The "ultimate indicator" of the potential of public chains? From the perspective of REV, Solana and Ethereum are in the competition

Original title: How to Backfill a Narrative on Solana, Ethereum, Memecoins, and REV

Written by: Brendan Farmer, Polygon

Compiled: Ashley, BlockBeats

Editor's note: The article criticizes Solana's value narrative, believing that its short-term wealth effect on Meme currency trading is not sustainable and has structural risks. Solana's success may be more due to speculation than technological advantages, while Ethereum is still developing steadily in the DeFi field. The author reminds readers to always maintain critical thinking about narratives in the crypto field and avoid being misled by the market craze.

The following is the original content (to facilitate reading comprehension, the original content has been compiled):

The task of thought leaders in the crypto field is to tell stories and explain why the value of certain currencies has risen or fallen. The curves that fluctuate up and down the chart are never just lines, but part of a larger technological or economic trend. These "filled narratives" may be compelling (such as "digital gold" and "world computers") or less attractive (such as "Play-to-Earn is the future of work"), but it is important to be critically conscious Examine how each narrative constructs the world—and who benefits from this construction.

Blue-collar workers and venture capitalists in narrative factories have been working overtime to explain why ETH performs poorly compared to BTC and SOL. Some of these arguments are not controversial: the Ethereum community should reach better agreement on the sharing direction, reevaluate its technical assumptions, or simply do better.

This article argues that a particular narrative about Solana and Ethereum is wrong. The story is probably like this: Solana dominates Ethereum on the most important economic indicators of blockchain, especially on decentralized exchanges (DEX) trading volume and REV (real economic value = MEV + transaction fees, measuring protocol cash flow indicators).

According to this story, Solana’s leading position in REV stems from technological strengths and traction across multiple application categories. The value of SOL can be evaluated based on future projected REVs, which is more advantageous than ETH, because ETH can only be valued based on "atmosphere" or "monetary".

But it's just a narrative. Solana's REV is generated entirely by Meme currency transactions, which makes it difficult to evaluate the value of SOL based on future cash flows. Moreover, Meme coins dominance poses structural risks to Solana.

Tracking REV

The SOL/ETH ratio has increased by about 10 times over the past year and a half. Whenever we see similar price fluctuations, we know it's time to fill in a new narrative.

We can tell a story like this: Solana has more advanced technology and users love it. All kinds of best developers—including DePIN, DeFi, payment, and of course Meme coins— have turned to Solana.

Venture capitalists would argue that this huge talent migration has brought about a huge increase in the most important indicators such as REV, transaction volume and application revenue. The direction of the story is that SOL does not need to be a currency or commodity like ETH, because its market value will eventually be confirmed by a reasonable multiple of actual income, rather than some kind of Meme culture nonsense.

If you want to see how Solana performs, the data can prove it.

This is a great narrative.

But to argue, let's see where REV comes from.

Probably a great combination of all the best encryption apps. A groundbreaking DePIN like Helium, a CLOB that is building a decentralized Nasdaq, stablecoin payment volume, complex DeFi transactions, of course, maybe a portion of the Meme currency, right?

Wait - these are just pump.fun and a bunch of Telegram Bots for Meme currency trading?

Where are the groundbreaking applications? Where is DePIN? Where are the global prices found for events that occur in Singapore or London? Where are the top-level, IMO Award winner-level developers?

Are we increasing bandwidth and reducing latency for the purpose of Bot trading $BUTTHOLE? !

Build a decentralized "casino"

This article is not about the good or bad Meme coins. Meme coins can be a great way to direct users to crypto protocols and transfer wealth from “ignorant market participants” to skilled liquidity providers.

But Solana's REV comes entirely from Meme currency trading, which brings structural problems to assessing the value of SOL based on future REVs.

Let's fill in our own narrative. After the FTX explosion, SOL was oversold, but Solana could still present a convincing story to institutional capital allocators. It has a pragmatic expansion roadmap and is culturally understandable for investors familiar with Silicon Valley tech startups.

As the promotion of SOL became successful, the price rose. This creates a wealth effect, which is a wonderful thing in the crypto space. It's a financial alchemy where the price increase of tokens (basically not related to technology) translates into on-chain activity (it seems to be driven by more advanced technologies).

You can think of the Wealth Effect as a pressure cooker full of funds, being heated, and the only way to release the pressure is to flow capital to silly and riskier assets like CryptoDickButts or this:

As the activity increases, thought leaders can fill in a engaging narrative that drives SOL prices to rise and creates more events. The app releases tokens, injecting more capital into the system (for example: Jito effectively airdrops a new car to everyone in Solana DeFi). We can call it the flywheel effect.

