By 2030, VanEck’s Solana Valuation Framework projects SOL prices to range from a bearish $9.81, a baseline $335, to a bullish $3,211.28, depending on different market share and revenue forecasts for key industries.
Original title: VanEck’s Base, Bear, Bull Case: Solana Valuation by 2030
Written by: Patrick Bush, Senior Investment Analyst at VanEck Digital Assets and Matthew Sigel, Head of Digital Asset Research at VanEck
Editor: Karen, Foresight News
In this study, we simulated a scenario where Solana was 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, and due to fundamental differences in community philosophy, its market share is less than half of ETH’s.
We see a solid path to $8 billion in SOL token holder revenue by 2030.
Table of contents
Solana’s Approach: Usability
Solana vs. Ethereum: A Comparison of Concepts
Solana’s Cost and Revenue Challenges
Overview of Solana Valuation Scenarios in 2023
Solana Projected Transaction Landscape by 2030
Solana’s Potential: Risks and Rewards
The purpose of a smart contract platform (SCP) is to host applications that enable users to participate in efficient, censorship-resistant economic activities while minimizing the extraction of rents from those economic activities by third parties.
Despite the diversity of blockchains, the user base of all blockchains is small compared to the users transacting off-chain. There are approximately 5.5 million active unique addresses per day on smart contract platforms and approximately 44 million active unique addresses per month.
However, these figures likely greatly overstate the number of users, as many users control multiple addresses. Even if we take these figures at face value, they are still relatively low compared to the 2 billion users who interact with Facebook every day and the 431 million users who use PayPal every month.
The reason why blockchain adoption is not fast enough is because there are still some cumbersome issues in using blockchain, and there is not much that can be done on the chain except value exchange and speculation.
For cryptocurrencies to achieve widespread adoption and grow their $1.3 trillion market cap, they need to have real appeal to people and businesses who aren’t decentralization maximalists or libertarian zealots — in other words, they need a killer app.
As a result, the blockchain that hosts the killer app will benefit greatly from the activity generated by the app. In this research, we simulated a scenario where Solana becomes the first blockchain to host a single application that attracts more than 100 million users.
SCP Monthly Active Users
Solana’s potential starts with its founding team combining radical experimentation with applied science to dramatically improve blockchain scalability.
While other blockchains have chosen scaling paths that cleverly work around the limitations of distributed ledgers, Solana has chosen to push the technical feasibility problem to its limits and work backwards from there.
The Ethereum ecosystem and many other blockchains have chosen a modular vision where different blockchains focus on the core functionality of the Layer 1 chain.
Solana, on the other hand, has been working hard to optimize every component of its blockchain, striving to achieve higher transaction throughput and make it ultra-efficient.
As a result, Solana has a huge advantage in blockchain processing power over its traditional competitors. At the same time, and more importantly, Solana has transformed its pioneering spirit into an ecosystem philosophy of risk-taking and technological optimism.
Solana has spawned a variety of fascinating experiments, including blockchain phones, NFTs containing apps, and consumer-facing products like decentralized mapping and car data collection.
More than any other ecosystem, project builders on Solana are creating things that could have a substantive impact on everyday people.
Solana Path: Usability
The probability of a blockchain network hosting the next “killer app” depends on the chain’s ability to make the use of that app fast, easy, and accessible. The better this ability, the better the environment for users.
The key question is how to measure the capacity of a blockchain and translate it into usability. A commonly used metric, transactions per second (TPS), is an inadequate measure that is easily manipulated.
In practice, blockchain teams can improve this metric through a variety of techniques, including changing the amount of data included in each transaction, abandoning ordering of transactions, and limiting the parts of the ledger that transactions can change.
In fact, the best metric to measure blockchain capacity is not transactions per second (TPS), but data throughput.
Data throughput involves the blockchain receiving, processing, and sorting data, and then reaching consensus on the data’s impact on the blockchain ledger.
Data throughput is determined by measuring the amount of data a blockchain can receive and apply in a certain amount of time.
Solana’s data throughput currently exceeds that of any other existing blockchain. In fact, Solana’s data capacity exceeds that of most planned blockchains, and Solana’s next major software upgrade, the Firedancer upgrade, is expected to increase Solana’s current capacity by 10x. While we can’t be sure how much data the next killer app blockchain will need to handle, we can imagine that 100 million+ users will push blockchain scalability to its limits.
