The "Ultimate Metric" of Public Blockchain Potential? A Comparison of Solana and Ethereum from the Perspective of REV

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 value narrative, arguing that its reliance on Memecoin trading's short-term wealth effect is not sustainable and carries structural risks. Solana's success may be more driven by speculation rather than technical superiority, while Ethereum continues to grow steadily in the DeFi space. The author reminds readers to maintain a critical perspective on the narratives in the crypto space and avoid being misled by market hype.

Below is the original content (slightly rearranged for better readability):

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 line on a chart going up and down is never just a line; it's part of a larger trend in technology or economics. 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's crucial to critically examine how each narrative shapes the world—and who benefits from this shaping.

The blue-collar workers in the narrative factory, the venture capitalists, have been working overtime to explain why ETH has underperformed compared to BTC and SOL. Some of these arguments are not controversial: the Ethereum community should achieve better consensus on the shared direction, reevaluate its technical assumptions, or simply do better.

This article argues that a specific narrative about Solana and Ethereum is incorrect. This story goes something like this: Solana has outperformed Ethereum on the blockchain's most crucial economic metrics, especially in decentralized exchange (DEX) trading volume and REV (Real Economic Value = MEV + Transaction Fees, a metric measuring protocol cash flow).

According to this narrative, Solana's lead in REV comes from its technical superiority and traction in multiple application categories. SOL's value can be evaluated based on the expected future REV, which is more advantageous than ETH because ETH can only be valued based on "sentiment" or "monetary attributes."

But this is just one narrative. Solana's REV is entirely generated by Memecoin trading, making it difficult to assess SOL's value based on future cash flow. 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 shifted to Solana.

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

If you want to see how Solana is performing, the data speaks for itself.

This is a great narrative.

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

Could it be a brilliant mix of all the top crypto apps? Innovative DePINs like Helium, a CLOB building a decentralized Nasdaq, stablecoin payment volume, complex DeFi transactions, and of course, maybe a part from meme coins, right?

Hold on — are all these just pump.fun and a bunch of Telegram bots used for meme coin trading?

Where are the groundbreaking apps? What about DePINs? Where is the global price discovery of 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 the merits of Meme coins. Meme coins may be a good way to onboard users to a crypto protocol and transfer wealth from "ignorant market participants" to savvy liquidity providers.

However, Solana's REV is entirely derived from Meme coin trading, posing a structural problem for assessing SOL's value based on future REV.

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

With successful marketing of SOL, the price surged. This created a wealth effect, which is a wonderful thing in the crypto space. It's a form of financial alchemy where token price appreciation (largely 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 funds, being heated, with the only way to release pressure being capital flowing into stupider and riskier assets, like CryptoDickButts or this:

As activity increases, thought leaders can fill a compelling narrative, drive SOL's price up, 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 the flywheel effect.

According to our narrative, the reason Meme coin activity has erupted on Solana (rather than other equally scalable L1 or L2 solutions) is primarily due to SOL's wealth effect. Solana's low transaction fees are a necessary condition, but a wealth effect is needed to propel Meme coin mania 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 astounding growth of REV on Ethereum. In the previous bull market, ETH holders' newfound wealth flowed into increasingly volatile on-chain assets, such as NFTs and Meme coins.

Highly speculative assets often tend to generate excessive REV as users are willing to pay higher priority fees and MEV rates to gain exposure to volatile opportunities. The value of Meme coin transactions heavily relies on their position in the block, allowing block proposers who control the ordering to extract more value. This has brought protocols a higher cut of the pie compared to other forms of on-chain activity.

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

Meme Coin REV Won't Last (Nor Will It Save You)

Just as the REV generated by Meme coins on Ethereum is unsustainable, it won't be sustainable on Solana either. While Meme coins may be fun, Meme coin speculation is a zero-sum game.

The fees and MEV paid by Meme coin gamblers are exorbitant compared to other forms of gambling, ultimately leading gamblers to deplete their funds. While high fees and MEV may benefit REV, in a zero-sum game, they don't create any economic value, and the consequence is that they siphon liquidity from the ecosystem. Every dollar of REV paid signifies a reduction in funds available for future Meme coin transactions, resulting in decreased future REV.

