SOL to reach $3211 in 2030? Why is VanEck so optimistic?

Is SOL Expected to Hit $3211 by 2030? Understanding VanEck's Optimism

Author: LianGuaitrick Bush, Senior Digital Asset Investment Analyst at VanEck, and Matthew Sigel, Research Director of Digital Assets at VanEck

Translator: Karen, Foresight News

• In this study, we simulated a scenario where Solana is the first blockchain to host an application with over 100 million users.
• We assume that SOL’s take rate is only 20% of ETH’s due to fundamental differences in community ideology, and its market share is less than half of ETH’s.
• We see a reliable path to SOL token holders earning $8 billion in income by 2030.

Table of Contents

• Solana’s Approach: Availability
• Solana vs Ethereum: Ideological Comparison
• Solana’s Cost and Revenue Challenges
• 2023 Solana Valuation Scenario Overview
• Projected Trading Patterns for Solana by 2030
• Solana’s Potential: Risks and Returns

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Although there is a variety of blockchains currently in use, the user base of all blockchains is relatively small compared to users conducting transactions off-chain. There are approximately 5.5 million active unique addresses on smart contract platforms per day and about 44 million active unique addresses per month.

However, these numbers likely greatly overstate the number of users as many users control multiple addresses. Even when considering the surface value of these numbers, they are still relatively low compared to the 2 billion users who interact with Facebook daily and the 431 million users who use LianGuaiyLianGuail monthly.

The reason why blockchain adoption is not fast enough is that there are still cumbersome issues with using blockchains, and there are few things that can be done on-chain besides value exchange and speculation.

In order for cryptocurrencies to achieve widespread adoption and increase their $1.3 trillion market value, there needs to be practical appeal for people and businesses who are not extreme decentralization advocates or liberal fanatics, in other words, a killer app is needed.

In this case, the blockchain that hosts this killer app will benefit hugely from the activity generated by that app. In this study, we simulated a scenario where Solana becomes the first blockchain to host a single application that attracts over 100 million users.

SCP monthly active users

Solana’s potential lies in its founding team combining radical experiments with applied science to greatly improve the scalability of blockchain.

Although other blockchains have chosen clever expansion paths to bypass the limitations of distributed ledgers, Solana chooses to push the limits of technical feasibility and think backwards from there.

The Ethereum ecosystem and many other blockchains have chosen a modular vision, where different blockchains focus on the core functionality of Layer1 chains.

On the other hand, Solana has been working tirelessly to optimize every component of its blockchain, aiming for higher transaction throughput and making it highly efficient.

Therefore, compared to its traditional competitors, Solana has a significant advantage in blockchain processing capacity. Moreover, more importantly, Solana transforms its pioneering spirit into a concept of risk-taking and technological optimism with its ecosystem.

Solana has given birth to various fascinating experiments, including blockchain phones, NFTs with embedded applications, and consumer-oriented products like decentralized maps and car data collection.

Compared to other ecosystems, builders on Solana are more inclined to create things that can have a substantial impact on daily life.

Solana Path: Accessibility

The probability of a blockchain network hosting the next “killer app” depends on its ability to make the app fast, convenient, and accessible for users. The stronger this ability, the better the environment for users to rely on.

The key question lies in how to measure the capacity of a blockchain and transform it into accessibility. A commonly used metric, transactions per second (TPS), is an insufficient measure and can be easily manipulated.

In reality, blockchain teams can improve this metric through various techniques, including changing the amount of data included in each transaction, giving up ordering transactions, and limiting the ledger parts that transactions can modify.

In fact, the best metric to measure blockchain capacity is not transactions per second (TPS) but data throughput.

Data throughput involves the blockchain’s ability to receive, process, and sort data, and then reach a consensus on the impact of the data on the blockchain ledger.

Data throughput is determined by measuring the amount of data that the blockchain can receive and apply within a certain period of time.

Currently, Solana’s data throughput surpasses any other existing blockchain. In fact, Solana’s data capacity exceeds that of most planned blockchains, and Solana’s next significant software upgrade, the Firedancer upgrade, is expected to increase Solana’s current capacity tenfold. While we cannot determine how much data a blockchain for the next killer app needs to handle, we can imagine that over 100 million users will push the scalability of the blockchain to its limits.

