Solana: My Biggest Bet in the Smart Contract Layer One Blockchain Revolution
A deep dive into smart contract enabled layer ones, their market potential, and my investment thesis behind my confidence in Solana
In this post, I’m going to cover my largest crypto holding and why I believe it offers the best risk-to-reward bet of this bull cycle: Solana.
Solana is a high-performance, smart contract-enabled, layer one blockchain. Since most of my readers aren’t crypto-native, I will begin by explaining what smart contract layer one blockchains are.
I will then cover the factors that I think determine the value of a smart contract layer one. I will then finish with an analysis on Solana and why I’m expecting a 300% + price appreciation over the next 18 months.
Before I get into it, if you haven’t read my last post (Macro Blueprint & Backing The Fastest Horse), I’d recommend reading that first for a little context and why I am very bullish on all risk assets over the next 12 to 18 months.
Disclaimer: I am not at all qualified to give financial advice, these are just my views.
What is the difference between a layer one blockchain like Bitcoin and a smart contract layer one like Ethereum or Solana?
Bitcoin is very simple. It provides a secure, decentralized ledger for peer-to-peer transactions. It does not have the advanced functionality of smart contract platforms. It's simplicity isn't a drawback. Its focus on the essential features of being a store of value and has therefore become the best crypto in that role.
Smart contract layer one blockchains (like Ethereum or Solana) expand upon peer to peer transactions by enabling programmable contracts to be executed on the blockchain. A smart contract can be self executing with terms that are written into the code.
Layer one blockchains serve as the primary infrastructure for transactions and operations. They provide the foundational network that supports various activities, such as the launching of tokens and the development of decentralized applications (dApps). These tokenized projects and dApps leverage the layer ones security and decentralization and then carry out their own purposes.
When comparing it to Web 2 (todays internet) think of Apple & Android as the infrastructure (Layer One) and then the apps on the app stores as the tokenized projects & dApps.
Types of tokens that have launched on layer one blockchains
Stable Coins, like USDT or USDC are crypto currencies that peg their value to a fiat currency, most often the USD. This enables the trading of fiat currency on the blockchain in decentralized finance (Defi).
Meme Coins are what often get the headlines in crypto and are the main reason why people are so skeptical of the space. They often don’t have any intrinsic value or utility and are driven by community speculation and entertainment. For example, Dogecoin was created as a joke, but now boasts a $15 billion market cap.
Utility Tokens are used within specific blockchain ecosystems to access services or pay for resources. For example, Filecoin (FIL) facilitates decentralized data storage services on the Filecoin Network, where storage providers earn FIL rewards and users must hold and pay in FIL
Governance & Reward Tokens are often one of the same. Governance tokens enable holders to participate in decision-making processes within decentralized protocols or organizations, influencing updates and changes. Reward tokens are distributed to participants as incentives for contributing to network liquidity, staking for network security, and fostering ecosystem growth.
Security Tokens represent ownership of real-world assets (RWAs) like real estate, shares, or bonds. Digitizing these assets on blockchain increases liquidity, accessibility, and reduces transaction friction and costs.
Non Fungible Tokens (NFT’s) are unique digital assets that certify ownership or authenticity for items such as digital art, collectibles, and in-game items. They also serve as online identities through avatars or profile pictures (PFPs). I predict sometime in the near future, governments will link NFTs to real-world identities as a measure against increasingly sophisticated AI deep fakes.
Types of Decentralized Applications (dApps) on Smart Contract Layer One Blockchains
When a dApp is built on a layer one, the token released with that dApp is often a Governance & Reward Token and/or Utility Token. DApps will often generate revenue and maintain a treasury. If it’s a governance token, the token holders decide how the treasury and revenue are managed. For example, once the protocol is well established and has reached a certain level of development and usage, token holders may vote on distributing revenue to token holders.
Here are four examples of existing dApps.
Uniswap is a decentralized trading protocol that allows users to swap cryptocurrencies directly with each other without the need for a traditional intermediary, promoting liquidity and efficiency in the market.
Aave is a decentralized lending and borrowing protocol where users can earn interest on deposits and borrow assets against collateral, enhancing financial inclusivity and providing flexible borrowing options.
Ethereum Name Service is a decentralized domain name service on Ethereum, replacing complex addresses with human-readable names, simplifying transactions and improving user experience in blockchain interactions.
Illuvium is a decentralized, Ethereum-based open-world game where players collect, trade, and battle digital creatures known as Illuvials. It leverages blockchain for ownership verification and scarcity of in-game assets, enhancing player autonomy and asset value.