Data throughput comparison MB/S
Solana leverages this data throughput capability to address user concerns. Compared to most other chains, Solana is able to provide faster feedback to users because it can continuously process transactions.
Taking Ethereum as an example, Ethereum works by pooling transactions submitted by users into a waiting area called a memory pool (mempool). Then, Ethereum validators (block builders in the new paradigm) select transactions from the pool and sort them according to the price provided by each transaction. Every 12 seconds, transactions are executed and blocks containing these transactions are transmitted to other nodes of the Ethereum network. Therefore, Ethereum processes transactions in discrete time intervals.
This way of processing transactions is much slower than Solana’s way, which causes users to wait longer. On Ethereum, users must wait for the entire process to complete before they know if their transaction is complete. Typically, this takes several minutes.
In contrast, Solana starts processing transactions immediately and has a processing time of around 2 seconds.
Applications on Solana
To make the user experience better, Solana also created a novel feature called "Local Fee Market".
If the blockchain can be likened to a data pipeline from users to the blockchain ledger, then Solana’s native fee market is actually an internal sub-pipeline that allows information to flow from different users to multiple parts of the ledger simultaneously.
This solves a core problem with Ethereum and other blockchains, where overusing one application on Ethereum’s pipeline slows down everything else.
For example, on Ethereum, if many users try to mint an NFT, the resulting congestion will prevent other users from borrowing and lending on AAVE. In the context of killer apps, users need to be able to continuously interact with the blockchain.
In contrast, Solana can use a native fee market to segment these different pipelines, charging different prices based on demand. Even if one application is experiencing high usage, many others can still access Solana.
This is especially important because the functionality of a killer app may rely on simultaneous interaction with many different applications.
Additionally, being able to adjust the local fee market to price different types of transactions could be key to Solana adjusting prices based on usage. This could allow Solana to price differently based on the economic value of each transaction.
A local fee market could allow killer app developers to more accurately assess their costs.
Solana vs Ethereum: A Comparison of Concepts
Solana was built by Qualcomm engineers who applied their expertise in enhancing mobile network capacity to build a high-performance blockchain.
The Solana team’s fundamental principle is to build a network that assumes that as consumer computing power grows in line with Moore’s Law, network bandwidth will scale accordingly. As a result, Solana is designed to take advantage of hardware advances more directly than its competitors.
We see this as an optimistic mindset, a belief in continued progress. A core belief of the Solana team is that blockchains should make blockspace (i.e. the amount of data that can fit on-chain at any given time) very cheap. In their view, this enables software engineers and entrepreneurs to cheaply test new use cases for blockchains. This is in stark contrast to Ethereum’s perspective. In Ethereum’s paradigm, success depends on Ethereum (ETH) serving as the primary (and only) collateral securing all blockchains.
Solana was originally conceived as a “decentralized Nasdaq.” While that vision still has potential, the launch of high-profile non-financial consumer applications like Hivemapper, Render, and Helium have expanded awareness of Solana’s capabilities.
The Solana team deserves praise for being open about innovative applications of Solana’s technology. They are trying to bring blockchain to mobile phones, either through SMS or the Solana mobile stack, which enables developers to create blockchain apps for mobile phones. Solana’s experiments have even led them to create a phone optimized for blockchain use. Although the Solana phone has been criticized as distracting from Solana’s core mission, it demonstrates Solana’s desire to solve fundamental core user problems. It is this commitment to consumers that has helped Solana secure partnerships with Shopify, Visa, and Google to explore new use cases for Solana and drive growth in its ecosystem.
Solana Developer Market Share
Solana’s Cost vs Revenue Challenge
Solana’s focus on cheap blockspace, experimentation, and cutting-edge technology is not without its drawbacks. While providing cheap blockspace fosters ecosystem growth by providing a nearly cost-free sandbox environment for projects and users, we need to remember that providing this blockspace still comes at a cost.
Solana generated $1.26 million in fee revenue in the last 30 days, but the cost to Solana to secure its blockchain by paying validators using SOL inflation was $52.78 million during the same period.
While Solana is not in danger of collapsing in the short term due to lack of “profitability,” in the long term the cost of ensuring security must be met by organic SOL demand for the Solana blockchain.
