Solana lacks ‘convincing signs’ of besting Ethereum: Sygnum

Solana does not yet have “convincing signs” that it could overtake Ethereum as the blockchain of choice for institutions, as its revenue is seen as unstable due to its memecoin concentration, according to crypto bank group Sygnum.

In a May 8 blog post, Sygnum said that the current sentiment around Ethereum “remains poor,” with the market focused on Solana’s “transaction volumes and its recent dominance in fee generation.”

However, Sygnum said “the medium-term outlook will primarily be shaped by traditional financial institutions’ platform choices to bring their product offerings,” not by sentiment.

“We do not yet see convincing signs that Solana would be the preferred choice as Ethereum’s security, stability and longevity are highly prized,” it added.

Sygnum argued that institutions could choose Ethereum over Solana as the market has viewed the latter’s revenue generation as “less stable” due to being “highly concentrated in the memecoin sector.”

“This will limit outperformance as it could be argued that the differential in valuation is accounted for by this difference in revenue sources,” the company said.

Transactions on Solana (purple) far exceed those on Ethereum and its layer 2s, but the latter has more value locked onchain. Source: Dune Analytics

Another factor is Solana’s tokenomics, which Sygnum said was “a comparable issue” to the criticism levelled at Ethereum over its mainnet’s stagnant transaction volumes due to it lowering the cost for its layer 2 networks.

The company said Solana is leading Ethereum in market share for layer-1 fee generation, but “most of the fees are paid to validators and do not grow the value of the Solana token.”

“In fact, when it comes to revenues, Ethereum still exceeds Solana 2- 2.5x,” Sygnum said.

It argued that Solana’s tokenomics are “easier to modify” than Ethereum’s scaling strategy. Still, it said that Solana “does not appear inclined to drive more value to the token,” as its community shot down a proposal to cut the SOL’s inflation rate in March.

Solana could gain with stable revenue focus

Sygnum noted that Solana, which some have hailed as an “Ethereum killer” that could challenge the network’s market share, could make some gains on the No. 2 blockchain.

The company said Ethereum has the dominant market share in “use cases that are showing traction” with support from governments, regulators, and traditional finance — such as tokenization, stablecoins, and decentralized finance.

However, it added that Solana had made progress in the amount of value locked on its decentralized finance protocols, and if it gains in “more stable revenue sources” such as tokenization and stablecoins, it could gain on Ethereum.

Sygnum added that Solana still has a strong backing, even with the Ethereum Foundation reshuffling its priorities to the layer 1 and recognising “the need to adjust its go-to-market strategy.”

However, that could give a sentiment tailwind to Ethereum as the blockchain’s “2-year-long underperformance vs Solana has been temporarily arrested” since the foundation’s pivot.