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Author: Kyle Samani, founder of Multicoin Capital; compiled by: 0xjs@Bitchain Vision
Multicoin Capital participated in the Solana seed round in May 2018, and since then, Multicoin Capital has also been investing in Solana native assets SOL and the broader Solana ecosystem.We have published four investment papers on Solana before.During that time.The first two versions were released about nine months before the mainnet generated the first block in March 2020.As the Solana network develops, our reference framework for how to think about Solana network and SOL assets is also evolving.
Solana has now become a US$100 billion asset, the fastest growing developer ecosystem and has surpassed Ethereum’s most important on-chain indicators (transaction volume, daily active address, revenue, total economic value TEV, DePIN payment, etc.).We want to share our thoughts why we have been subscribing to SOL for strong returns, even with Soalna’s market capitalization exceeding $100 billion.
This article is the fifth in our ever-evolving Solana paper.The first four articles are: 1.Separation of time and state; 2.The world’s computers should be logically centralized; 3.Technology scalability creates social scalability;4.The hidden cost of modular systems.
In this article,I will argue that Solana is the leading public chain supporting the Internet capital market.Furthermore, I think Solana as a technology can outperform major traditional finance (TradFi) players in core performance metrics such as latency (including NYSE, NASDAQ, CME, JPM, Goldman Sachs and Morgan Stanley in financial markets, as well as paymentsVisa and Mastercard) while retaining the core properties of blockchains that TradFi has never provided (atomic composability and permissionless access to users, developers and validators).Most importantly, I think the Solana ecosystem is able to achieve the following two goals at the same time, even if they seem to conflict with each other:
1. Reduce financial service fees of end users by 90-99%
2. Obtain a higher total market value than existing companies in TradFi
While traditional financial players such as the NYSE and Nasdaq offer only a small portion of the value in the financial stack, Solana has powered the superset of functionality of these systems through the unique DeFi protocol that has been put into production on Solana for years.Not only does Solana expand the total potential market (TAM) of transactions by increasing visits and performance, it also draws value from more levels of the financial stack.
Broadly speaking, all financial services can be classified into two categories: payment and finance.I will first explain how payments become a loss-making product for blockchain; after that, much of this article will focus on the core infrastructure of Wall Street Finance.
Provide the best global payment experience
There are many ways to transfer funds.The user experience of Apple Pay is great.Using a physical credit card is great.It’s also good to use Venmo, PayPal or Square Cash.Other methods are average, or even worse – ACH, Wires, Zelle, Bill Pay, remittances, etc.
But even if these traditional systems have a good user experience, the cost is ridiculously high.The wire transfer fee is $25 and the credit card fee may exceed 2%.It’s crazy to update the ledger entry to such a huge cost to consumers and merchants.This goes against basic common sense and directly goes against the natural intuition that electronic trading should be cheaper than simulated trading.
Solana simplifies the payment process and makes the user experience great.And the cost is almost zero.Please watch the video (https://youtu.be/LaNwHW_NBIs), Sling Money is built entirely based on Solana.This is the future of currency flows.
The global payment companies have a market capitalization of approximately US$1.4 trillion.Solana’s goal is to reduce this cost by 90%.The only fee Solana itself charges users is gas, which is about 0.1 cents per transaction, or $0.001 per transaction.Even if the Solana network processes an average of 50,000 transactions per second in a year, that’s a total of only $1.5 billion for users.For comparison, Visa maintains thousands of transactions per second.
Payment is a loss-making product of blockchain.Payments are crucial to driving adoption, providing real utility to users and companies, but are not the primary source of profit for blockchain or its ecosystem.
However,Payment is crucial to the development of blockchain.The beauty of payment is that it is inherently viral.This leads to a natural increase in wallet adoption when Alice sends money to Bob and then Bob sends money to Carol.