Therefore, it's challenging to argue that the growth of REV will continue, ultimately proving that SOL's market cap 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, we get a ratio of 45:1. While this is an improvement, it still assumes that Meme coin transaction volume will grow over time. Given that this is unlikely (see ETH in the previous market cycle, where REV dropped from $10 billion to $2.6 billion), it is challenging 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 would struggle to find 100x more innocent order flow willing to be "front-run" — buying Meme coins through sandwich attacks and sniper bots, except in Ken Griffin's most twisted fantasies?

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

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

「Mercenary」 Memecoin

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

You might think that the reason for Memecoin issuance moving from Ethereum to Solana is that Solana is more scalable, better for trading, and its technical advantages mean it will continue to be a hotbed of degenerate gambling. This is not the so-called "decentralized Nasdaq," but as a crazy speculative hub, it is at least worth something.

This overlooks that the direct cause of the Memecoin frenzy is the SOL wealth effect. For instance, by the end of 2023, BONK's price and volume closely followed SOL. We can see a similar situation with decentralized exchange (DEX) trading volumes, especially Meme coin trading volumes, until March 2024 when SOL rebounded 10x from the lows after the FTX collapse, and Memecoin trading started to surge.

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.

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

What About Ethereum?

The narrative around REV growth on Solana 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). Given that Solana's activity is entirely driven by Memecoin, this point is not logical. Increasing L1 execution by 5x or 10x will not bring Memecoin back to Ethereum L1; Solana still offers lower fees and a stronger short-term wealth effect.

If DeFi had indeed largely migrated to Solana, we should have seen a significant drop in Ethereum's transaction volume. However, Ethereum's DEX volume in December 2023 remains at 10%-20% of the historical peak monthly volume, even during the bull market of 2021/22 when ETH price volatility was higher, and NFT and Memecoin volumes were much higher than they are now.

This supports the view that there are different categories of DeFi users. While Memecoin traders are increasingly flocking to Solana, substantial funds still remain on Ethereum. Referencing REV or DEX volume as evidence of Solana's dominance in DeFi is misleading.

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

A counterargument is that almost all on-chain activities are purely speculative, so labeling Ethereum's activity as not tethered to real economic activity while only considering Solana's activity as Memecoin transactions is somewhat disingenuous. My initial reaction is: it is advisable not to express such views for the benefit of the industry.

More seriously, while Solana leads in REV, Ethereum clearly boasts a more mature and vibrant DeFi ecosystem, as it exhibits strong TVL and activity even without a plethora of Memecoin issuance.

The Rollup Central Roadmap Rebuttal

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

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

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

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

Ethereum's liquidity and TVL make it a better platform for L2. Additionally, Ethereum has explicitly struck a balance between performance and availability, which is a better choice for L2 since L2 does not require high throughput on L1. The worst-case scenario for L2 is when L1 goes offline, rendering transactions or bridging incomplete.

This poses a real risk for Solana as its REV growth is entirely driven by highly cyclical activity, which could be better served by other chains.

Conclusion

Solana's optimistic scenario is that it is currently in the same place as Ethereum in 2021; ultimately, activity will bring about a more mature DeFi ecosystem. But this is not a guarantee.

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

Solana's pessimistic scenario, on the other hand, is that it has not truly succeeded in following its own North Star of building a decentralized Nasdaq. Traders care about latency and guaranteed transaction execution. During volatility, it is hard to get transactions included 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 looking to cash in on short-term wealth effects.

As the Memecoin craze subsides, this may morph into a new form of gambling, but that seems unlikely because gamblers care less about Solana's advantages over L2 and more about L2's advantages over Solana.

But I digress. In the crypto space, it is very easy to fill the narrative supporting a particular viewpoint (and bagholding). This is especially easy when your story includes compelling technology and activity driven by speculative frenzy. However, precisely because of this, we should be skeptical of heavily biased storytellers.

I believe Ethereum's openness to critics has actually done it a disservice. This includes the story about REV and the comparison to Solana's economic metrics, but more importantly, the debate about value accrual and L2 as Ethereum L1 parasites. Hopefully, I will discuss this in future posts.

Disclaimer: This article has been sitting in the drafts folder for a few months, so it does not cover $TRUMP, $MELANIA, or recent market sell-offs. These do not materially impact the argument, so they were not addressed.

Original article link: 「Original Article Link」