Author: Kyle Samani, founder of Multicoin Capital; Translator: 0xjs@黄金财经
Multicoin Capital participated in Solana's seed round in May 2018, and has since been investing in Solana's native asset SOL and the broader Solana ecosystem. We have previously published four investment theses on Solana. During that time. The first two versions were released about nine months before the mainnet produced the first block in March 2020. As the Solana network grows, our reference framework for how to think about the Solana network and SOL assets is also evolving.
Solana is now a $100 billion asset, the fastest growing developer ecosystem and has surpassed Ethereum's most important on-chain indicators (transaction volume, daily active addresses, revenue, total economic value TEV, DePIN payments, etc.). We wanted to share our thoughts on why we have been buying SOL to generate strong returns, even as Solana’s market cap exceeds $100 billion.
This post is the fifth in our evolving Solana thesis. The first four are: 1. Separation of time and state; 2. The world computer should be logically centralized; 3. Technical scalability creates social scalability; 4. The hidden costs of modular systems.
In this article, I will argue that Solana is the leading public blockchain supporting internet capital markets. Furthermore, I argue that Solana as a technology can outperform major traditional financial (TradFi) players (including NYSE, NASDAQ, CME, JPM, Goldman Sachs, and Morgan Stanley on the financial markets side, and Visa and Mastercard on the payments side) on core performance metrics like latency, while retaining the core properties of blockchains that TradFi has never offered (atomic composability and permissionless access for users, developers, and validators). Most importantly, I believe the Solana ecosystem is able to achieve both of the following goals simultaneously, even if they seem to contradict each other: 1. Reduce end-user financial service fees by 90-99% 2. Capture a higher total market cap than traditional financial (TradFi) incumbents While traditional financial players like the NYSE and Nasdaq provide only a small portion of value in the financial stack, Solana already powers a superset of functionality from these systems through a unique DeFi protocol that has been in production on Solana for years. Solana not only expands the total addressable market (TAM) for trading by increasing access and performance, but also captures value from more layers of the financial stack. Broadly speaking, all financial services can be classified into two categories: payments and finance. I will start by explaining how payments are a loss-making product for blockchain; after that, the majority of this article will focus on the core infrastructure of Wall Street finance. Provide the best global payment experience There are many ways to move money. Apple Pay’s user experience is great. Using a physical credit card is great. Using Venmo, PayPal, or Square Cash is fine. Everything else is mediocre or worse — ACH, Wires, Zelle, Bill Pay, remittances, etc.
But even these legacy systems with a good user experience have ridiculous fees. Wire transfers cost $25, and credit card fees can be over 2%. It’s crazy that updating a ledger entry would cost consumers and merchants so much. It defies basic common sense and goes directly against the natural intuition that electronic transactions should be cheaper than analog transactions.
Solana simplifies the payment process and makes the user experience awesome. And the fees are next to zero. Watch the video (https://youtu.be/LaNwHW_NBIs) Sling Money is built entirely on Solana. It’s the future of money movement.
The market cap of global payment companies is about $1.4 trillion. Solana aims to reduce this cost by 90%. The only fee Solana itself charges users is gas, which is about 0.1 cents per transaction, or $0.001 per transaction. Even if the Solana network averaged 50,000 transactions per second over a year, that would only add up to $1.5 billion for users. For comparison, Visa maintains thousands of transactions per second.
Payments are a loss leader for blockchains. Payments are critical to driving adoption, providing real utility to users and companies, but are not the primary source of profit for blockchains or their ecosystems.
Yet payments are critical to the growth of blockchains. The beauty of payments is that they are inherently viral. When Alice sends money to Bob, who then sends money to Carol, this leads to natural growth in wallet adoption.
The primary source of profit for blockchains is not payments, which are effectively $0. Instead, the primary source of profit for blockchains is the naturally occurring volatility between asset prices, which manifests itself in the form of Maximum Extractable Value (MEV). My co-founder Tushar further explained this in his 2022 Multicoin Summit talk.
The rest of this post will focus on how and why Solana is able to outperform TradFi on traditional performance metrics, and how this will enable SOL and the Solana ecosystem to profit.
Market Efficiency in CeFi and DeFi
Solana is a decentralized network of thousands of nodes that reach consensus on a series of financial transactions at a rolling rate of 400ms (and hopefully down to 120ms in the coming years).
The correct way to measure market efficiency is not by transaction latency, but by the spreads offered by market makers (MMs). At the end of the day, buyers and sellers experience price. A human user (i.e. non-bot) cannot experience the difference between a 50ms, 100ms, and 200ms financial transaction. For context, the average human eye blink is 100-150ms.
Market making in centralized finance (CeFi) is nearly deterministic. Most market makers have their servers co-located with CeFi exchanges, and each market maker has a fiber optic cable of exactly the same length connecting its servers to the exchange. Exchanges complete trades in microseconds, so market makers can understand their exposure in real time and with high precision.
Decentralized Finance (DeFi) exchanges — such as Drift, Phoenix, Clearpools, Raydium, and Orca — in contrast have much lower finality than CeFi exchanges because:
1. Solana’s network leaders are constantly rotating
2. Finality time increases because validators around the world need to reach consensus
As a result, market makers cannot understand their exposure in real time with the same precision. In many cases, market makers may leave outdated prices on the blockchain order book, which others may take advantage of.
