Original Article Title: How to Backfill a Narrative on Solana, Ethereum, Memecoins, and REV
Original Article Author: Brendan Farmer, Co-founder at Polygon
Original Article Translation: Ashley, BlockBeats

Editor's Note: The article criticizes Solana's narrative, arguing that its reliance on Memecoin trading for short-term wealth effects is not sustainable and poses structural risks. Solana's success may be more driven by speculation rather than technological advantage, while Ethereum continues to develop steadily in the DeFi space. The author reminds readers to maintain a critical perspective on the narratives in the crypto space to avoid being misled by market hype.

Below is the original content (reorganized for easier comprehension):

The role of thought leaders in the crypto space is to tell stories, explaining why the value of certain coins is rising or falling. The fluctuating line on a chart is never just a line; it is part of a larger technical or economic trend. These "backfilled narratives" can be attention-grabbing (such as "digital gold" or "world computer") or less appealing (such as "Play-to-Earn is the future of work"), but it is crucial to critically examine how each narrative constructs the world—and who benefits from this construction.

The blue-collar workers in the narrative factory, alongside venture capitalists, have been working overtime to explain why ETH is underperforming compared to BTC and SOL. Some of these arguments are not controversial: the Ethereum community should strive for better alignment, reevaluate its technical assumptions, or simply do better.

This article argues that a specific narrative about Solana and Ethereum is flawed. The story goes something like this: Solana has outpaced Ethereum in blockchain's most critical economic metrics, particularly in decentralized exchange (DEX) trading volume and REV (Real Economic Value = MEV + transaction fees, a measure of protocol cash flow) metrics.

According to this narrative, Solana's lead in REV is due to technological superiority and traction across multiple application categories. SOL's value can be evaluated based on the expected future REV, which is more advantageous compared to ETH, as ETH can only be valued based on "sentiment" or "monetary policy."

However, this is just one narrative. Solana's REV is entirely generated by Memecoin trades, making it challenging to assess SOL's value based on future cash flows. Moreover, the dominance of Memecoins has brought structural risks to Solana.

Tracking REV

Over the past year and a half, the SOL/ETH ratio has increased by about 10x. Whenever we see such price volatility, we know it's time to craft a new narrative.

We can tell a story like this: Solana has more advanced technology, users love it, all kinds of top developers—including DePIN, DeFi, payments, and of course meme coins—have all flocked to Solana.

Venture capitalists would argue that this massive talent migration has led to significant growth in key metrics such as REV, trading volume, and app revenue. The narrative goes that SOL doesn't need to be a currency or commodity like ETH, as its market value will ultimately be validated by a reasonable multiple of actual revenue, not some sort of meme culture nonsense.

If you want to see how Solana is performing, the data can prove it.

This is a great narrative.

But to play devil's advocate, let's explore where REV really comes from.

It could be a fabulous blend of all the top crypto apps. Pioneering DePINs like Helium, a CLOB building a decentralized Nasdaq, stablecoin payment volumes, intricate DeFi trades, and of course, maybe even a slice from meme coins, right?

Wait a minute—were all these just pump.fun and a bunch of Telegram bots for meme coin trading?

Where are the groundbreaking apps? What about DePINs? Where is the global price discovery for events happening in Singapore or London? Where are the top-tier, IMO award-winning developers?

Are we increasing bandwidth and reducing latency for Bot trading $BUTTHOLE?!

Building a Decentralized "Casino"

This article is not a discussion of whether Meme coins are good or bad. Meme coins may be a good way to onboard users to a crypto protocol and transfer wealth from "ignorant market participants" to skilled liquidity providers.

But Solana's REV is entirely derived from Meme coin trading, which brings a structural problem when evaluating SOL's value based on future REV.

Let's craft our own narrative. After FTX's explosion, SOL was oversold, but Solana can still present a compelling story to institutional capital allocators. It has a practical roadmap for expansion and is culturally understandable to investors familiar with Silicon Valley tech startups.

With successful promotion of SOL, the price has risen. This creates a wealth effect, which is a wonderful thing in the crypto space. It's a kind of financial alchemy where token price appreciation (essentially unrelated to the tech) translates into on-chain activity (seemingly driven by more advanced tech).

You can think of the wealth effect as a pressure cooker full of capital, heated up, where the only way to release pressure is for capital to flow into dumber and riskier assets like CryptoDickButts or this:

With increasing activity, thought leaders can fill an engaging narrative, drive SOL price increases, and create more activity. Apps release tokens, inject more capital into the system (e.g., Jito effectively airdropped a new car to everyone in Solana DeFi). We can call it a flywheel effect.