Data throughput comparison: MB/S

Solana uses this data throughput capacity to address user concerns. Compared to most other chains, Solana is able to provide relatively fast feedback to users because it can process transactions continuously.

Take Ethereum for example. Ethereum collects user-submitted transactions into a waiting area called the mempool. Then, Ethereum validators (block builders in the new paradigm) select and sort transactions from the pool based on the price provided by each transaction. Every 12 seconds, the transactions are executed and the blocks containing these transactions are transmitted to other nodes in the Ethereum network. Therefore, Ethereum processes transactions at discrete time intervals.

This way of processing transactions is much slower than Solana’s approach, leading to longer wait times for users. On Ethereum, users have to wait for the entire process to complete before knowing if their transaction is complete. Typically, this takes minutes.

In contrast, Solana starts processing transactions immediately, and the processing time is approximately 2 seconds.

Applications on Solana

To enhance user experience, Solana has also created a novel feature called “local fee market”.

If we think of blockchain as a data pipeline from users to the blockchain ledger, Solana’s local fee market is essentially an internal sub-pipeline that allows information to flow simultaneously from different users to different parts of the ledger.

This solves a fundamental problem with Ethereum and other blockchains, as overusing one application on the Ethereum pipeline can slow down all other applications.

For example, on Ethereum, if many users are trying to mint an NFT, the resulting congestion will prevent other users from borrowing on AAVE. In the context of killer applications, users need to be able to interact with the blockchain continuously.

In contrast, Solana can use the local fee market to separate these different pipelines and charge different prices based on demand. Even if one application is experiencing high load, many other applications can still access Solana.

This is particularly important because the functionality of killer applications may depend on simultaneous interactions with many different applications.

Furthermore, being able to adjust the local fee market to price different types of transactions may be key to Solana adjusting prices based on usage. This may allow Solana to price different transactions based on their economic value.

The local fee market may enable killer application developers to more accurately assess their costs.

Solana vs Ethereum: Contrasting Principles

Solana was built by engineers from Qualcomm, who applied their expertise in enhancing mobile network capacity to build a high-performance blockchain.

The foundational principle of the Solana team is to build a network that assumes consumer-grade computing power and network bandwidth expand with Moore’s Law. Therefore, Solana is designed to directly leverage hardware advancements more than its competitors.

We see this as an optimistic mindset, believing that the future will continue to progress. The core belief of the Solana team is that blockchain should make block space (i.e., the amount of data suitable for storage on the chain within a given period of time) very cheap. In their view, this allows software engineers and entrepreneurs to cheaply test new use cases for blockchain. This is in stark contrast to Ethereum’s perspective. In Ethereum’s paradigm, success depends on Ethereum (ETH) as the primary (and only) collateral to secure the entire blockchain.

Solana’s original idea was to become a “decentralized Nasdaq.” While this viewpoint still has potential, the launch of notable non-financial consumer applications such as Hivemapper, Render, and Helium has expanded people’s awareness of Solana’s capabilities.

Solana’s team deserves appreciation for their openness to innovative technical applications of Solana. They are trying to bring blockchain to mobile phones through SMS or the Solana mobile stack, allowing developers to create blockchain apps for phones. Solana’s experimentation even led them to create phones optimized for blockchain use. Although Solana phones have been criticized for diverting from Solana’s core mission, they demonstrate Solana’s desire to address fundamental core user issues. It is this commitment to consumers that has helped Solana partner with Shopify, Visa, and Google to explore new use cases for Solana and promote the growth of its ecosystem.

Solana Developer Market Share

Solana’s Cost vs Revenue Challenge

Solana’s focus on cheap block space, experimentation, and cutting-edge technology is not without drawbacks. While providing cheap block space facilitates ecosystem growth by offering projects and users a sandbox environment at almost no cost, we must remember that providing this type of block space still incurs costs.

In the past 30 days, Solana generated $1.26 million in fee revenue, but during the same period, the cost of protecting its blockchain by paying fees to validators using SOL inflation amounted to $52.78 million.

Although Solana is not at risk of collapse in the short term due to a lack of “profitability,” ensuring the cost of security must be met by organic SOL demand for the Solana blockchain in the long run.

This is because Solana validators sell a portion of their inflationary tokens to cover their day-to-day operational costs, including hardware, labor, and connection costs (voting costs are ignored in this calculation).

