To our Partners and Shareholders,
At the onset of our series of Solana updates, I thought it would be helpful to reiterate why we find this investment so compelling. Here is an excerpt from the first page of our internal investment memo:
Blockchain protocols facilitate transactions and recordkeeping through a decentralized, peer-to-peer, open-source distributed network. Bitcoin was the first successful blockchain protocol and it serves as a payment network. Ethereum extended the technology by adding generalized programmability, enabling more complex transactions. This enhanced functionality has led to the rise of a wide variety of decentralized applications. However, Ethereum is slow and clunky to use relative to centralized databases, which has hindered faster adoption. This has led to innovation around scaling solutions, some of which are built on Ethereum and others of which are entirely new blockchain architectures. Solana is a redesign of the technical architecture, inspired by the founder’s experience working on cellular networks at Qualcomm, that unlocks enormous performance improvements and give it the highest probability of enabling applications that onboard the next billion users.
Solana is a high-throughput low-cost Layer 1 blockchain protocol that supports smart contract programmability. Leveraging novel optimizations like Proof of History, transaction pipelining, mempool-less forwarding, and parallelized consensus, Solana can process an industry-leading 2,000 transactions per second (comparable to Visa payments network load), settling with 400ms block times, while costing users a fraction of a penny per transaction.
The SOL token is the native token on Solana. It is used to pay transaction fees and to stake to participate in its proof-of-stake consensus and earn SOL-denominated block rewards.
We believe Solana is a good investment for the following reasons:
The fundamental developments year to date give us good evidence of our thesis playing out. Key performance metrics including user growth and transaction fees are accelerating rapidly. Solana has emerged as the primary destination for retail users and memecoin traders, displacing Ethereum's NFT dominance from the previous cycle.
Solana's unique active addresses have skyrocketed from a local bottom of 202K in October 2023 to nearly 1.58M in the past nine months, showcasing the platform's staggering growth in user activity. Simultaneously, priority fees on the network have exploded, surging from under $100K per month in mid-2023 to an all-time high of over $60M in March 2024, underlining the intensity of demand for block space on Solana.
One of the clearest signs of Solana's surging retail adoption is the explosive growth in new tokens in its ecosystem. Starting in January 2024, Solana saw a massive influx of new tokens, far outpacing other chains like BNB, Ethereum, and Polygon. Solana now accounts for 75% of all new tokens appearing on DEXs, up from 0.50% a year ago. This rise in Solana-based tokens reflects its strength in retail usage, driven by memecoin activity.
Solana's share of Ethereum’s decentralized exchange volume has skyrocketed from virtually 0% in 2021 to over 79% in June 2024. This demonstrates the incredible momentum behind Solana's DEX ecosystem and highlights how its high-performance architecture is enabling it to rapidly gain market share from competitors for core use cases like trading.
Crucially for investors, Solana's soaring user activity and DEX volumes are translating into real economic value capture. The total value accrued from Solana transactions, as measured by Transaction Fees + MEV, has grown to the point where it now rivals that of Ethereum. This underscores how Solana's rising adoption is creating a powerful flywheel effect - more usage drives more fees, which in turn attracts more developers, who build apps that attract more users.
Taken together, the combination of Solana's booming retail user base, record-breaking token launches, dominant DEX growth, and surge in value capture presents a compelling fundamental case.
As one might expect, these strong fundamentals have been accompanied by supportive price action. Solana price increased 41% year-to-date, placing it in the top decile of crypto tokens. In particular, we are encouraged by Solana’s relative strength despite the FTX Estate selling a roughly $4.0bn position through the last few months. Looking forward, with that supply overhang now gone and continued strong fundamentals, the path forward for Solana seems clear.
There are a couple ways we think about the upside for Solana from here. Our fundamental underwriting is premised on Solana capturing 5% of the Global Payments TAM at an all-in take rate of 15bps (as compared to Visa and Mastercard at 25bps), which gets Solana close to $20bn of free cash flow and suggests more than 6x upside potential from here. On a relative valuation basis, Solana’s market cap is just 15% of the Ethereum ecosystem (ETH plus its Layer 2s combined), and arguably the value in those two ecosystems could converge also implying more than 6x upside potential.
On June 27th, Van Eck filed an S-1 for a Solana ETF. It’s reasonable to expect other ETF issuers to follow after the ETH ETF officially launches. VanEck may have jumped the gun a little bit, but clearly isn’t the only one interested. The BTC ETF has been such an incredible success that it will drive issuers to want to launch other spot digital asset ETFs.
There is also now a clearer path to regulation of digital assets in the US after the events in May. SOL is the next likely candidate in terms of being widely decentralized, the critical item to judge if something is a commodity or security under FIT21, such that it is regulatorily compliant and being widely known and large enough market cap to be a commercially viable product.
I don’t think this will be approved anytime soon, and this move is more about marketing and positioning for the issuers than anything else at the moment. The Solana ETF decision-making process will be different because Solana has been explicitly mentioned by the SEC in its lawsuit against Coinbase as an alleged security. Additionally, Solana doesn’t have the CME futures trading history that Ether has and which issuers used as the core argument to get an ETF approved. As a result, it will be some time before this product gets approved. Remember the Bitcoin ETF took more than 6mths from Blackrock announcing its initial intentions to approval, so something longer than that shouldn’t be surprising. This decision making process could accelerate under a new, more friendly crypto administration in 2025.
Solana Headlines (reading material for those with some extra time and curiosity)
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