This is because Solana’s validators sell a portion of their inflation tokens to cover their day-to-day operating costs, including hardware, labor, and connectivity costs (we ignore voting costs in this calculation).
Solana Revenue vs Fees
We estimate the total non-blockchain costs of running Solana’s 1,977 validator nodes to be $11.8 million per year, not even including labor. As such, we view this number as a minimum estimate of Solana’s annual SOL token selling pressure.
On the revenue side, half of the revenue fees ($630,000) are burned, representing buying pressure on SOL tokens (the other half of the tokens are remitted to validators and stakers and offset by potential sales).
Based on this simplified buy and sell pressure, we must have a net imbalance of -11.17 million USD, which represents the buy pressure that must offset the collective sell pressure of validators.
In effect, selling pressure from Solana validators has been offset by funds from speculators.
Therefore, until Solana’s fee income improves, Solana’s ability to function as an ecosystem in its current state is dependent on the continued introduction of new speculative capital.
The long-term pricing of Solana blockspace and the cost of using Solana is another thorny issue. The main problem with monolithic chains like Solana is that it is difficult to extract value from users and return it to token holders.
This model exists because Solana prices its transactions based on the computation required, the total demand for that computation, and the congestion in the region where that computation is applied.
While resource pricing makes economic sense from the perspective of pricing the Solana network’s ability to allocate its network resources, it makes no sense from the perspective of effectively pricing various user actions.
For example, sending a trade order to the Chicago Mercantile Exchange (CME) is essentially free.
However, CME and other similar exchanges charge traders fees when trades are executed, and may even change the amount of the fee depending on whether the trade is executed after an "active acceptance" of another order or after another order "accepts" it. Similarly, on platforms like Twitter, posting is free, but if users choose to promote posts or target other users, they will incur higher fees.
Taken in isolation, this pricing, while suboptimal from a value extraction perspective, is inconsequential.
However, with tens of thousands of blockchains in existence, each tailored to specific use cases, each may be able to capture value for token holders more efficiently.
If weak SOL prices cause Solana’s security budget to fall below its needs, this could threaten Solana’s economic sustainability.
Likewise, from a resource perspective, a blockchain will want to ensure that its limited resources are allocated to economically beneficial activities.
If resources are mispriced, the blockchain could become flooded with economically harmful activity, whether or not that activity is segmented by Solana's native fee market. This is already happening and is causing more disruption to more legitimate use cases. Likewise, with Solana executing hundreds of transactions per second, low-value arbitrage trades flooded the network. This problem may be alleviated through a local fee market, but it remains to be seen whether this improvement will be adaptable enough if Solana usage accelerates significantly.
We greatly appreciate the vision and experimental spirit of Solana and its team, but its architecture has led to undesirable outcomes that have affected Solana’s technical stability.
Although Solana achieved 100% uptime after a series of important network upgrades after March 2023, it had previously experienced several downtimes that resulted in a complete halt to network functionality.
Solana experienced outages in 7 of the 13 months between January 2022 and February 2023. The most recent outage occurred on February 25, 2023 and lasted nearly 19 hours.
The core cause of this outage and other past outage issues lies in an experimental system that Solana is running.
The Solana consensus mechanism has not been formally verified, and due to the huge amount of data processed by the system, it is impossible to predict potential future failures in the Solana design.
Although Solana has implemented many improvements to mitigate these issues, the Solana design may lead to future complexities that cannot be anticipated before problems arise. Therefore, the Solana team still considers the chain to be in a "beta" state, as future network failures may be caused by unforeseen reasons.
Due to the complexity of Solana and the amount of data it processes, resolving these issues may take considerable time to resolve.
Obviously, this situation is unacceptable to both financial and non-financial enterprises that may wish to deploy to Solana. The unpredictability of Solana’s availability is part of the reason why Solana has a low TVL (Total Value Locked) relative to its peers in the decentralized finance space.
Although the Solana team has implemented what they believe to be important fixes, network fragility will remain an issue for the foreseeable future, and the introduction of the new design, Firedancer, may even increase the likelihood of irreconcilable issues.
SCL Weekly Active Developer Market Share
Finally, we have some questions 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 complex design.
