On-chain data analysis: Can Solana, which is mired in a quagmire, "survive in the end"?

Source | Web3 Academy

Compile the | Shirasawa Research Institute

There's no doubt that investors are depressed about Solana...

Take a look at the price list below. Over the past 14 months, the price of SOL (Solana's native token) has fallen from around $260 to less than $10, and at the time of writing, just over $16.

That said, SOL is down nearly 97% from its all-time high.

To make matters worse, DeGods, one of the top NFT projects on Solana, recently announced that it will migrate to Ethereum, while the team's second project, Y00ts, will also migrate to Polygon.

All of this, of course, happened with the bankruptcy of FTX, one of SOL's largest holders (over 10% of the total supply) and Solana ecosystem investor.

There is no doubt that Solana's current situation looks bad. 

However, cryptocurrency investors in 2018 know that Ethereum went through some similar situations.

In 2018, the price of ETH fell nearly 94% from its then-all-time high of $1,428 to around $85.

The cryptocurrency and Web3 space back then was very different from it is now, and after the bear market, many projects ran out of money and investors fled the space, leaving many, even loyal members of the Ethereum community, wondering if the Ethereum blockchain would succeed.

Thankfully, the Ethereum community eventually survived the long crypto "winter" and became the vibrant and thriving Ethereum ecosystem we know today.

If there is one thing I learned from the 2018 ETH crash, it's that there is a big difference between the Ethereum blockchain and the native currency, ETH.

The same goes for the Solana blockchain and native currency SOL. So, while the price of SOL looks very bad, it may not reflect what is happening with the Solana blockchain and its community.

In fact, take a look at this chart of Amazon stock below.

In 2000, the price of AMZN fell by 94.79% to $4. AMZN's most recent all-time high of $165, in its 26 years of stock market trading, came out: 

Seven times the price fell by more than 30%

Four times the price dropped by more than 50% 

and three price drops of more than 60%

However, this does not prevent Amazon from being one of the largest companies in the world at the moment.

The crux of the matter is that the price has nothing to do with the underlying technology. The price of technology will always fluctuate and may sometimes be significantly "decoupled" from its fundamental value.

But it doesn't matter, because network effects are the real drivers of a technology's adoption.

Why network effects matter

Network effects are a phenomenon in which more and more participants using (or interacting with) a particular technology increases the "value" of that technology.

A more valuable technology increases the number of participants who use (or interact with) the technology, which again increases its "value" and thus the number of participants.

For example, the internet is getting better and better as more and more people start using it. Facebook, Amazon, and others have the same network effect advantage.

Once a technology reaches a certain level of network effect, it is very difficult to die — especially if the network continues to evolve over time. Bitcoin and Ethereum may have reached this point.

So, when we ask "Is Solana going to die?" "When this problem comes in, what we need to do is look at the network effects of it. We must investigate what the participants in the Solana blockchain (i.e. users and developers) are doing.

The beauty of blockchain technology is that we can do just that!

We can take a look at new user trends on the Solana blockchain.

We can review trends in user transactions and value on the Solana blockchain

On top of that, especially early in the technology, we can study developer activity trends and new projects deployed on the blockchain.

Before analyzing on-chain data, keep in mind that we've been in a bear market for 14 months now, so naturally, the numbers can look bad.

So what we're going to do is compare Solana's stats with Ethereum over the same time period, and Ethereum's "bear market" stats from 2017-2018 to see how well Solana is right now.

Active wallets

If we look at Daily Active Users (DAUs) on the Solana blockchain, we see that after the FTX event, it dropped directly from its all-time high of 454,229 to its lowest point of 95,958, a drop of 78.8%. 

In contrast, Ethereum's DAU decline was much smaller. Ethereum's DAU dropped from 528,671 to a low of 295,500, down 44% during Solana's same time period. 

We also need to remember that the current focus of the Ethereum community is to move users from Tier 1 to the newly thriving Tier 2 such as Arbitrum and Optimism.

As we can see in the chart below, these L2s actually gained users in the 14 months of the bear market.

However, a fairer comparison might be to look at Ethereum's decline in DAU during the 2018 ETH crash. Interestingly, during the bear market of 2018, the Ethereum DAU dropped from 459,969 to 128,265, a 72% drop in DAU.

To recap...

Daily active users

Solana 2022 = -78.8%

Ethereum 2022 = -44%

Ethereum 2018 = -72%

Price

Solana 2022 = -97%

Ethereum 2022 = -79%

Ethereum 2018 = -94%

So far, in this bear market, Solana's data in terms of price and DAU seems similar to Ethereum in 2018.

The main difference is that Solana faces direct competition from other public blockchains in this bear market, while in 2018, Ethereum was basically the only viable smart contract platform.

It's worth noting that the Ethereum L1 and Solana blockchains shouldn't be considered competitors because of their distinct goals. However, Ethereum L2 and Polygon are direct competitors to Solana. 

So, interestingly, Ethereum L2 and Polygon are growing, while Solana is not.

Trading and TVL

Solana executes significantly more transactions per week (txns) than Ethereum.

However, the legitimacy of these txns is questionable as many txns on Solana are believed to be bots executing bulk transactions.