The main source of profit for blockchain is not payment, payment is actually $0.On the contrary, the main source of profit for blockchain is the natural fluctuations between asset prices, this fluctuation is manifested in the form of Maximum Extractable Value (MEV).My co-founder Tushar in hisSpeech at the 2022 Multicoin SummitFurther explanation.
The rest of this article will focus on how and why Solana can outperform TradFi on traditional performance metrics and how this will make the SOL and Solana ecosystem profitable.
Market efficiency of CeFi and DeFi
Solana is a decentralized network of thousands of nodes that agree on a series of financial transactions at a rolling speed of 400 milliseconds (and is expected to decrease to 120ms in the next few years).
The correct way to measure market efficiency is not through trading delays, but through price spreads provided by market makers (MMs).Ultimately, what buyers and sellers experience is price.Human users (i.e. non-bots) cannot experience the differences between 50 milliseconds, 100 milliseconds, and 200 milliseconds of financial transactions.As background, the average time for human blinking is 100-150 milliseconds.
Market making in centralized finance (CeFi) is almost certain.Most market makers have servers in the same location as CeFi exchanges, and each market maker has a fiber optic cable of exactly the same length to connect their servers to the exchange.Exchanges complete transactions in microseconds, so market makers can understand their risk exposure in real time and with high accuracy.
Decentralized finance (DeFi) exchanges—such as Drift, Phoenix, Clearpools, Raydium and Orca—in contrast, have much less certainty than CeFi exchanges because:
1. Solana’s network leader is constantly rotating
2. Since validators around the world need to reach a consensus, the final time will increase
Therefore, market makers cannot understand their risk exposure in real time with the same accuracy.In many cases, market makers may leave outdated prices on the blockchain order book, which others may take advantage of.
Therefore, DeFi spreads are usually larger than CeFi spreads.
Let’s see how these systems have changed in order to bring a better experience to the maker and the recipient.
Maker – narrowing the spread through conditional liquidity
Things are changing.DFlow has just quietly launched Conditional Liquidity (CL) on Solana.As the name implies,Conditional liquidity refers to liquidity that is only available when the recipient’s order meets certain predefined conditions.For the purposes of this article, the important condition is toxic and non-toxic order flow.
How does CL work?CL stipulates that liquidity of a given unit can be extracted only if the order eater is endorsed by a known front-end application.These include the following wallets: Phantom, Backpack, Solflare, and Fuse as well as their own frontends such as Drift, Kamino, Jupitar and DFlow.This mechanism ensures that the robot cannot consume CL because the robot order is not endorsed by the endorsementist.This is a huge improvement for MMs, as it actually guarantees that they won’t be eliminated even if their offer is delayed by a few seconds.
While CL is a new concept in mechanics, it is directly inspired by the widely adopted practices in TradFi.Robinhood is a pioneer in this area.Robinhood always offers customers better prices than the national best bid and offer (NBBO) on the NYSE and Nasdaq.They have proven this pricing improvement over the past decade with trillions of dollars in trading experience.This makes sense because market makers have good statistical reasons to believe that Robinhood users have lower average toxicity than trading directly on the NYSE or Nasdaq.In short, who do you prefer to face in the transaction: Joe who watches YouTube videos, or Citadel?
CL lets MM know that they are not facing the well-known Citadel.
More context on how order flow segmentation can bring more favorable prices to retail traders,You can see here.
The advantage of DFlow CL is that it has both the advantages of TradFi and cryptocurrency.It is able to provide closer price spreads for retail customers and more of Robinhood and provides real-time permissionless access and open auditability of blockchain.
CL is an emerging concept.However, we expect it to become the dominant paradigm for on-chain liquidity quotes in the coming years, as market makers hate being deceived by stale quotes.Market making is fundamentally based on the maximum available information to quote.Market makers (whether passive or proactive) have no reason not to include more information (i.e. conditional liquidity) into their pricing.
DFlow’s CL implementation on Solana is currently 100% open source and does not charge any fees or taxes.The following isGitHub repository.