In fact, building the Solana project is difficult for developers, and Solana founder Anatoly once likened it to "chewing glass." This is partly because Solana developers need to be familiar with Rust, a language with 2.2 million active developers, compared to Ethereum, which can attract 17.4 million JavaScript developers. Although Solana has made significant progress in creating tools to make development easier, its high requirement for programming skills has caused Solana to account for about 6-7% of weekly active cryptocurrency developers in the past 18 months.
Given that Solana lost its largest supporter FTX/Alameda in November 2022, it is fine to maintain a relatively stable developer share, but the total number of developers and developer market share need to increase to increase the possibility of hosting blockbuster applications.
Overview of Solana Valuation Scenarios in 2023
Applying VanEck’s standard valuation framework to Solana yields a baseline token valuation of $335 in 2030. This estimate is based on projecting a terminal valuation multiple for the SOL token based on the projected actual returns.
This actual rate of return is calculated based on the projected cash flow returned to SOL token holders. This multiple is then applied to the final year token FCF (free cash flow) and divided by the expected number of tokens in the final year.
More specifically, in terms of revenue and cash flow, our framework begins by examining the different revenue streams for Solana. The first is the adoption rate of end-market activity. We begin by identifying the end markets that will utilize public blockchains such as Ethereum and Solana.
Its three main categories are Finance, Banking and Payments (FBP), Metaverse and Gaming (MG), and Infrastructure (I).
Depending on the case, we assume that a portion of the business and its revenue will come from blockchain activities or leverage blockchain in some way to find customers, create new products, reduce costs, or streamline back-end business functions.
Since public blockchains are similar to Web 2.0 platforms such as Amazon, the Apple App Store, and Uber, we assume that public blockchains will have an effective take rate (GMV to platform revenue conversion rate) of their end-market revenue.
In our base case, we find blockchain activity with 1/5th the adoption rate of Ethereum’s equivalent. Therefore, Solana’s total revenue from end-market transactions is $2.88 billion.
In addition, we also include MEV as a revenue item, which actually goes from trader entities to validators to token holders. We calculate MEV by estimating the total amount of assets locked in Solana DeFi and multiplying it by the annual take rate.
Additionally, we consider MEV (Maximum Extractable Value) as a revenue item that effectively flows from trading entities to validators and ultimately to token holders. We calculate MEV by estimating the total amount of assets locked in Solana DeFi and multiplying it by the annual collection rate.
In our baseline case we find MEV revenues of $5.99 billion in 2030. Once we have the raw revenue data, we deduct an assumed tax rate, as well as an approximate estimate of validator node costs for the ecosystem.
2030 Trading Revenue Estimates Assumptions
2030 Transaction Revenue Estimates Assumptions Under Base Case
Despite the huge potential, we believe Solana is less likely than Ethereum to host the majority of the world’s cryptocurrency transactions by 2030.
The Solana network and execution engine enable higher throughput and unlock greater potential, but it lacks adoption momentum from most crypto users and developers.
Currently, Solana only accounts for a small share of the total locked value (TVL) in cryptocurrencies, at $408 million out of $40.8 billion, and has a low percentage of daily active users, at 184,000 out of 5.5 million users.
We also believe that as public blockchains gain widespread adoption, new developers joining the space may not feel attached to the existing ecosystem nor necessarily be decentralization maximalists.
As a result, new developers joining in the future are likely to have strong interest in next-generation blockchains that offer novel development frameworks, features, and capabilities, just as in previous cryptocurrency cycles. As a result, in our base case, we expect Solana’s adoption rate to be close to 30%, a significant increase from current data, but much lower than Ethereum’s base case, which is 70%.
The comparison is apt, as the growth of the Ethereum ecosystem has had a black hole-like effect, swallowing and absorbing ideas while increasing its share of blockchain developers.
It’s worth noting that our $11,800 price target for Ethereum is based on the Ethereum network reaching a 70% market share in transmitting value among open-source blockchains.
If Solana can avoid falling into Ethereum’s event horizon and achieve Ethereum-like dominance, our bullish case shows revenue of $51.8 billion in 2030 and a price target of $3,211.
In terms of value capture of end-market revenues that adopt blockchain, we believe Solana’s value capture potential is inferior to Ethereum. In our base case, 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 embrace of the philosophy of abundance over scarcity.