According to our narrative, the reason why Meme coin activity has erupted on Solana (rather than on other equally scalable L1 or L2) is mainly due to SOL's wealth effect. Solana's low transaction fees are a necessary condition, but the wealth effect is what has allowed Meme coin mania to grow to its current scale.

Time is a Circle

All of this has happened before. If we look back at 2020-2021, we will see the phenomenal growth of REV on Ethereum. During the last bull market, the new wealth of ETH holders flowed into increasingly volatile on-chain assets, such as NFTs and Meme coins.

Highly speculative assets often overproduce REV as users are willing to pay higher priority fees and MEV rates to gain exposure to volatility. The value of Meme coin transactions is highly dependent on their position in the block, allowing block proposers who control the ordering to capture more value. This has brought higher fees to the protocol than other forms of on-chain activity.

However, we can see that with the changing market cycle, the highly speculative activity on Ethereum (in NFTs and Meme coins) has disappeared. Using Ethereum's 2021 REV as an estimate for future REV is fundamentally flawed.

Meme Coin REV Will Not Sustain (Nor Will It Save You)

Just as the REV generated by Meme coins on Ethereum is unsustainable, it will not sustain on Solana either. While Meme coins can be fun, Meme coin speculation is a zero-sum game.

The fees and MEV paid by Meme coin gamblers are extremely high compared to other forms of gambling, and ultimately, gamblers will deplete their funds. While high fees and MEV may benefit REV, in a zero-sum game, they do not create any economic value, and the consequence is they will extract liquidity from the ecosystem. Every dollar paid in REV means less funds for future Meme coin transactions, leading to a decrease in future REV.

Therefore, it is hard to argue that the growth of REV will continue, ultimately proving that SOL's market value is justified.

SOL's FDV (approximately $150 billion) compared to the 2024 REV ($1.4 billion) ratio is about 100:1. If we are generous and based on Q4 REV ($825 million) annualized, the ratio we get is 45:1. While there is some improvement, this still assumes that Meme coin transaction volume will grow over time. Given that it is unlikely (see ETH in the last market cycle, where REV dropped from $10 billion to $2.6 billion), it is difficult to justify SOL's valuation based on expected future REV.

The popular rebuttal is that Solana will simply scale its block space by 10x or 100x, while REV will scale proportionally.

The issue is that even if Solana can increase throughput by 100x, it will struggle to find 100x more innocent order flow willing to be "front-run"—buying Meme coins through sandwich attacks and snipers, except in Ken Griffin's most twisted fantasy?

In order to keep Meme coin trading volume growing and compress SOL's P/E ratio, we need SOL's price to rise, enhancing the wealth effect. But this goes against the purpose; we are trying to compress P/E ratio, not expand or maintain it.

Other applications like DeFi, DePIN, and payment apps will not produce the same amount of REV per unit of block space. For example, a sophisticated trader lending out blue-chip assets to earn 10%, or a gamer playing a game, may consume the same amount of block space but generate far less REV than Meme coin trading.

“Mercenary” Memecoin

Meme coin trading volume also tends to follow the wealth effect of new tokens moving to new chains.

You might think the reason for Memecoin issuance moving from Ethereum to Solana is that Solana is more scalable and better suited for trading, and Solana's technological edge means it will continue to be a hotbed of degenerate gambling. It is not the so-called "decentralized Nasdaq," but as a center of crazy speculation, it is at least worth something.

This overlooks the direct cause of the Memecoin craze, which is the SOL wealth effect. For example, by the end of 2023, BONK's price and volume closely followed SOL's lead. We can see a similar situation applies to decentralized exchange (DEX) volumes, especially Memecoin volumes, until March 2024, when SOL rebounded 10x from the low point after the FTX collapse, Memecoin trading began to take off.

With the launch of new chains, especially high-performance L2s (such as MegaETH and Rise), these chains may provide a better trading venue for Memecoin traders. These chains will kickstart with new tokens and new wealth.

While they may not be decentralized, nor will they synchronize global information at the speed of light, those transacting $FARTCOIN don't care—the risk they take in Memecoin gambling far outweighs any risk of decentralization. L2 can offer lower latency, better performance, and higher transaction success rates, making it a better trade-off.

What about Ethereum?