Solana Revenue vs Expenses

We estimate that the total non-blockchain costs of running 1,977 Solana validator nodes is $11.8 million per year, not including labor. Therefore, we consider this figure to be the minimum estimate of the annual sale pressure for SOL tokens on Solana.

In terms of revenue, half of the revenue expenses ($630,000) are burned, representing the buying pressure for SOL tokens (the other half of the tokens are sent to validators and stakers, offsetting the potential sell-off).

Based on this simplified buying pressure and selling pressure, there must be a net imbalance of -$11.17 million, representing the buying pressure that must counteract the collective sell-off pressure from validators.

In reality, the selling pressure from Solana validators has been offset by speculators’ funds.

Therefore, until Solana’s fee income improves, the operational capacity of Solana as an ecosystem depends on the continuous introduction of new speculative capital.

The long-term pricing of Solana’s block space and the costs of using Solana are another tricky issue. The main problem with whole-chain systems like Solana is that extracting value from users and returning it to token holders is challenging.

This pattern exists because Solana prices its transactions based on the computation required, the total demand for computation, and the congestion of the region where the computation is applied.

While resource pricing makes economic sense from the perspective of pricing Solana’s network resources’ allocation, it is illogical from the perspective of effectively pricing various user operations.

For example, sending a trade order to the Chicago Mercantile Exchange (CME) is essentially free.

However, the CME and similar exchanges charge fees to traders for trade execution, and these fees can vary depending on whether the trade is executed “actively accepting” another order or after another order has “accepted” it. Similarly, posting on platforms like Twitter is free, but there are higher costs if a user chooses to promote a post or target it towards other users.

While this pricing may not be ideal from the perspective of value extraction, it is inconsequential when considered in isolation.

However, with the existence of thousands of blockchains, each tailored for specific use cases, each blockchain has the potential to extract value more effectively for token holders.

If a weak SOL price leads to Solana’s security budget falling below its demand, it could threaten Solana’s economic sustainability.

Similarly, from a resource perspective, blockchains will want to ensure that their limited resources are allocated to economically beneficial activities.

If resource pricing is improper, blockchains can be flooded with economically harmful activities, regardless of whether these activities are segmented by Solana’s native fee market. This situation has already occurred and has resulted in more disruption to legitimate use cases. Similarly, with Solana processing hundreds of transactions per second, low-value arbitrage trades are flooding the network. Implementing a native fee market may alleviate this issue, but the adaptability of this improvement in case of significant acceleration in Solana’s usage remains to be observed.

We have great respect for the vision and experimental spirit of Solana and its team, but its architecture has resulted in adverse outcomes and has affected Solana’s technical stability.

Although Solana achieved 100% uptime after a series of important network upgrades in March 2023, it experienced several periods of downtime prior to that, resulting in a complete halt of network functionality.

During the period from January 2022 to February 2023, Solana had interruptions in 7 out of the 13 months. The most recent interruption occurred on February 25, 2023, and lasted for almost 19 hours.

The core reason for this and past downtime issues is an experimental system that Solana is running.

The Solana consensus mechanism has not been formally validated, and due to the massive amount of data the system handles, it is unable to predict potential failures in Solana’s design.

Although Solana has implemented many improvements to mitigate these issues, Solana’s design may lead to unforeseen complexities that cannot be predicted before problems arise. Therefore, the Solana team still considers the chain to be in a “testnet” state, as future network failures may be caused by unforeseeable reasons.

Given the complexity of Solana and the data it processes, resolving these issues may take a considerable amount of time.

Clearly, for financial and non-financial enterprises that may want to deploy on Solana, this situation is unacceptable. Solana’s unpredictability in terms of availability is one of the reasons why Solana has a lower TVL (Total Value Locked) compared to its peers in the decentralized finance sector.

Although the Solana team has implemented what they consider to be important fixes, network vulnerabilities will still be a concern in the foreseeable future, and the introduction of the new design, Firedancer, may even increase the likelihood of irreconcilable issues arising.

SCL Weekly Active Developer Market Share

Finally, we have some doubts about Solana’s ability to attract developers to its ecosystem. Creating applications on Solana is a challenging task due to the complexity of the Solana Virtual Machine (SVM) and Solana’s intricate design.