Conditional liquidity is the most important feature improvement in DeFi since Uniswap launched the xyk automatic market makers (AMM) in late 2018.With its adoption, it will reshape all the discussions in DeFi about UX, spreads, MEV, and more.
To reiterate, CL will enable market makers to provide stricter quotes for average users.We hope this will benefit market makers, users, SOL and Solana ecosystems.
Takers – use Alpha by reducing delays
Financial markets should include all public information in asset prices.They usually do this.However, most asset price discoveries occur on one server in one place, while information affecting prices is generated around the world.
The TradFi market microstructure is designed around low-latency traders who want to co-locate with the exchange matching engine.
If you as a retail trader observe that events in Singapore will affect the price of TSLA, you still have to send a message to New Jersey next to the market makers.This is fundamentally unfair to the recipient and not necessary to market makers.
The first correct point of this question is that observers of this information should be able to place orders with validators located in Singapore rather than New Jersey based on the new information.This market participant should get the alpha for first observing the information and adding the order to the global order book as fast as possible.
Today, Solana, like other leading blockchains, has only one leader at any time.But this situation will change soon because Solana is heading towards multiple concurrent leaders (MCL).
Under MCL, there will not be only two leaders at any time, but dozens of them.With MCL, participants who observe real-world information can and will incorporate this information into asset pricing more quickly.
The key to optimizing price discovery is not to reduce the latency of a single matching engine by one nanosecond, but to push price discovery to the edge, allowing people around the world to get information about updated prices.
Contrary to intuition, decentralization enables recipients to minimize latency in transaction times, thus maximizing the spread of information in financial markets.
By definition, decentralized price discovery is better than centralized price discovery.The world is big and very different.
Horizontal expansion TAM…
From the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, most major exchanges around the world trade an asset (such as stocks or commodities).But blockchain reveals a reality: all units of value (currency, commodities, stocks, derivative positions, debt, Meme coins, governance tokens, utility tokens, NFTs, etc.) can be expressed on a blockchain without permissionFor standardized tokens.
Today, most of the assets traded on blockchain are blockchain native assets.That is, they are created and issued natively on the chain.This includes DeFi tokens, DePIN tokens, NFTs, etc.But more and more assets are issued on-chain, representing TradFi assets, including U.S. stocks, bonds, real estate, U.S. Treasury bonds, mezzanine debt, etc.
Ultimately, almost all assets will be traded on essentially global and license-free systems like Solana.This doesn’t necessarily mean people will stop trading on the NYSE, the Nasdaq and the Chicago Mercantile Exchange, but it means that more and more transaction volume will be on-chain rather than on TradFi venues.This is natural because blockchain is essentially global, license-free, all-weather, and more accessible to retail traders and easier for developers to integrate than TradFi.
Integrating private keys and tokens into any app is a piece of cake, whether it is a telegram robot, a lightweight Android app, or a WeChat applet.The difficulty of docking with a large number of heterogeneous systems representing the global TradFi system has increased exponentially.Their APIs are much more complex, with slow and inconsistent settlement times, and in many cases, TradFi institutions simply don’t face retail traders.
Since blockchain is open and license-free, it explicitly increases participation in various forms of financial markets.Ultimately, asset issuers do not care about the track on which their assets are traded.The asset issuer just wants to make sure that anyone who wants to buy its assets can buy it.Today, most company CEOs do not think that on-chain issuance of shares will increase their potential shareholder range, but this will change in the coming years as global cryptocurrency users grow from about 500 million to billions.
Not only do we believe that cryptocurrency will support all TradFi assets, we also expect it to support many new assets that were simply impossible to exist before.One of my favorite examples is Parl, which offers permanent contracts based on a 30-day cycle, based on the average price per square foot of completed real estate transactions in a specific market.Parcl allows you to go long Austin, short San Francisco, and use the equity value of each position to pledge another position!
There are even teams developing products and issuing NFTs to represent single bottles of whiskey, wine, and watches on the chain!