As a result, DeFi spreads are generally wider than CeFi spreads.
Let’s take a look at how these systems are changing to make the experience better for makers and takers.
Makers — Narrowing Spreads with Conditional Liquidity
Things are changing. DFlow has just quietly launched Conditional Liquidity (CL) on Solana. As the name implies, conditional liquidity is liquidity that is only available if the taker’s order meets certain predefined conditions. For the purposes of this article, the important conditions are toxic vs. non-toxic order flow.
How does CL work? CL stipulates that a given unit of liquidity can only be withdrawn if the taker is endorsed by a known frontend application. This includes wallets such as: Phantom, Backpack, Solflare, and Fuse as well as frontends such as Drift, Kamino, Jupitar, and DFlow’s own. This mechanism guarantees that bots cannot consume CL because bot orders are not endorsed by an endorser. This is a huge step forward for MMs as it virtually guarantees that they will not be eliminated even if their quotes are delayed by a few seconds.
While CL is a new concept in terms of mechanism, it is directly inspired by the practice widely adopted in TradFi. Robinhood is a pioneer in this area. Robinhood consistently offers customers better prices than the national best bid and offer (NBBO) on the NYSE and NASDAQ. They have demonstrated this pricing improvement over trillions of dollars of trading experience over the past decade. This makes sense because market makers have good statistical reasons to believe that the average Robinhood user is less toxic than if they were trading directly on the NYSE or NASDAQ. In short, who would you rather be dealing with in a trade: Joe watching YouTube videos, or Citadel?
CL lets MM know that they are not dealing with the well-known Citadel.
For more background on how order flow segmentation can lead to better prices for retail traders, can be seen here.
The beauty of DFlow CL is that it has the best of both worlds, TradFi and crypto. It is able to offer tighter spreads to the likes of Robinhood’s retail clients, and provides the real-time permissionless access and open auditability of the blockchain.
CL is an emerging concept. However, we expect it to become the dominant paradigm for on-chain liquidity quotes in the coming years, as market makers hate being fooled by stale quotes. Market making is fundamentally about quoting based on the maximum available information. There is no reason why market makers (whether passive or active) could not incorporate more information (i.e. conditional liquidity) into their pricing.
DFlow’s CL implementation on Solana is currently 100% open source and does not charge any fees or taxes. Below is the GitHub repository.
Conditional liquidity is the most significant feature improvement in DeFi since Uniswap launched the xyk automated market maker (AMM) in late 2018. As it is adopted, it will reshape all discussions in DeFi about UX, spreads, MEV, and more.
To reiterate, CL will enable market makers to provide tighter quotes to ordinary users. We hope this is good for market makers, users, SOL, and the Solana ecosystem.
Takers — Leveraging Alpha by Reducing Latency
Financial markets should incorporate all public information into asset prices. They usually do. However, price discovery for most assets happens on a single server in one place, while the information that affects prices is generated all over the world.
The TradFi market microstructure is designed around low-latency traders who want to co-locate with exchange matching engines.
If you as a retail trader observe that an event in Singapore will affect the price of TSLA, you still have to send the information to New Jersey next to the market maker. This is fundamentally unfair to the taker and unnecessary for the market maker.
The first correct view of this problem is that the observer of that information should be able to place an order based on that new information to a validator located in Singapore rather than New Jersey. That market participant should get that alpha for observing that information first and adding the order to the global order book the fastest.
Today, Solana, like other leading blockchains, has only one leader at any time. But this will soon change as Solana is moving towards Multiple Concurrent Leaders (MCL).
Under MCL, there will not be just two leaders at any time, but dozens. With MCL, participants who observe real-world information can and will incorporate that information into asset pricing more quickly.
The key to optimizing price discovery is not to reduce latency by a nanosecond on a single matching engine, but to make information about updated prices available to people around the world by pushing price discovery to the edge.
Counterintuitively, decentralization enables takers to minimize latency in transaction times, thereby maximizing information dissemination in financial markets.
By definition, decentralized price discovery is superior to centralized price discovery. The world is big and diverse.
Scaling the TAM horizontally…
Most major exchanges around the world, from the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, trade one asset (e.g., stocks or commodities). But blockchains reveal a reality: all units of value (currencies, commodities, stocks, derivative positions, debt, meme coins, governance tokens, utility tokens, NFTs, etc.) can be represented as standardized tokens on a permissionless blockchain.
Today, most assets traded on blockchains are blockchain-native assets. That is, they are natively created and issued on the chain. This includes DeFi tokens, DePIN tokens, NFTs, and more. But more and more assets are being issued on-chain that represent TradFi assets, including US stocks, bonds, real estate, US Treasuries, mezzanine debt, and more.
Eventually, almost all assets will be traded on systems like Solana that are global and permissionless in nature. This does not necessarily mean that people will stop trading on the NYSE, NASDAQ, and CME, but it means that more and more volume will be traded on-chain rather than on TradFi venues. This is natural because blockchains are inherently global, permissionless, 24/7, more accessible to retail traders, and easier for developers to integrate than TradFi.
