Figure 5: Solana has the second largest developer ecosystem after Ethereum
During the last cryptocurrency cycle, the price of the SOL token fell from a peak of nearly $260 in November 2021 to just $2 in December 2022. For a time, Solana was associated with the failed cryptocurrency exchange FTX, which injected capital into Solana and contributed some development resources. Perhaps unsurprisingly, after FTX's collapse, many casual observers were uncertain about Solana's future, despite the continued presence of a significant number of SVM developers. However, starting in late 2023, the SOL token began to recover. Since then, it has significantly outperformed the FTSE/Grayscale Smart Contract Platform Cryptocurrency Sector Index (Figure 6). Figure 6: SOL Outperforms Peers Since 2023 Currently, the supply of SOL tokens is growing at approximately 4% to 4.5% per year. All else being equal, this could be considered a dilution of token holders' equity. However, depending on network conditions, SOL stakers can earn a nominal return of approximately 7%. As a result, SOL stakers earn a “real” (inflation-adjusted) return of approximately 2.5% to 3% (Figure 7). Currently, approximately two-thirds of the outstanding SOL tokens are staked.
Figure 7: SOL stakers can earn a nominal return of approximately 7%
Smart contract platform tokens like SOL are digital commodities that provide utility within their network and may earn additional financial returns (e.g., staking rewards). Their value is tied to network size. Like other smart contract platform tokens, the investment thesis for SOL tokens focuses on the potential growth of the Solana network. Like any other asset, prices don't always move in tandem with fundamentals. However, we believe that if the Solana network grows over time—if it acquires more users, processes more transactions, and earns more fees—investors can expect SOL prices to increase. Competitive Dynamics Solana has successfully executed its vision, which we interpret as a fast, inexpensive blockchain open to all. However, its specific design choices leave room for competitors to capture or retain market share in certain use cases. For example, other blockchains sometimes offer faster and/or cheaper transactions by operating more centralized networks (e.g., using only a small number of active network nodes). Even though centralization may carry risks, users may favor this convenience. Other blockchains may compete with Solana by maintaining a permissioned network (i.e., allowing only approved users and/or approved activities). This could be advantageous in certain situations. Because Solana is a permissionless network—everyone is welcome to join—it's a hotbed for both high-tech startups and speculative retail trading. On the other hand, the Solana token may be less suitable as a long-term "store of value" monetary asset than Bitcoin or Ethereum. This partly reflects Solana's higher nominal supply inflation: scarcity is a key characteristic of any long-term store of value. But a more important factor may be the network's resilience to third-party interference. For a digital asset to serve as a long-term store of value, users need to be confident that they will be able to transact under virtually any circumstances in the future. One way to support this outcome is to keep node requirements low, so that the network remains highly decentralized and easily replicable. Solana's efficiency comes at the cost of relatively high hardware and bandwidth requirements, resulting in many network nodes running in data centers. In theory, over time, this could become a source of centralization and a vector for third-party interference with the network. That said, these are complex and unresolved issues, and investor perception of crypto assets as long-term stores of value may evolve over time.
Blockchains are not businesses, and blockchain tokens are not stocks—they are digital commodities with utility value within a decentralized network. Despite this, it's still possible to analyze blockchain fundamentals and base token investments on them. We believe the three most important metrics for measuring on-chain activity are users, transaction volume, and transaction fees. Based on these metrics, Solana is the leading network in on-chain activity today. Other blockchain fundamentals can also have a significant impact on token prices, and the Solana network faces formidable competition. However, the depth and diversity of Solana's on-chain economy provide a solid foundation for SOL's valuation and, in our view, are essential for further growth.
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