Solana Valuation Framework
The Solana team is building the fastest universal state machine humanly possible, enabling instantaneous settlement of assets on-chain or “Nasdaq on-chain” as Solana co-founder, Anatoly Yakovenko would say. Regarding execution speed, Solana averages real-time transactions per second of 755, in comparison to 13.32 for Ethereum and 7.23 for Bitcoin.1 This 50x improvement in speed for Solana in comparison to Ethereum, and 100x improvement over bitcoin, enables many exciting applications to be built directly on-top of the Solana blockchain that are simply not possible on Ethereum or Bitcoin. One example of innovation on Solana is Drift Protocol, a decentalised perpetual swaps trading platform, which offers comparable execution speeds to centralised exchanges, such as Binance. Another example is Beemaps, which creates high fidelity global maps, rewarding community members with a crypto token “$Honey” in exchange for improving the accuracy of maps as they drive, using the Beemaps dashcam and GPS hardware device.
Solana generates cashflows from transaction fees on the network, and a portion of these cashflows are distributed to SOL token holders (SOL is the native token of the Solana network). Using data from token terminal, we can see that Solana total network fees have grown from $900K per week in Nov 2023 to $25 million per week in Nov 2024 (27x year-on-year revenue growth). In addition, daily active addresses has grown from 140K per day in Nov 2023 to 5.5 million per day in Nov 2024 (39x year-on-year daily active addresses growth). If we project Solana's fee revenue from the past 30 days on an annual basis, the network currently has a $1.03 billion annual revenue run rate.
Given Solana’s 27x annual revenue growth rate, it’s challenging to determine a reasonable revenue multiple for our valuation framework (for instance, an early stage software company, growing recurring revenue by 50% annually, may command a 10x revenue multiple). Let’s take a step back and reason through what Solana’s network usage may look like in five years time under three alternative scenarios.
Solana base case: under the “base case” scenario, daily active addresses on the Solana network grow 40x within five years, while revenue grows by 20x. This implies $20B in network revenue by 2029, a fully diluted market cap of $504 billion, and a SOL token price of $739.
Solana best case: under the “best case” scenario, daily active addresses grow by 80x within five years, while network revenue grows by 50x. This implies $51B in network revenue by 2029, a fully diluted market cap of $1.78 trillion, and a SOL token price of $2,613.
Solana bear case: under the “bear case” scenario, daily active addresses remain unchanged from the current level, as does the annual revenue run rate. However the valuation multiple contracts to 15x token holder revenue share, and as a result, the SOL token value falls to $20 (a 90% decline from the current token price).
Many exciting projects are now building useful applications within the Solana ecosystem. In this section, I’ll focus on Drift Protocol, a decentralised exchange, focused on perpetual swaps trading (“perps” are one of the the most popular financial products in crypto). Because the Drift team has chosen to build on-top of the Solana network, they can offer execution speeds that rival centralised exchanges, potentially with cheaper costs, greater user transparency, and less risk of government intervention. In the future, a decentralised exchange will be able to provide a broad set of financial products to billions of people in developing countries that currently have near zero access to basic financial products. For instance, if you’d like to buy stock in Tesla or Apple as a citizen of Ghana, there is currently no straight-forward way for the average person to execute this trade. Drift could theoretically create a synthetic Tesla stock that mirrors the return profile of Tesla, with reference to a price oracle, thereby enabling anyone, anywhere to invest in Tesla with complete transparency of the underlying blockchain-based automated agreements.
In terms of growth, Drift’s trading volume is up 52x year-over-year ($5 billion trading volume in Aug 2024, up from $97M in Aug 2023), with $50 billion in cumulative trading volume as of September 2024.2 Considering these metrics, Drift appears to have achieved break-out velocity as the leading decentralised exchange on Solana.
The Drift team has also been shipping product like crazy. For instance, Drift recently launched a “community vaults” product, which enables investors to deposit assets, such as USDC and SOL, into investment vehicles that employ delta neutral strategies within the decentralised finance ecosystem to generate yield, irrespective of the vagaries of the market. Gauntlet, a leading crypto risk modelling firm, has created a Drift community vault, which has already attracted $10 million in deposits. In this case, Gauntlet is using Drift Protocol in two distinct ways: firstly, to attract investor deposits, and secondly, as a hedging venue to create perpetual swap positions in order to execute Gauntlet’s investment strategy. Because Drift has an order book on-chain, Gauntlet has greater transparency and potentially lower counter-party risk in comparison to using a centralised exchange to execute its hedging strategy.
I do not have a specific price target for Drift Protocol, however it’s worthwhile reading this valuation framework for Drift created by Spencer Applebaum and Tushar Jain from MultiCoin Capital, a leading crypto venture firm. MultiCoin has a bull case price target for the Drift token of $7.16 (~5x the current price).
Footnotes
Transaction-per-second data from Chainspect.
Spencer Applebaum and Tushar Jain from MultiCoin Capital (a leading crypto venture firm) recently published an excellent analysis and valuation of Drift. MultiCoin also led Drift’s recent $25M fundraising round, and noted that “Multicoin has accumulated a large position across our funds, both liquid and venture, in DRIFT, the native token of Drift”.