According to our narrative, the reason why Meme coin activity exploded on Solana (rather than other equally scalable L1 or L2) is mainly due to the wealth effect of SOL. Solana cheap transaction fees are a necessary prerequisite, but wealth effects are required to allow Meme coin fanaticism to grow to its current scale.

Time is a circle

All this happened before. If we look back on 2020-2021, we will see a stunning increase in REV on Ethereum. In the last bull market, new wealth of ETH holders flowed to increasingly volatile on-chain assets such as NFT and Meme coins.

Highly speculative assets tend to over-produce REV because users are willing to pay higher priority fees and MEV rates to gain exposure to volatility. The value of Meme currency transactions is highly dependent on their position in the block, so the proposed blocks that control the sort can obtain more value. This brings a higher commission to the protocol than other forms of on-chain activity.

However, we can see that as the market cycle changes, the high speculation on Ethereum (in terms of NFT and Meme coins) disappears. It is fundamentally wrong to use the 2021 Ethereum REV as the basis for estimating future REVs.

Meme Coin REV will not last (and will not save you)

Just as the REV produced by Meme coins on Ethereum is not sustainable, it will not last on Solana. While Meme Coin may be interesting, Meme Coin speculation is a zero-sum game.

The fees and MEV paid by gamblers in Meme Coin are extremely high compared to other forms of gambling, and eventually the gamblers will run out of funds. High fees and MEVs may be good for improving REVs, but in a zero-sum game, this does not create any economic value, with the consequence that they extract liquidity from the ecosystem. The REV paid per dollar means that the funds for Meme currency transactions will be reduced in the future, and the REV will be reduced in the future.

Therefore, it is difficult to argue that REV growth will continue, ultimately justifying the SOL's market value.

The ratio of SOL's FDV (approximately $150 billion) to the 2024 REV (1.4 billion) is about 100:1. If we are a little more generous, according to the Q4 REV ($825 million) annualization, we get a ratio of 45:1. Although there has been some improvement, this still assumes that Meme currency trading volume will increase over time. Given that this is unlikely (see ETH, REV dropped from $10 billion to $2.6 billion in the previous market cycle), it is difficult to justify SOL's valuation through the expected future REV.

The popular rebuttal is that Solana will simply expand its block space by 10 times or 100 times, and the REV will scale.

The problem is that even if Solana can increase throughput by 100 times, it will be hard to find 100 times more innocent order streams that are willing to be "extracted" - buying Meme coins through sandwich attacks and snipers, except for the most perverted ones in Ken Griffin In fantasy?

In order for Meme currency trading volume to continue to grow and compress SOL's price-to-earnings ratio, we need SOL's price to increase to enhance the wealth effect. But this goes against the purpose; we try to compress the P/E, rather than expand or keep it.

Other applications such as DeFi, DePIN, and payment applications will not generate the same number of REVs per unit of block space. For example, if a complex trader lends blue chip assets to earn 10%, or if a player plays a game, it may consume the same amount of block space, but the REV generated is much lower than Meme currency trading.

"Mercenary" Memecoin

Memecoin's trading volume also tends to shift to new chains as the wealth effect of the new tokens is transferred.

You might think that the reason Memecoin’s release moved from Ethereum to Solana is that Solana is more scalable and more suitable for trading, and Solana’s technological advantages mean it will continue to be a hotbed of depraved gambling. This is not the so-called "decentralized Nasdaq", but as a center of crazy speculation, it is worth at least something.

This ignores the direct cause of the Memecoin frenzy is the SOL wealth effect. For example, by the end of 2023, BONK's price and trading volume were following SOL's footsteps. We can see that the same situation applies to the volume of decentralized exchanges (DEXs), especially Memecoin, until March 2024, after SOL rebounded 10 times from its FTX low point after the crash, Memecoin The transaction just began to explode.

With the introduction of new chains, especially high-performance L2s such as MegaETH and Rise, these chains may provide Memecoin traders with a better trading venue. These chains will be launched with new tokens and new wealth.

They may not be decentralized, nor do they synchronize global information at the speed of light, but the talent who trades $FARTCOIN doesn't care—the risks they take on on Memecoin are much greater than any risks that decentralizes. L2 provides lower latency, better performance and higher transaction success rates, which is a better trade-off.

Where is Ethereum?

