's future value proposition.

Comparing L1 Assets: Relative Valuation Metrics

Given the challenges in applying traditional valuation models to L1 assets, the experts discussed various metrics for comparing different blockchains. Some of the key metrics mentioned include:

1. Daily average users and growth
2. Transactions per second (TPS)
3. Market cap per transaction
4. Stablecoin market cap on the chain

Lamar provided an interesting comparison: "If you look at Visa or MasterCard or some of these others, you know, it's like 600 to 900 dollars per transaction is what the market cap to transactions are. And so, you know, I've looked at that across chains and, you know, I think Solana is the one of the few, it's like $200 per transaction or something and value that."

These relative metrics can help investors and analysts gauge the potential value of different L1 assets, even if absolute valuations remain challenging.

The Impact of Tokenomics and Distribution

The discussion touched on the importance of token distribution and its impact on valuation. Sol raised an interesting point about the difference between Ethereum and newer L1s like Solana: "ETH, for all intents and purposes, was more or less kind of, it's an ICO like fairly distributed. There was a bit of an insider holding, but not nearly as bad as most of the new L1s that come out since then were VCs and insider zone, like 60% of the supply or even more."

This concentration of tokens in the hands of insiders and venture capitalists can potentially affect the economics and valuation of the asset. However, Dave suggested that this situation might improve over time: "I think inevitably things will decentralize over time and tokens will disperse amongst hands. Once we're five years further down the line, then I hope that there'll be better distribution of the sole token."

The Potential for Solana as Digital Money

Despite statements from Solana founder Anatoly Yakovenko suggesting that SOL is not intended to be money, the experts discussed the potential for Solana to accrue monetary premium over time. Dave argued, "The way you become money, the way you get that sort of premium, the moneyness premium is just by having an enormous ecosystem where frankly people don't really need to leave it. You can do everything with the asset."

This perspective suggests that Solana's focus on low fees and high scalability could position it well to become a widely used digital currency, even if that's not the primary goal of the project. The ability to support a diverse ecosystem of applications and financial services could naturally lead to SOL being used as a medium of exchange and store of value.

The Importance of Real-World Adoption

Throughout the discussion, the experts emphasized the critical role of real-world adoption in determining the long-term value of L1 assets. Lamar highlighted the potential of decentralized physical infrastructure (DePIN) projects: "I mean, that fundamentally is why I believe to essentially depend to centralize physical infrastructure is gonna be the next wave of adoption is because the Uber, like a decentralized Uber, a decentralized Wi-Fi, like helium network creator, like decentralized storage, like all of these things are activities that people might want to do and get paid in fiat, but the most effective way and efficient way to do it is on chain."

This focus on practical, real-world applications could be a key driver of adoption for Solana and other L1 platforms. By enabling new business models and economic incentives, blockchain technology could find its way into everyday life, potentially driving significant value accrual for the underlying assets.

The Evolution of L1 Economics

The experts discussed how the economics of L1 platforms might evolve over time. Lamar raised an interesting point about the potential commoditization of block space: "I think inherently, block space becomes commoditized, right? If you're building into a digital space, block space and the prices of block space will be erased to the bottom."

This perspective suggests that as more L1 platforms achieve similar levels of security and functionality, the premium currently commanded by platforms like Ethereum might erode. In this scenario, Solana's focus on low fees and high scalability could position it well for long-term success.

The Role of Security in Valuation

Security emerged as a crucial factor in the valuation of L1 assets. The experts discussed how Ethereum's perceived security advantage contributes to its current valuation premium. However, they also noted that this advantage might diminish over time as other platforms prove their security and reliability.

Lamar suggested a potential future scenario: "Let's fast forward three or four years. Let's idealistically assume Solana hasn't had outages. And all of a sudden there's $50 billion of TBL on it. And, you know, Apple decided to launch something. I think the security premium of Ethereum isn't nearly erased at that point."

This perspective highlights the potential for Solana to close the perceived security gap with Ethereum over time, potentially leading to a reassessment of relative valuations between different L1 assets.

The Challenge of User Experience and Adoption

The discussion touched on the importance of user experience in driving blockchain adoption. Lamar emphasized the need to abstract away the complexities of blockchain technology: "My core thesis is always the more you abstract, the blockchain, and the interactions with the consumer, the higher probability of adoption, because most people just don't want to be in a wallet or whatever."

This focus on user experience aligns well with Solana's approach of providing fast, low-cost transactions. By reducing friction for end-users, Solana could potentially drive greater adoption and, consequently, value accrual for the SOL token.

The Potential for Cross-Chain Interoperability

The experts discussed the challenges and opportunities presented by cross-chain interoperability. Lamar used an interesting analogy: "Imagine if you had a city and every part of the city you went to, you had to use a different currency. And I think the challenge, that would be a frustrating dynamic, right?"

This perspective highlights a potential advantage for Solana's single-chain approach, as it eliminates the need for users to navigate multiple ecosystems and token bridges. However, the discussion also touched on emerging solutions like Layer Zero, which aim to facilitate seamless cross-chain interactions.