These examples highlight current dApps in the finance, infrastructure, and gaming sectors.
Blockchain technology enables trustlessness while enhancing automation, transparency, security, and efficiency. Therefore, as the space evolves, I expect dApps to be created in various other sectors such as:
Supply Chain Management: Utilizing blockchain for transparent and traceable supply chains to reduce fraud and optimize logistics.
Healthcare: Secure management of patient records, facilitating telemedicine, and ensuring data privacy and integrity through decentralized solutions.
Energy: Optimizing energy distribution, enabling peer-to-peer energy trading, and tracking renewable energy certificates using blockchain technology.
Education: Decentralized platforms for certifications, skill verification, and global distribution of educational content, enhancing accessibility and credibility.
How do tokenized projects and dApps drive value to Layer One blockchains like Ethereum and Solana?
Layer one blockchains like Ethereum and Solana serve as the foundational infrastructure for executing transactions within their networks. The native tokens, ETH for Ethereum and SOL for Solana, act like commodities within their respective protocols. They are the fuel that powers all transactions and operations on the network.
As demand for using the protocol increases, driven by the growth of dApps and tokens, the demand for the native token also rises. Every transaction, whether it’s executing a smart contract, trading tokens, or interacting with a dApp, requires the use of the native token to pay fees. Therefore, the more the protocol is used, the greater the demand for its native token, which in turn drives its value.
When selecting a smart contract layer one blockchain to build on, projects prioritize security, decentralization, and scalability.
Security ensures the integrity of the ledger against attacks, fraud, and unauthorized access, typically assessed by the robustness of its consensus mechanism. Many smart contract platforms, including Ethereum and Solana, use Proof of Stake (PoS). In PoS, validators secure and validate transactions based on the cryptocurrency they stake. Higher stakes incentivize honest behavior, thereby enhancing network security.
Decentralization is measured by the distribution of nodes, which are computers that validate, relay, and store transactions on the blockchain's ledger.
Scalability refers to a blockchain's ability to handle a large number of transactions per second (TPS) smoothly and efficiently.
For instance, Ethereum boasts a widespread node distribution and substantial stake values making it the most decentralized and secure smart contract platform. However, its current scalability is limited by low TPS and high fees. To address this, the Ethereum community is actively developing layer 2 solutions (blockchains built on top of Ethereum) that focus on high throughput and low fees while leveraging Ethereum’s security. This strategy, known as “modular blockchains,” allows different blockchains to specialize in one or two components while maintaining interoperability.
In contrast, Solana operates as a monolithic blockchain, integrating all three components (security, decentralization, and scalability) into a unified structure within a single blockchain.
My Investment Thesis For Solana
Having covered what a smart contract enabled layer one blockchain is, the addressable market, sources of usage and transactions and the key technological components, I will now delve into my investment thesis for Solana.
Solana vs Ethereum
In my last post, I touched on network effects and how, in my view, BTC, ETH, and SOL are the only three cryptocurrencies that have achieved significant adoption and network effects. The market cap of BTC is $1.1 trillion, ETH is $376 billion, and SOL is $64 billion.
Solana is approximately one-sixth the market cap of Ethereum, which, in my opinion, is a complete mismatch when comparing the capabilities of the two protocols. More importantly, even if my view is off, I believe it doesn't matter at this stage. It’s too soon to tell if I’m right or wrong. Over the next 18 months, what matters is the market's perception because that will dictate where the money flows.
I anticipate that the majority of market participants entering the space will conduct a simple analysis when comparing SOL to ETH:
Solana operates as a monolithic (all-in-one) blockchain that is fast and cheap. The dApps built on it offer superior user interfaces and experiences, and it doesn’t have the complexities that Ethereum has with bridging to layer 2 solutions. Solana's thriving developer community continues to deliver upgrades that enhance the protocol’s usability... AND IT’S ONLY ONE SIXTH OF THE MARKET CAP OF ETH.
This narrative is likely to gain traction and I expect the value gap between the two to narrow. There are also a lot of reasons to be bullish on ETH, especially the imminent launch of the Ethereum ETF this month, which I believe the market has underpriced. Therefore, the narrowing of the gap will not result from ETH depreciating but from both cryptocurrencies appreciating, with SOL outperforming.
Monolithic (all in one chain) vs Modular (multiple chains that are interoperable)
This is a hotly debated topic in crypto. Monolithic supporters argue that integrating all functionalities into a single blockchain ensures seamless operation, simplifies development, and enhances security through unified consensus.
