Should SOL Be Trading at a 70% Discount to ETH?

Solana (SOL) was trading at 97% discount to the market capitalization of Ethereum's ether (ETH) in January 2023 — a clear market dislocation that has closed significantly over the last two years.

Today, the discount has shrunk to 70%.

However, Solana is starting to challenge Ethereum in terms of on-chain activity and key measures of network usage.

Which raises the question: Is the market still dislocated?

In this short piece, we explore this key question with relative analysis across four key data points. Let’s dive in.

1. Network Fees

Data: Artemis, The DeFi Report, Gas Fees Only (does not include MEV). Please note that we’ve included the following L2s in the comps data: Arbitrum, Base, Optimism, Blast, Celo, Linea, Mantle, Scroll, Starknet, zkSync, Immutable, and Manta Pacific.

Layer 2s create new demand for block space on the Ethereum layer 1 and increase the network effects of ETH the asset. Therefore, we include them in our comparatrive analysis for SOL.

In the second quarter, Solana did $151 million in fees, which is 27% of Ethereum plus its top layer 2s.

Fast forward to the last 90 days and the ratio has jumped to 49%.

2. DEX Volumes

Data: Artemis, The DeFi Report

Solana did $108 billion in decentralized exchange, or DEX, trading volume in the second quarter, or 36% of Ethereum and its top L2s. Over the last 90 days, Solana is up to $153 billion and 57%, respectively.

3. Stablecoin Volumes

Data: Artemis, The DeFi Report

Solana did $4.7 trillion in stablecoin volume in the second quarter: 1.9 times Ether and the top L2s.

Over the last 90 days, solana did $963 billion of volume: 30% of ether and the top L2s.

Why the drop?

We think this is mostly due to bots/algorithmic trading that were juicing the numbers in the second quarter.

Furthermore, only 6% of Solana’s stablecoin volumes are peer-to-peer transfers, per Artemis. On the Ethereum L1, this figure is closer to 30% — an indication that Ethereum is used more for non-speculative activity than Solana.

In terms of stablecoin supply, Solana has just 4.1% of Ethereum and its top L2s, up from 3.5% at the end of the second quarter.

4. Total Value Locked (TVL)

Data: Artemis, The DeFi Report

Solana ended the second quarter with $4.2 billion of total value locked (TVL): 6.3% of ether + the top L2s.

Solana’s TVL is currently $8.2 billion: 12% of ether + the top L2s.

In summary, based on 90-day performance, Solana now has:

1. 49% of Ethereum's fees (up from 27% at the end of Q2)
2. 57% of Ethereum's DEX volumes (up from 36% end of Q2)
3. 30% of Ethereum's stablecoin volumes (down from 190% in Q2)
4. 4.1% of Ethereum's stablecoin supply (up from 3.5% end of Q2)
5. 12% of Ethereum's TVL (up from 6% end of Q2)

We think the on-chain data points to a fair re-pricing of SOL's valuation relative to ETH.

With that said, investors should consider qualitative differences between the two networks as well as potential upcoming catalysts as we head into year-end and 2025.