The narrative around growth on Solana with REV has also been used to advocate for a transformation of Ethereum. The implicit argument is that Ethereum must scale in order to regain lost activity (and REV). Considering Solana's activity is entirely driven by Memecoin, this point is unreasonable. Increasing L1's throughput by 5x or 10x will not bring Memecoin back to Ethereum L1; Solana still boasts lower fees and a stronger short-term wealth effect.

If DeFi largely moved to Solana, we should expect to see a significant drop in Ethereum's transaction volume. However, Ethereum's DEX volume in December 2023 remains at 10%-20% of its peak monthly volume, despite higher ETH price volatility during the bull market of 2021/22, with NFT and Memecoin volume far exceeding current levels.

This supports the view that there are different categories of DeFi users. While Memecoin traders are increasingly flocking to Solana, a large amount of capital still resides on Ethereum. Using REV or DEX volume as evidence of Solana's dominance in DeFi is misleading.

If we use DeFi TVL as a measure of each network's activity type, we can see that Ethereum's TVL is 6 times that of Solana (despite ETH's price weakness), indicating a different quality of activity on Ethereum compared to Solana. From a DeFi perspective, Memecoin is almost useless; by the way, what is the collateral requirement for a $BUTTHOLE loan?

A counterargument is that nearly all on-chain activity is purely speculative, so viewing Ethereum's activity as disconnected from real economic activity while only seeing Solana's activity as Memecoin trading is somewhat disingenuous. My initial reaction is: I suggest refraining from making such statements for the betterment of the industry.

More seriously, although Solana leads in REV, Ethereum clearly has a more mature and vibrant DeFi ecosystem as it demonstrates strong TVL and activity even without a large issuance of Memecoins.

Rollup-Centric Roadmap Counterattack

We have argued before that the value of SOL cannot be proven by future expected REV. Currently, SOL is still vying with BTC and ETH to become the first link in the flow of crypto asset capital.

However, Memecoins present another structural challenge to Solana's long-term viability, as Memecoin traders are better suited for L2 transactions.

L2 can perform high-throughput operations with very low latency. They can respond more quickly to issues and downtime, without the decentralized coordination overhead. They can more easily filter out spam transactions.

You might think that Solana's high-performance layer-1 is a lasting advantage, but open-source tech always likes to be commoditized. Ironically, when venture capitalists reference Solana's technical advantages over Ethereum, teams like Eclipse and Atlas have already deployed an SVM L2 on Ethereum.

Ethereum's liquidity and TVL make it a better platform for L2. Additionally, Ethereum has explicitly made trade-offs between performance and availability, which is a better choice for L2 as they do not need high throughput on L1. The worst-case scenario for L2 is being unable to transact or bridge when L1 is offline.

This presents a real risk to Solana as its REV growth is entirely driven by highly cyclical activities that could be better served by other chains.

Conclusion

The optimistic scenario for Solana is that it is now in the same position as Ethereum in 2021; eventually, activity will bring a more mature DeFi ecosystem. But there are no guarantees.

DeFi activity on Ethereum is dominated by fee-insensitive whales who prioritize decentralization, availability, and security. One can envision a world where retail users trade Memecoins on Unichain, while whales trade UNI on Ethereum. L2 can provide a better environment for Memecoins and long-tail crypto assets, while Ethereum provides a better environment for whales because it prioritizes activity over raw performance.

The pessimistic case for Solana is that it has not truly succeeded in following its own North Star of building a decentralized Nasdaq. Traders are concerned with latency and guaranteed transaction execution. During volatility, it is difficult to include transactions on Solana, and the latency cannot compete with (more centralized) L2.

More accurately, Solana is successfully building a decentralized "casino," a place designed to maximize volatility and risk exposure for traders seeking to capitalize on short-term wealth effects.

When the Memecoin craze subsides, this may morph into a new form of gambling, but that seems unlikely as gamblers are not as concerned with Solana's advantage over L2 but rather with L2's advantage over Solana.

But back to the point. In the crypto space, it is very easy to fill the narrative supporting a particular view (and heavy bags). This is especially easy when your story involves compelling technology and activity driven by speculative frenzy. However, precisely because of this, we should approach storytellers' heavily biased stories with skepticism.

I believe Ethereum's wholesale embrace of critics has actually done it a disservice. This includes the story about REV, the comparisons with Solana's economic metrics, but more importantly, the debate surrounding value accrual and L2 as Ethereum L1's parasite. I hope to address this issue in future posts.

Disclaimer: This article has been sitting in the drafts folder for a few months, so it does not include $TRUMP, $MELANIA, or the recent market sell-off. These do not materially impact the argument, hence they are not mentioned.

「Original Article Link」

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