On the other hand, advocates of modular architectures argue that this approach allows for specialized optimization of individual components like scalability, security, and governance and flexibility within the blockchain ecosystems.
The monolithic approach tends to make more sense to me however, I am not a tech guy so I put little weight in my view/opinion on this.
However, I am engaged in the crypto space, particularly on platforms like X (Twitter), where much of the debate and conversation occur so I can gauge community sentiment. Currently, I’d estimate that about 50% of the community is neutral, 30% favor modular, and 20% support monolithic. However, with a recent shift towards monolithic architectures due to friction within Ethereum's ecosystem and challenges with its layer 2 solutions.
However, what I will highlight is of the smart contract-enabled layer one protocols from the top 100 projects by market cap is that the majority are modular. Some blur the lines between the two but Solana developers have explicitly committed to a monolithic architecture, emphasizing it as the key to scaling.
Therefore, for investors looking to place a bet on modular architectures, there are multiple options including Ethereum and others. Conversely, for those favoring monolithic architectures, Solana stands out as the primary choice.
The Super Team & Firedancer
The Super Team is an underappreciated initiative that plays a significant role in Solana’s adoption. Essentially, the Super Team is a collective of developers, designers, and other professionals who collaborate on various Solana projects globally.
While some crypto projects operate on the thesis of “build the tech and they will come,” which I disagree with, the Super Team and the Solana Foundation proactively foster development and communities world wide adding to the network affects.
The Firedancer upgrade is Solana’s latest technological leap. This upgrade (expected in Q4 2024) focuses on improving transaction speeds, bolstering security measures, and increasing the overall capacity of the network. Essentially, improving some of those key technological components I covered earlier.
This upgrade is expected to be a game changer, opening up new use cases and supporting a broader range of dApps and therefore further enhancing Solana’s adoption.
Downtime & Risks
Before I finish with some bullish charts, it’s important to point out that it hasn’t all been sunshine and rainbows for Solana. The protocol has experienced down time in the past, and more recently have had UX issues with failed transactions. This was definitely a set up back, however, highly respected independent figures within the industry have called these growing pains and that any major technological adoption will face.
It makes me laugh when other projects are highly critical claiming their tech is better, when in reality, these claims are theoretical because their tech is hardly being used.
I’d much rather back a protocol facing issues due to high demand than back a project with "better tech" but no users. The key point being that Solana's engineers have a strong track record for execution and are confident that their ongoing upgrades will resolve these issues.
Final Thoughts and Strategy
Solana has been a standout performer during this crypto run-up, currently priced at $152.27 USD at the time of writing. The token's all-time high was $255, reached at the peak of the 2021 bull market.
I don’t have a specific price target for Solana. Although I mentioned a potential 300%+ increase in my introduction, I believe the price could exceed that projection. Instead of focusing on a fixed price, I plan to exit my position when there are signs of global liquidity tightening, which I anticipate will occur sometime between mid-2025 and early 2026 (as indicated by the pink box below).
Solana / USD (weekly log scale)
It’s important to note that despite the token’s price being well below its all-time high, the market cap is currently at its all-time high. This is due to the increased number of tokens in circulation compared to 2021. This factor makes Solana, and older, established projects in general, an attractive proposition. They have a larger percentage of their total supply already in circulation compared to newer projects.
Newer projects are often funded by venture capitalists (VCs) in return for tokens that are initially locked. The token unlock schedule varies for each project, but it typically occurs within the first few years from launch, which can result in heavy sell pressure as tokens are released.
Solana Market Cap
Below is the Solana/Ethereum chart. You can see that Solana crossed the 200-day moving average in mid-2023, retested it in September 2023, and then rallied significantly higher. Since the beginning of this year, it has been consolidating, forming an ascending triangle. In the short term, I expect Ethereum to benefit from the ETF tailwinds, which might cause Solana to retest the trendline over the next month. However, I anticipate a breakout before October.
Currently, I hold a decent position in Ethereum as well but plan to reallocate all of it into Solana before October.
My current position in Solana makes up 40% of my holding portfolio, that will become 50% once I trade my ETH into it. While there will almost certainly be other projects that outperform Solana in this bull cycle, they typically come with higher risks.
My average buy price for Solana was below $50. At that time, it was a riskier investment compared to where Solana stands today. I currently have a property on the market, and if it sells, I plan to add around 50% to my current position provided the price hasn't increased too significantly by then.
I hope you’ve found this post informative and useful. Please feel free to share it with anyone who might be interested.
Good read bro. 📈📈📈
The hat goes on !