In fact, building Solana projects is difficult for developers, as Solana founder Anatoly has likened it to “chewing glass.” Part of the reason is that Solana developers need to be familiar with Rust, a language with 2.2 million active developers, compared to Ethereum’s ability to attract 17.4 million JavaScript developers. Although Solana has made significant progress in creating tools to simplify development, its high programming requirements result in Solana accounting for approximately 6-7% of weekly active cryptocurrency developers in the past 18 months.

Given that Solana lost its biggest supporter FTX/Alameda in November 2022, it is still able to maintain a relatively stable developer share. However, it needs to increase the total number of developers and market share to increase the potential for hosting heavyweight applications.

2023 Solana Valuation Scenario Overview

We applied VanEck’s standard valuation framework to Solana and obtained a token valuation of $335 in the baseline scenario for 2030. This estimate is based on predicting the final valuation multiple of the SOL token based on the predicted actual return rate.

This actual return rate is calculated based on the expected cash flow returned to SOL token holders. Then, the multiple is applied to the token’s final year free cash flow (FCF) and divided by the expected token quantity in the final year.

Specifically, in terms of revenue and cash flow, our framework first examines Solana’s different revenue streams. The first is the acceptance rate of terminal market activities. We first determine the terminal markets that will utilize public blockchains such as Ethereum and Solana.

The three main categories are Financial, Banking, and Payments (FBP), Metaverse and Gaming (MG), and Infrastructure (I).

Depending on the specific scenario, we assume that a portion of the businesses and their revenue will come from blockchain activities or utilize blockchain in some way to find customers, create new products, reduce costs, or simplify backend business functions.

Since public blockchains are similar to Web 2.0 platforms like Amazon, Apple App Store, and Uber, we assume that public blockchains will adopt an effective take rate percentage (GMV to platform revenue conversion rate) of the total transaction value (GMV) of their terminal market revenue.

In our base case, we find that the adoption rate of blockchain activities is 1/5th of the equivalent adoption rate of Ethereum. Therefore, Solana’s total revenue from terminal market transactions is $2.88 billion.

In addition, we also include MEV as a revenue stream, where MEV flows from trading entities to validators and ultimately to token holders. We calculate MEV by estimating the total locked assets in Solana DeFi and multiplying it by the annual take rate.

Furthermore, we also consider MEV (Maximal Extractable Value) as a revenue stream, which effectively flows from trading entities to validators and ultimately to token holders. We calculate MEV by estimating the total locked assets in Solana DeFi and multiplying it by the annual fee rate.

Baseline, we found that the MEV revenue in 2030 is $5.99 billion. Once we have the raw revenue data, we will deduct the assumed tax rate, as well as approximate estimates of the verification node costs for the ecosystem.

Assumptions for 2030 Transaction Revenue Estimate

Baseline 2030 Transaction Revenue Estimate

Although the potential is huge, we believe that the possibility of Solana hosting the majority of global cryptocurrency transactions by 2030 is still lower than that of Ethereum.

The Solana network and execution engine can achieve higher throughput and unleash greater potential, but it lacks the adoption drive of most crypto users and developers.

Currently, Solana only occupies a small portion of the total locked value (TVL) in the cryptocurrency at $40.8 billion, or $408 million, and the proportion of daily active users is also low, with 184,000 out of 5.5 million users.

We also believe that new developers entering this field during the widespread application of public blockchains may not feel reliant on existing ecosystems and may not necessarily be decentralized extremists.

Therefore, new developers joining in the future may have a strong interest in next-generation blockchains that offer novel development frameworks, functionality, and capabilities, just like previous cryptocurrency cycles. Therefore, in our baseline scenario, we expect Solana’s adoption rate to be close to 30%, which is a significant increase compared to current data but far lower than Ethereum’s baseline of 70%.

This comparison is appropriate because the growth of the Ethereum ecosystem has a similar black hole effect, it devours and absorbs various ideas while increasing its share among blockchain developers.

It is worth mentioning that our price target of $11,800 for Ethereum is based on Ethereum network achieving a 70% market share in value transferred among open-source blockchains.

If Solana can avoid falling into Ethereum’s event horizon and achieve a similar dominant position like Ethereum, our bullish scenario shows revenue of $51.8 billion in 2030, with a price target of $3,211.

In terms of value capture from the end-market revenue of adopting blockchain, we believe that Solana’s potential for value capture is not as strong as Ethereum. In our baseline scenario, we believe Solana’s GMV value capture will be 20% of Ethereum’s. We make this assertion based on the simplicity of Solana’s value capture framework and founder Anatoly Yakovenko’s support for a philosophy of abundance rather than scarcity.