Solana's weekly transactions dropped by 74% from 496,847,478 to 127,963,178, and Ethereum dropped 40% from 11,074,661 to 6,705,093 during the same period. (This chart is for reference only and does not include all voting transactions on Solana).

Let's take a look back in history and see how Ethereum traded during the 2018 bear market. We can see that Ethereum's weekly trading volume dropped by 64% from 8,203,034 to 2,959,182. 

To recap...

Weekly deals

Solana 2022 = -74%

Ethereum 2022 = -40%

Ethereum 2018 = -64%

Similarly, Solana and Ethereum 2018 have similar statistics.

Outside of trading, we can also see the total value of a locked-up position on any blockchain and how it has changed over time. Solana's TVL dropped 98% from $10.17 billion to $230 million.

And Ethereum's TVL fell by 78% from $109.49 billion to $23.82 billion.

There were no TVL metrics in 2018 because DeFi didn't exist at the time, so we don't have a historical comparison for that.

Developer activities and deployments

Similar to trading, we should take the amount of developer activity with a grain of salt.

This is a difficult metric to track, especially in the Ethereum ecosystem, as there are many different Ethereum clients. In addition, many teams are now only building in L2, not Ethereum itself.

In the chart below, we used Token Terminal tracking Github commits for each blockchain, and it's clear that they're not numerically accurate. So let's focus less on the actual numbers and more on the percentage change.

Solana's daily active developers peaked at 156 and as low as 61, down 61%. Ethereum's recent high of 296 and low of 153 is down 48%.

But again, we should consider developer growth across the Ethereum ecosystem, as many Ethereum developers and teams are moving to a variety of Ethereum L2s that are faster and cheaper.

That's why the recent growth in the number of Arbitrum, Optimism, Starknet, and Polygon developers shouldn't be ignored.

But again, let's look at Ethereum's historical data for 2018. At that time, Ethereum's daily active developers dropped from 195 to 100, a drop of 49%.

To recap...

Daily active developers

Solana 2022 = -61%

Ethereum 2022 = -48%

Ethereum 2018 = -49%

This is the first indicator that Solana has not mimicked Ethereum in 2018 so far in this article. I think the reason can be traced back to the competition.

In 2018, developers had nowhere to go if they wanted to develop on smart contract platforms other than Ethereum. Today, there are more than 20 L1s and 20 more L2s for developers to choose from.

As mentioned at the beginning, we've seen some of Solana's well-known projects migrate to Ethereum and Polygon over the past few weeks. Therefore, it will be interesting to see if this trend continues throughout 2023.

For the last few comparisons, we will examine the trend of newly minted fungible tokens (FTs) and non-fungible tokens (NFTs) in both ecosystems.

I would actually prefer to compare the total number of smart contract deployments in the two ecosystems, because developers are building more than just tokens on the blockchain. However, I couldn't find Solana's smart contract deployment data.

In the chart below, we can see that Solana's peak in Q3 2022 was 1,000 to 1,500 new FTs deployed per day, which has since dropped to around 300-800.

Aside from a few spikes in October, Ethereum's FTs deployment has remained strong between 500 and 1,000 over the past few months.

Looking at NFTs, Solana has taken a fairly noticeable hit since October. Previously, an average of about 100,000 NFTs were minted per day, but now it averages only 25,000/day, well below the peak level before October.

Ethereum's data is a bit different because this chart reflects the number of smart contracts for NFTs, not the number of NFTs minted. That said, Ethereum is once again back to its pre-October peak level.

An important factor to keep in mind here is that if we are to count the minting of FTs and NFTs in the Ethereum L2 ecosystem, you will see continued growth throughout the Ethereum ecosystem during this bear market.

Is Solana dead/dying?

If we only look at on-chain metrics, there is nothing to suggest that Solana is dead.

Some might argue that these statistics suggest Solana is "dying." However, Solana's data is very similar to Ethereum in 2018, which managed to survive and thrive in a 2-year bear market.

I don't understand why Solana can't do this. In addition to having an incredibly talented leadership team, they seem to have a strong community.

However, the biggest difference between Solana today and Ethereum in 2018 is that Solana faces strong competition.

Solana is trying to become the king of "consumer" blockchains — a fast, cheap, and mobile-friendly blockchain for the masses.

Ethereum did not join the fray because that was not its goal. Instead, Ethereum aims to become the ultimate decentralized and secure consensus layer for the internet.

That said, the Ethereum ecosystem has launched some rivals competing with Solana, such as Polygon, multiple Optimistic L2s (Arbitrum and Optimism) and ZK L2 such as Immutable, and many more L2s are on their way to joining the battlefield.

Since they are based on Ethereum, each of these L2s has the ability to offer fast and cheap transactions while also remaining decentralized and secure.

While Solana's technology has the potential to be superior in terms of scalability, we haven't seen it work yet.

The debate about the future of multi-chain and what properties blockchains need is beyond the scope of this article. 

But I would say that there is a lot of demand for blockchain in the mainstream world and it will only grow over time. While the competition between blockchains is heating up, in the short to medium term, we still don't have enough available blockchains to cope with mass adoption in the mainstream world. 

Solana, the Ethereum ecosystem, and other blockchains have plenty of room to make the pie bigger together, rather than competing for market share.

To sum up, I don't think Solana will "die" and its story will continue.

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