The Impact of DeFi on L1 Valuation

Decentralized Finance (DeFi) emerged as a significant factor in the valuation of L1 assets. The experts discussed metrics like Total Value Locked (TVL) and the velocity of capital within DeFi ecosystems.

Dave noted an interesting trend for Solana: "TVL is incredibly low and people love to talk about that on Solana. But there's high velocity of the TVL on Solana." This observation suggests that while Solana might not lead in terms of raw TVL numbers, the efficiency and speed of its DeFi ecosystem could be a valuable differentiator.

The Role of Stablecoins in L1 Ecosystems

The discussion touched on the importance of stablecoins in L1 ecosystems. Sol noted, "Stablecoin market cap for the chain seems like there's some decent correlation between people who use it." He went on to highlight Solana's strong position in this metric: "Solana's number five at $1.52 billion."

This significant stablecoin presence on Solana suggests a healthy ecosystem for financial applications and could be a positive indicator for future growth and adoption.

The Potential for Institutional Adoption

The experts discussed the potential for institutional adoption of L1 assets like Solana. Lamar noted, "I think that for sophisticated investors to feel comfortable that they're acquiring an asset that's sustainable, there needs to be some degree of this is a money-making enterprise."

This perspective suggests that as Solana's ecosystem matures and demonstrates sustainable economics, it could become increasingly attractive to institutional investors. The platform's focus on scalability and low fees could position it well for adoption in traditional finance use cases.

The Importance of Developer Ecosystem

While not extensively discussed, the importance of a strong developer ecosystem was touched upon. The ability to attract and retain talented developers is crucial for the long-term success of any L1 platform.

Solana's growing ecosystem of projects and developers could be seen as a positive indicator for its future value. The platform's focus on performance and scalability makes it attractive for building complex decentralized applications, potentially driving further adoption and value accrual.

The Role of Governance in L1 Valuation

The discussion briefly touched on the importance of governance in L1 ecosystems. While not extensively explored, the ability of a platform to evolve and adapt through effective governance mechanisms could be a crucial factor in long-term valuation.

Solana's governance model, which allows for rapid iteration and improvement of the protocol, could be seen as a strength. The platform's ability to quickly implement upgrades and respond to challenges demonstrates a level of adaptability that could be valuable in the fast-moving blockchain space.

The Potential for Novel Use Cases

Throughout the discussion, the experts emphasized the potential for blockchain technology to enable entirely new use cases and business models. Solana's high performance and low fees position it well to support innovative applications that might not be feasible on other platforms.

As these novel use cases emerge and gain traction, they could drive significant value accrual for the underlying L1 asset. Solana's focus on performance and scalability makes it a strong contender to support the next wave of blockchain innovation.

The Importance of Ecosystem Diversity

While not explicitly discussed, the diversity of an L1's ecosystem emerged as an important factor in valuation. Solana's growing ecosystem, which spans DeFi, NFTs, gaming, and more, could be seen as a strength. A diverse ecosystem helps distribute risk and creates multiple pathways for value accrual.

The Role of Community in L1 Success

The discussion touched on the importance of community in driving the success of L1 platforms. While not extensively explored, the strength and engagement of a platform's community can be a crucial factor in adoption and long-term value accrual.

Solana's vibrant and growing community, evidenced by its active social media presence and frequent hackathons and events, could be seen as a positive indicator for its future prospects.

Conclusion: The Future of Solana and L1 Valuation

As the discussion concluded, it became clear that valuing L1 assets like Solana remains a complex and evolving challenge. Traditional valuation models fall short in capturing the unique properties and potential of these innovative digital assets.

However, the experts provided valuable insights into the factors that could drive Solana's future value. Its focus on scalability, low fees, and user experience positions it well to support mass adoption of blockchain technology. The growing ecosystem of applications, increasing institutional interest, and potential for novel use cases all contribute to a positive outlook for SOL.

As the blockchain space continues to evolve, new metrics and valuation models will likely emerge to better capture the value proposition of L1 assets. For now, investors and analysts must consider a wide range of factors, from technical capabilities to ecosystem growth and real-world adoption, when assessing the potential of platforms like Solana.

While the future remains uncertain, the discussion highlighted Solana's strong positioning in the competitive L1 landscape. Its focus on performance, scalability, and user experience aligns well with the requirements for mass adoption of blockchain technology. As the ecosystem continues to grow and mature, Solana could play a significant role in shaping the future of decentralized finance, digital identity, and beyond.