Rich and abundant results mean that block space will remain cheap, resulting in extremely low transaction costs. In mathematical terms, this will make Solana’s take rate on Gross Merchandise Volume (GMV) approximately 0.60% of FBP, 2.00% of MSG, and 1.00% of I.

Average transaction costs on different networks in the past 30 days

The key question is, “How does Solana make money in the long term considering its low transaction pricing?” Currently, transaction prices are very small, so a large amount of transaction activity is needed to increase Solana’s revenue data.

In our benchmark model, we expect annual trading volume to be around $600 billion by 2030, based on the assumption of Solana’s market share in the terminal market and the number of transactions per user. Based on these assumptions, we estimate the number of monthly active users to be 534 million.

Although in our base case, MEV will be Solana’s most important value capture mechanism, accounting for 67.5% of total revenue, we believe that even if usage does not reach the estimates of our base case, Solana still has the potential to increase the value of its tokens through other means.

As mentioned earlier, a blockchain needs to be cheap enough to encourage widespread use, while ensuring that validators receive enough rewards to validate the network.

Blockchains like Solana provide a security budget, which is the funds paid to validators, by introducing inflation. This inflation dilutes the share of existing token holders to compensate validators.

If there is no economic activity or if on-chain economic activity is priced too low, it is not sustainable to pay the security budget solely through inflation. This situation cannot continue indefinitely.

While it is reasonable to say that if Solana raises transaction fees, transaction throughput will almost certainly decrease, but if there are economic activities of value, Solana should be able to capture some of that value effectively.

In addition, Solana can also reduce the effective supply of its tokens by increasing the amount charged for applications, encrypted wallets, NFTs, and tokens used to store data on-chain.

On Solana, any entity that deploys code to Solana or operates a wallet must pay fees in the form of SOL based on their storage size. Anyone using Solana can choose to waive this fee by simply keeping enough SOL in their account to cover 2 years’ rent.

Since the storage fee is 0.00000348 SOL per byte and the wallet data size is 372 bytes, each active wallet holder must hold 0.0026 SOL. Similarly, applications and token smart contracts must also maintain these storage fees.

A program like Serum, which has a size of approximately 340KB, would need to hold a balance of 2.4 SOL to avoid paying rent. If Solana chooses to do this, it can significantly increase these balances and effectively reduce the circulating supply of SOL.

Of course, these changes in rent and transaction costs will violate the protocol principles currently controlled by the Solana founding team. At the same time, Solana does not have a governance mechanism to regulate these decisions, but recently some validators have proposed a proposal to introduce token voting governance on Solana. By 2030, we believe that Solana will already be using token voting for governance if the Solana blockchain has a vibrant ecosystem, which will enhance the economic value of the SOL token.

The Potential of Solana: Risks and Rewards

Solana is indeed a very remarkable project, dedicated to improving user experience by pushing the boundaries of blockchain possibilities and providing the necessary functionality for developing the next killer application.

In addition, the Solana team is a “giant” in the field, and their non-consensual thinking has fostered one of the most powerful blockchains today.

As they continue to innovate, their experiments and optimistic ideals have permeated a small but creative, consumer-focused application ecosystem.

Most importantly, the Solana community has a strong sense of identity, which has allowed it to remain resilient in the face of significant setbacks that could have destroyed many other blockchain ecosystems.

Unlike Ethereum and its supporters, who focus on building modular blockchain components, Solana has chosen a different path and developed a comprehensive blockchain that integrates these components into an integrated data throughput machine.

This is a daunting task, and the Solana team started from a relatively weak position compared to EVM-compatible chains, with fewer developers, total locked value (TVL), venture capital funds, and foundation capital. Similarly, they still face significant challenges in the long-term stability of blockchain technology approaches.

Nevertheless, even if we assume that the terminal market share and take rate we use are much lower than our assumptions for Ethereum, our model shows a greater upside potential for the SOL token in the baseline scenario. Therefore, we believe it is reasonable to give significant weight to the SOL token in an investor’s portfolio.

Solana valuation scenarios

The 5 most gas-consuming dApps on Solana and the 5 most promising dApps

Disclosure: The VanEck team owns shares of the SOL token as well as other applications based on Solana such as Hivemapper, Helium, and Render.

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