The State Of Solana With Carlos Gonzalez Campo

This episode dissects Solana's recent market turbulence against its resilient on-chain fundamentals, exploring how application revenue, stablecoin growth, and core protocol upgrades paint a picture of an ecosystem evolving despite price volatility.

Guest Introduction and Q1 Solana Recap

• Host Jack Cuban welcomes Carlos Gonzalez Campo, Analyst at Blockworks Research, back to the show.
• The discussion centers around Carlos's recent Blockworks Research report analyzing Solana's performance during March and concluding Q1 2024.
• The conversation aims to cover the state of the Solana network, key narratives, and underlying themes relevant to investors and researchers.

Solana Price Action vs. Bitcoin/Ethereum

• The episode opens by addressing the recent significant price downturn in the crypto markets, particularly Solana's underperformance relative to Bitcoin.
• Carlos notes the divergence between SOL/BTC (Solana price relative to Bitcoin) and SOL/ETH (Solana price relative to Ethereum), with SOL/BTC down significantly (~30% YTD) while SOL/ETH remains up (~18-20% YTD).
• Carlos interprets this as a sign of market maturation, stating, “Bitcoin right now is positioning as a non-sovereign form of money... whereas Solana is mainly competing and taking market share from Ethereum on the smart contract chain landscape.” This highlights distinct market narratives driving asset performance.
• Strategic Insight: Investors should recognize the differing market roles and narratives influencing Bitcoin versus smart contract platforms like Solana and Ethereum, leading to potential performance divergences even within the broader crypto market.

Market Sentiment and Fundamental Strength

• Jack expresses surprise at SOL dropping below $100, questioning if it felt like an overcorrection given Solana's perceived institutional interest and stable network fundamentals.
• Carlos agrees, pointing out that key network metrics (revenue, DEX volumes, stablecoin supply) are significantly higher today compared to the last time SOL traded at the $100 level. He emphasizes, “Fundamentally soul is much much better today than it was the last time it was at this stage like in price.”
• While declining to make price predictions or declare a bear market, Carlos acknowledges the current sentiment feels like “bear market bias.” The discussion touches on macroeconomic factors like potential US tariffs influencing market direction.
• Strategic Insight: Crypto AI investors should weigh volatile price action against underlying network fundamentals. Solana's improving metrics despite price drops suggest ecosystem resilience, though macroeconomic headwinds remain a risk factor.

Solana Open Interest Analysis

• Carlos clarifies that while dollar-denominated Open Interest (the total value of outstanding derivatives contracts) isn't at an all-time high, SOL-denominated Open Interest reached its second-highest point ever in March, just shy of the peak before the FTX collapse.
• He suggests this high leverage indicated traders were “expecting a sharp move,” which subsequently occurred with the drop below $100.
• Strategic Insight: High open interest, especially denominated in the native asset, signals significant leverage and trader positioning, often preceding periods of heightened volatility. Monitoring these derivatives metrics can offer clues about market expectations.

Solana Governance: TPU Feedback (SIMD-248)

• The conversation shifts to Solana network upgrades, specifically SIMD-248, a proposal for TPU feedback. SIMD stands for Solana Improvement Document, a formal proposal process. The TPU (Transaction Processing Unit) is the part of a validator responsible for processing incoming transactions.
• Carlos explains that this proposal would allow validators (called "leaders" when producing blocks) to send richer feedback to clients about submitted transactions via Quick datagram messages, beyond a simple receipt acknowledgment. For example, it could specify if a transaction failed due to an insufficient priority fee.
• This aims to improve quality of service, reduce network spam (as users wouldn't need to blindly retry failed transactions), and allow applications to adjust parameters like priority fees more intelligently. Carlos notes this helps avoid the current “trial and error” approach that contributes to network congestion.
• Strategic Insight: Technical upgrades like TPU feedback, while seemingly minor, are crucial for enhancing network performance, reliability, and user experience. For AI applications requiring high throughput and predictable execution, these improvements are vital for Solana's viability as a platform.

App Revenue vs. Network Revenue Ratio

• Despite a significant drop in Solana's network revenue (fees paid to the protocol) from February to March, Carlos highlights a bullish trend: the ratio of application revenue to network revenue reached a near all-time high of 1.84 in March.
• He explains this ratio: “Sena apps generating $1.84 per revenue per $1 of Sena rev.” This indicates that applications built on Solana are, on average, generating significantly more revenue than the underlying network itself captures in fees.
• Carlos views this positively, suggesting it shows product-market fit for Solana applications and that the network isn't overly “extractive,” allowing businesses (apps) within the ecosystem to thrive. He compares network revenue to a “tax rate” on user activity.
• Strategic Insight: The App Revenue/Network Revenue ratio is a key metric for assessing the economic health and sustainability of a Layer 1 ecosystem. A high ratio suggests a vibrant application layer capable of capturing value, potentially attracting further development and investment.

Pump.fun's Role and Ecosystem Impact

• The discussion touches on Pump.fun, a platform for launching memecoins on Solana, which frequently surpassed the Solana L1 itself in daily revenue.
• Jack raises the point that while Pump.fun's success is cited as proof of Solana's ability to host real businesses, some criticize it for potentially extracting value (selling earned SOL for operational costs).
• Carlos defends Pump.fun, arguing that criticism is often unfounded: “At the end of the day it's like a business right? You you need to make money... You cannot pay the bills with soul.” He stresses Pump.fun's positive net impact, driving significant volume to DEXes like Radium and contributing massively to Solana's activity over the past year.
• Strategic Insight: Breakout applications, even controversial ones like Pump.fun, can significantly drive L1 activity, liquidity, and user adoption. Understanding the dynamics between popular apps and the base layer is crucial for evaluating ecosystem growth trajectories.