The result of abundance rather than scarcity means that block space will remain cheap, resulting in extremely low transaction costs. Expressed in mathematical terms, this will give Solana a take rate of approximately 0.60% of the gross transaction value (GMV) for FBP, 2.00% for MSG, and 1.00% for I.
Average fees per transaction over the past 30 days for different networks
The key question is, “How can Solana become profitable in the long term given its low transaction pricing?” Currently, transaction pricing is very tiny, so it would take a lot of trading activity to boost Solana’s revenue numbers.
In our baseline model, we project annual transaction volume of approximately $600 billion by 2030, based on assumptions about Solana’s market share in the end market and the number of transactions each user performs. Based on these assumptions, we estimate monthly active users to be 534 million.
While MEV will be Solana’s most important value capture mechanism in our base case, accounting for 67.5% of all revenue, we believe Solana will likely be able to increase the value of its token in other ways even if usage does not reach our base case estimates.
As we mentioned before, a blockchain needs to be cheap enough to encourage widespread use while ensuring that validators are sufficiently paid to validate the network.
Blockchains like Solana provide security budgets by introducing inflation, which is the money paid to validators. This inflation dilutes existing token holders to compensate validators.
It is not sustainable to pay for the security budget solely through inflation if there is no economic activity, or if economic activity on the chain is underpriced. This situation cannot continue indefinitely.
While transaction throughput would almost certainly decrease if Solana increased transaction prices, if there is economically valuable activity, it stands to reason that Solana should be able to efficiently capture some of that value.
Additionally, Solana could reduce the effective supply of its tokens by increasing the amount it charges applications, crypto wallets, NFTs, and tokens for storing data on-chain.
On Solana, all entities that deploy code to Solana or operate a wallet must pay a fee in SOL based on the size of their storage. Anyone using Solana can choose to waive this fee and simply keep enough SOL in their account to pay for 2 years of rental.
Since the storage fee is 0.00000348 SOL per byte and the wallet data size is 372 bytes, each active wallet holder must maintain 0.0026 SOL. Likewise, applications and token smart contracts must also maintain these storage fees.
A program like Serum, which is about 340KB in size, would need to maintain a balance of 2.4 SOL in order to avoid paying rent. Solana could significantly increase these balances if it chose to do so, effectively reducing the supply of SOL in circulation.
Of course, these changes in rent and transaction costs would violate the principles of the protocol currently controlled by the Solana founding team. At the same time, Solana has no governance mechanism to regulate these decisions, but some validators have recently proposed the introduction of token voting governance on Solana. By 2030, we believe Solana will already be using token voting for governance, which will enhance the economics of the SOL token if the Solana blockchain has a vibrant ecosystem.
Solana’s Potential: Risks and Rewards
Solana is indeed a very compelling project that is committed to improving the user experience by pushing the boundaries of what is possible in blockchain, providing the right features needed to develop the next killer app.
In addition, the Solana team is a "giant" in the field, and its non-consensus thinking has given birth to one of the most powerful blockchains currently available.
As they continue to innovate, their philosophy of experimentation and optimism has permeated into a small but creative ecosystem of consumer-focused apps.
Most importantly, Solana’s community has a strong sense of identity, which has made it resilient in the face of massive setbacks that would have devastated many other blockchain ecosystems.
Unlike Ethereum and its backers, which have focused on building modular blockchain components, Solana has chosen a different path, developing a comprehensive blockchain that combines these components into an integrated data throughput machine.
This is a daunting task, and the Solana team is starting from a relatively weak position, with less developers, less total value locked (TVL), less venture capital funds, and less foundation capital than EVM-compatible chains. Likewise, they still face huge questions about the long-term stability of their approach to blockchain technology.
Nonetheless, even though we use terminal market share and take rate assumptions that are much lower than our assumptions for Ethereum, our model generates greater upside potential for SOL tokens in the baseline case. Therefore, we believe it is reasonable to give SOL tokens a significant weighting in investors' portfolios.
Solana Valuation Scenarios
The top 5 most gas-intensive dApps on Solana and the top 5 most promising dApps
Disclosure: The VanEck team owns shares of the SOL token as well as other Solana-based applications such as Hivemapper, Helium, and Render.