Facts + Figures

• Solana currently processes about 450 transactions per second, compared to 25,000 transactions per second in traditional finance.
• High-frequency trading in traditional finance has a ratio of about 20 to 1 for placing and canceling orders, which would translate to about half a million TPS on a blockchain.
• Solana's potential throughput could reach millions of TPS according to Kevin Bowers, making it highly attractive for financial applications.
• Ethereum's staking rate is around 16%, significantly lower than other proof-of-stake chains like Solana (60%), Cardano (60%), and Avalanche (60%).
• Solana's market cap per transaction is around $200, compared to $600-900 for traditional payment networks like Visa or Mastercard.
• Solana ranks 5th in stablecoin market cap at $1.52 billion, behind Ethereum ($68 billion) and Tron ($45 billion).
• The crypto industry is still highly speculative, with assets often valued based on potential future value rather than current fundamentals.
• Ethereum's high fees during peak demand periods (up to $250 on L1 and tens of dollars on L2s) highlight scalability challenges.
• Solana's focus on sub-one-cent transaction fees positions it well for potential mass adoption.
• The concept of "velocity of money" is applied to cryptocurrency, with Solana showing high velocity despite lower total value locked (TVL).
• Metcalfe's Law, which suggests network value is proportional to the square of the number of connected users, is considered in valuing L1 networks.
• The hybrid nature of L1 assets, combining properties of commodities, capital assets, and currencies, makes traditional valuation models challenging to apply.
• Decentralized Physical Infrastructure (DePIN) projects are highlighted as a potential driver for the next wave of blockchain adoption.
• The importance of abstraction in blockchain interactions is emphasized for increasing the probability of consumer adoption.
• Cross-chain interoperability and its challenges are discussed, with Layer Zero protocol mentioned as a potential solution.

Questions Answered

How do experts approach valuing Layer 1 blockchain assets like Solana?

Experts approach valuing Layer 1 blockchain assets like Solana by considering multiple factors beyond traditional financial metrics. They look at network effects, protocol revenue, transaction throughput, user adoption rates, and ecosystem growth. Additionally, they consider the asset's hybrid nature, combining properties of commodities, capital assets, and currencies, which makes traditional valuation models challenging to apply directly.

What advantages does Solana have in terms of scalability and adoption potential?

Solana has significant advantages in terms of scalability and adoption potential due to its high transaction throughput and low fees. The platform can potentially process millions of transactions per second, making it suitable for demanding applications like high-frequency trading. Solana's sub-one-cent transaction fees also position it well for mass adoption, as it reduces friction for users and developers building on the platform.

How does Ethereum's layer 2 scaling approach compare to Solana's single-chain architecture?

Ethereum's layer 2 scaling approach involves moving transactions off the main chain onto separate networks, while Solana uses a single-chain architecture. This difference impacts network effects and user experience. Ethereum's approach may lead to fragmentation and added complexity for users navigating multiple L2 solutions, while Solana's single-chain design could offer a more seamless experience and stronger network effects.

What role do stablecoins play in assessing the value of Layer 1 blockchains?

Stablecoins play a significant role in assessing the value of Layer 1 blockchains as they indicate the level of financial activity and adoption on the platform. A higher stablecoin market cap on a blockchain suggests more users are utilizing it for transactions and DeFi applications. Solana ranks 5th in stablecoin market cap at $1.52 billion, indicating a healthy ecosystem for financial applications.

How might the economics of Layer 1 platforms evolve over time?

The economics of Layer 1 platforms may evolve towards commoditization of block space as more platforms achieve similar levels of security and functionality. This could erode the premium currently commanded by established platforms like Ethereum. Factors like real-world adoption, novel use cases, and the ability to support a diverse ecosystem will likely play increasingly important roles in determining the value of L1 assets over time.

What metrics do experts use to compare different Layer 1 blockchains?

Experts use various metrics to compare Layer 1 blockchains, including daily average users and growth, transactions per second (TPS), market cap per transaction, stablecoin market cap on the chain, and total value locked (TVL) in DeFi protocols. They also consider factors like developer activity, ecosystem diversity, and the velocity of capital within the network.

How does the concept of network effects apply to Layer 1 blockchains?

Network effects, often quantified using Metcalfe's Law, suggest that the value of a network is proportional to the square of the number of connected users. For Layer 1 blockchains, this concept applies to the growth of users, developers, and applications on the platform. Solana's single-chain architecture may have advantages in terms of network effects compared to Ethereum's more fragmented L2 approach.

What role does security play in the valuation of Layer 1 assets?

Security plays a crucial role in the valuation of Layer 1 assets, with established platforms like Ethereum currently commanding a premium due to their perceived security advantage. However, this advantage may diminish over time as other platforms prove their security and reliability. The ability to maintain security while scaling will be a key factor in the long-term valuation of L1 assets.

How important is real-world adoption for the future value of Layer 1 assets?

Real-world adoption is critical for the future value of Layer 1 assets. Experts emphasize the potential of decentralized physical infrastructure (DePIN) projects and other practical applications to drive adoption. The ability of a platform to support diverse use cases and integrate blockchain technology into everyday life could be a significant driver of long-term value accrual.

What factors might contribute to Solana's potential success in the long term?

Several factors could contribute to Solana's potential success in the long term. These include its focus on scalability and low fees, which position it well for mass adoption; its growing ecosystem of applications across various sectors; its potential to support novel use cases due to its high performance; and its ability to attract institutional interest as the platform matures. Additionally, Solana's governance model, which allows for rapid iteration and improvement, could be a key strength in the fast-moving blockchain space.