Solana’s TAM is expanding in all directions.Wall Street is slowly developing on the chain, and developers are building various new financial markets on the chain.
…and gain value from innovation
So far, everything in this post sees Solana as a matchmaking engine.However, with the help of DeFi protocols such as Drift, Jupiter, Kamino, marginfi, etc., the Solana ecosystem can provide:
1. All imaginable financial services
2. For everyone in the world
3. Improve transparency and auditability, thereby significantly reducing the risk of chain infection
4. Capital efficiency is higher than TradFi.
Today, the largest DeFi primitives on Solana are 1) spot trading, 2) borrowing and 3) perpetual futures trading.These roughly amount to 1) NYSE/NASDAQ, 2) large banks that provide consumer and quality loan services, as well as FCM, and 3) Chicago Mercantile Exchange.These are only available in the United States.Solana competes to provide financial services to everyone in the world.
Although many Solana supporters include Anatoly (co-founder and CEO of Solana Labs) and I once called Solana a decentralized Nasdaq, Solana and its ecosystem have a much larger TAM than Nasdaq.Solana is trying to power all financial services around the world; it is much more than a matchmaking engine.
What’s incredible about Solana is that all these different financial tools can be combined with each other in a native and atomic ways without explicit approval or support from the application developers.This concept of using existing smart contracts as Lego bricks to build more useful services is what most people in the industry call composability.This makes experimentation and growth faster, as developers can build on a set of basic contracts, integrations, and liquidity, all creating value for stakeholders in the Solana ecosystem in a virtuous cycle.This means Solana-based products can innovate faster and provide a better consumer experience.
Solana itself does not provide financial services.But Solana creates a stack that supports hundreds (and soon to thousands) of financial services that contribute to trillions of dollars in risk transfer every year.Although gas costs are close to 0 and are on a downward trend, Solana profits directly from the growth of these financial services through maximum extractable value (MEV).
Just as my partner Tushar is2022and2024As mentioned at the Multicoin Summit, asset ledgers like Solana can be valued based on the MEV they capture.Each new financial service generates incremental MEV, and Solana can capture some of it.Today, more than $100 million in MEV has been generated for a single Solana application, and everything here is still in its infancy, besides revenue from those specific apps.
In the fourth quarter of 2024, Solana Network received more than $800 million in REV (this does not include SOL inflation), which is about $3.2 billion at an annualized rate.And it was only about $0 a year ago.This is still the case despite the fact that there are few TradFi assets issued on Solana and the major DeFi protocols on Solana are relatively immature, most of which are only a few years old.
Solana’s TAM is growing in three dimensions:
1. The DeFi protocol continues to mature, adding new features and features and creating more MEV opportunities.
2. Entrepreneurs are building new financial markets on the chain, such ascalculate,telecommunications,Energy Marketand blockchain collectibles market (Blockchain-Enabled Collectibles Marketplaces, BECMs), etc.
3. From memecoin to US stocks, more and more assets are being issued on-chain.
These not only increase Solana’s TAM, but also enhance each other.For example, the more assets are issued, the more collateral available for borrowing.
Solana’s compounding rate is getting faster and faster.
Internet Capital Market
The Solana ecosystem is fully committed to realizing the vision of the Internet capital market.Solana simultaneously improves execution for market makers through conditional liquidity and improves recipients through multiple concurrent leaders.Additionally, the Solana ecosystem is expanding its TAM horizontally (by supporting a wider range of TradFi and crypto-native assets) and expanding its TAM vertically (by getting some MEV from the numerous financial services built on Solana).
This is an excellent opportunity to create a global, license-free financial system:
1. Enable people with information advantages to capture the alpha of each asset class
2. At the same time, cross the smallest price difference
3. Enjoy the lowest fee
4. Have leverage from global sources, transparent and real-time auditable
5. Maximize capital efficiency through atomic composability across locations and protocols.
This is the vision of the Internet capital market.That’s Solana’s vision.