The narrative about REV growth on Solana has also been used to advocate for changes to Ethereum. The implicit argument is that Ethereum must be expanded to regain lost activity (and REV). This is not justified considering that Solana’s activity is driven entirely by Memecoin. Extending L1's execution by 5 or 10 times will not bring Memecoin back to Ethereum L1; Solana still has lower fees and stronger short-term wealth effects.

If DeFi was migrating to Solana overall, we should have seen a significant drop in transaction volume on Ethereum. However, Ethereum's DEX trading volume in December 2023 remained between 10% and 20% of its historical highest monthly trading volume. Even during the 2021/22 bull market, ETH prices fluctuated more, with NFT and Memecoin trading The amount is also much higher than that now.

This supports the idea that DeFi users have different categories. While Memecoin traders are increasingly flocking to Solana, a large amount of funds remain on Ethereum. Citing REV or DEX volumes as evidence that Solana is dominant in DeFi is misleading.

If we use DeFi TVL as an indicator of each network activity type, we can see that Ethereum’s TVL is 6 times that of Solana (although ETH price is weak), which shows that activity on Ethereum is of quality to activity on Solana different. From a DeFi perspective, Memecoin is almost useless; by the way, what are the mortgage requirements for a $BUTTHOLE loan?

The counterpoint is that almost all on-chain activities are pure speculation, so it is somewhat hypocritical to regard Solana's activities as Memecoin transactions only when they are not linked to real economic activities. My first reaction is: I suggest that for the benefit of the industry, stop making such remarks.

More serious, while Solana leads the way in REV, Ethereum clearly has a more mature and vibrant DeFi ecosystem, as it still shows strong TVL and activity even without a large number of Memecoin releases.

Rollup Center Roadmap Counterattack

We have argued that the value of SOL cannot be proven by future expected REV. At present, SOL is still competing with BTC and ETH to become the first link in the capital flow of crypto assets.

But Memecoin presents another structural challenge for Solana's long-term viability, as Memecoin traders are more suitable for L2 trading.

L2 is capable of high throughput operation with extremely low latency. They respond faster to problems and downtime without the decentralized coordination overhead. They make it easier to filter spam transactions.

You might think that Solana's high-performance client is a lasting advantage, but open source technologies always like to be commoditized. Ironically, when venture investors cite Solana's technological advantages over Ethereum, teams like Eclipse and Atlas have already deployed SVM L2 on Ethereum.

Ethereum's liquidity and TVL make it a better platform for L2. Furthermore, Ethereum explicitly makes a tradeoff between performance and availability, which is a better choice for L2, as L2 does not require high throughput on L1. The most feared situation of L2 is that when L1 is offline, transactions or bridges cannot be completed.

This presents real risks to Solana, as its REV growth is driven entirely by highly cyclical activities that can be better served by other chains.

in conclusion

Solana's optimistic situation is that it is now in the same position as Ethereum in 2021, and ultimately, the activity will bring a more mature DeFi ecosystem. But that's not a guarantee.

DeFi activity on Ethereum is dominated by whales who don’t care about fees, and they focus more on decentralization, availability and security. Imagine a world where retail users trade Memecoin on Unichain and whales trade UNI on Ethereum. L2 can provide a better environment for Memecoin and long-tail crypto assets, while Ethereum provides a better environment for whales because it prioritizes activity over performance.

Solana's pessimistic situation is that it has not really succeeded in following its own North Star to build a decentralized Nasdaq. Traders are concerned about delaying and ensuring the execution of transactions. During volatility, it is difficult to include transactions on Solana, and delays cannot compete with (more centralized) L2.

More precisely, Solana is successfully building a decentralized “casino,” a place to maximize volatility and risk exposure for traders who obtain rich cash through short-term wealth effects.

When the Memecoin craze ends, this may become a new form of gambling, but it is unlikely that it will happen because gamblers don’t care about Solana’s advantages over L2, but more about (centralized) L2’s advantages over Solana .

But back to the point. In the crypto space, narratives that support specific perspectives (and heavy positions) are very easy to fill. This is especially easy especially when your story contains compelling technology and activities driven by speculative crazes. But because of this, we should be skeptical about stories that are clearly biased towards the narrator.

I think Ethereum accepts critics’ views in fact doing itself a harm. This includes stories about REV and comparisons with Solana’s economic indicators, but more importantly, the debate about value accumulation and L2 as Ethereum’s L1 parasitics. Hopefully I will discuss this in a future post.

Note: This post has been in the draft box for several months, so it does not include $TRUMP, $MELANIA or the recent market sell-off. These do not have a substantial impact on the argument and are therefore not mentioned.