Integrating private keys and tokens into any application is a piece of cake, whether that application is a Telegram bot, a lightweight Android app, or a WeChat mini program. Interfacing with the large number of heterogeneous systems that represent the global TradFi system is exponentially more difficult. Their APIs are much more complex, settlement times are slow and non-uniform, and in many cases, TradFi institutions do not face retail traders at all.
Because blockchain is public and permissionless, it unambiguously increases participation in all forms of financial markets. Ultimately, asset issuers don’t care what rail their assets are traded on. Asset issuers just want to ensure that anyone who wants to buy their assets can. Today, most company CEOs don’t think that issuing shares on-chain will increase their potential shareholder base, but this will change in the coming years as the number of crypto users worldwide grows from approximately 50 billion to billions.
Not only do we believe crypto will support all TradFi assets, we also expect it will support many new assets that simply could not have existed before. One of my favorite examples is Parl, which offers perpetual contracts based on the average price per square foot of closed real estate transactions in a specific market over a rolling 30-day period. Parcl allows you to go long Austin, short San Francisco, and use the equity value of each position to collateralize the other!
There are even teams building products that issue NFTs to represent single bottles of whiskey, wine, and watches on-chain!
Solana’s TAM is expanding in every direction. Wall Street is slowly moving on-chain, and developers are building all kinds of new financial markets on-chain.
…and capturing value from innovation
So far, everything in this post has viewed Solana as a matching engine. But with DeFi protocols like Drift, Jupiter, Kamino, marginfi, etc., the Solana ecosystem can provide:
1. All imaginable financial services
2. For everyone in the world
3. Improved transparency and auditability, thereby significantly reducing chain contagion risk
4. More capital efficient than TradFi.
Today, the largest DeFi primitives on Solana are 1) spot trading, 2) lending, and 3) perpetual futures trading. These are roughly equivalent to 1) NYSE/NASDAQ, 2) large banks and FCMs that provide consumer and prime lending services, and 3) CME. These are only available in the United States. Solana is racing to provide financial services to everyone in the world.
While many Solana supporters including Anatoly (Co-founder and CEO of Solana Labs) and I have called Solana the decentralized Nasdaq, the TAM of Solana and its ecosystem is far larger than Nasdaq. Solana is trying to power all of the world’s financial services; it’s much more than a matching engine.
The incredible thing about Solana is that all of these different financial instruments can be natively and atomically combined with each other without explicit approval or support from application developers. This concept of using existing smart contracts as lego blocks to build more useful services is what most people in the industry call composability. This enables faster experimentation and growth because developers can build on a base set of contracts, integrations, and liquidity, all of which create value for stakeholders in the Solana ecosystem in a virtuous cycle. This means products built on Solana can innovate faster and provide a better consumer experience.
Solana itself does not provide financial services. But the stack created by Solana supports hundreds (soon to be thousands) of financial services that facilitate trillions of dollars in risk transfer each year. Even though gas costs are near 0 and trending downward, Solana directly profits from the growth of these financial services through Maximum Extractable Value (MEV).
As my partner Tushar talked about at the Multicoin Summit in 2022 and 2024, asset ledgers like Solana can be valued based on the MEV they capture. Every new financial service generates incremental MEV, and Solana can capture a portion of that. Solana alone is already generating over $100 million in MEV today, and outside of those specific app revenues, it’s still early days here.
In Q4 2024, the Solana network earned over $800 million in REV (not including SOL inflation), which is about $3.2 billion on an annualized basis. That’s up from about $0 a year ago. This is the case despite the fact that there are almost no TradFi assets issued on Solana and the relative immaturity of the major DeFi protocols on Solana, most of which are only a few years old.
Solana’s TAM is growing in three dimensions:
1. DeFi protocols continue to mature, adding new features and functionality and creating more MEV opportunities.
2. Entrepreneurs are building new financial markets on the chain, such as computing, telecommunications, energy markets, and blockchain-enabled collectibles markets (BECMs), etc.
3. From memecoin to US stocks, more and more assets are being issued on the chain.
These not only increase Solana's TAM, but also reinforce each other. For example, the more assets are issued, the more collateral is available for lending.
Solana is compounding faster and faster.
Internet Capital Markets
The Solana ecosystem is moving full steam ahead to realize the vision of the Internet Capital Markets. Solana is simultaneously improving execution for market makers through conditional liquidity and taking parties through multiple concurrent leaders. In addition, the Solana ecosystem is expanding its TAM horizontally (by supporting a wider range of TradFi and crypto-native assets) and vertically (by capturing some MEV from the multitude of financial services built on Solana).
This is a great opportunity to create a global, permissionless financial system that:
1. Enable those with information advantages to capture alpha in every asset class
2. At the same time, straddle the smallest spreads
3. And enjoy the lowest fees
4. Have leverage from global sources, transparent and auditable in real time
5. Maximize capital efficiency through atomic composability across locations and protocols.
This is the vision of the Internet Capital Markets. This is the vision of Solana.
Weiliang
Weatherly
Alex
Miyuki
Anais
Catherine