Network Revenue Drop and Validator Incentives (CID-123)

• Solana's network revenue saw a steep drop in March ($71M, down 87% from January's peak during the “Trump memecoin” launch). Carlos attributes this primarily to reduced memecoin trading activity, which drives contentious transactions and higher priority fees.
• He clarifies that validator income isn't solely reliant on transaction fees (rev); it also includes inflation rewards (issuance).
• Importantly, Carlos mentions CID-123 (another Solana Improvement Document) passed alongside the controversial SIMD-228. CID-123 will enable validators to share priority fee revenue with stakers, similar to how issuance rewards are shared. This is expected to increase the portion of network revenue flowing to stakers over time.
• Strategic Insight: Understanding the sources of network revenue (trading activity, priority fees) and the distribution mechanics (validator cuts, staking rewards, fee-sharing via proposals like CID-123) is essential for assessing the economic incentives securing the network and the potential returns for stakers.

Solana vs. Ethereum L2 Strategy (SVM Chains)

• The conversation explores whether Solana is heading down Ethereum's path with the emergence of SVM (Solana Virtual Machine) chains like Eclipse, Atlas, and Fogo, potentially fragmenting liquidity like Ethereum's Layer 2s (L2s).
• Carlos argues the situations differ. He states Ethereum “explicitly gave up on scaling the L1 and embraced like a modular scaling road map,” pushing users and liquidity to L2s. In contrast, “Solena developers will do everything in their power to give users and developers and liquidity like in the L1.”
• He notes that Solana's leading applications (Radium, Camino, Jupiter) haven't migrated to these SVM chains, indicating a focus on optimizing the main Solana L1.
• Strategic Insight: Solana's strategy appears focused on maximizing the performance and capacity of its monolithic L1, contrasting with Ethereum's modular, L2-centric approach. This difference has significant implications for developers choosing a platform and for investors assessing long-term scalability and value accrual.

Off-Chain Solutions and Toxic Order Flow

• A major challenge on Solana is “toxic order flow,” where sophisticated actors (often MEV bots) exploit transaction ordering or latency (jitter) to gain an advantage over regular users and market makers, leading to poor price execution and wider spreads. MEV stands for Maximal Extractable Value.
• Carlos highlights application-level innovations emerging on the L1 to combat this, often involving off-chain components. Examples include Camino's partnership with dLOB for an off-chain auction swap product and Drift's similar “Swift” protocol. These aim to provide better, more reliable price execution.
• Other approaches mentioned include DFlow (permissioned front-ends) and Ellipsis Labs' Atlas (an SVM L2 with opinionated transaction sequencing).
• Strategic Insight: Application teams on Solana are actively developing sophisticated solutions, including off-chain elements, to mitigate core network challenges like toxic order flow. This demonstrates adaptability but also highlights the complexities of achieving optimal on-chain execution.

Pump.fun L2 Speculation

• Jack mentions Twitter speculation about Pump.fun potentially launching its own L2 or app chain.
• Carlos expresses strong skepticism, believing Pump.fun benefits immensely from Solana's L1 distribution, liquidity, and composability, which it would lose by moving. He estimates, “I would put it like a sub 5% chance it happens to be honest.”
• Strategic Insight: The decision for successful applications to launch their own chains involves significant trade-offs regarding sovereignty versus leveraging the network effects, security, and user base of an established L1.

Rise of New Market Makers (Soulfi, Zerofi, Orbit)

• The discussion notes the emergence of new, relatively opaque decentralized exchanges (DEXes) or market makers like Soulfi, Zerofi, and Orbit, which handle significant trading volume despite having closed-source programs and little public presence.
• Carlos acknowledges their growing market share (Soulfi rivaling Orca) but admits the lack of transparency makes their exact mechanisms unclear. He links their rise to the broader trend of using off-chain components to address issues like MEV and toxic order flow.
• Strategic Insight: The DEX landscape is dynamic. The rise of new, potentially more sophisticated (though less transparent) players like Soulfi indicates ongoing evolution in market structure and liquidity provision on Solana, warranting close observation.

DEX Landscape Competition

• Competition within Solana's DEX sector is intensifying. Radium, once dominant (over 60% market share), saw its share drop to ~38% in March, though still leading overall.
• New entrants and products are challenging incumbents: Orca dominates specific pairs (SOL/USDC), Soulfi/Zerofi are gaining ground, Camino launched a swap aggregator, Titan is building a Jupiter competitor, and Pump.fun launched its own AMM (Automated Market Maker).
• Carlos notes that established apps like Camino and Drift have an advantage in user familiarity compared to newer, less accessible protocols like Soulfi, which rely more on aggregators like Jupiter.
• Strategic Insight: The Solana DeFi landscape is far from settled. Increased competition among DEXes and aggregators can lead to better pricing and execution for users but also requires investors to stay updated on shifting market shares and technological innovations (like RFQ systems or off-chain components).

Stablecoin Stickiness on Solana

• Despite market volatility, stablecoin supply on Solana (primarily USDC and USDT) has remained remarkably “sticky,” reaching a new all-time high of $12.2 billion in March after recovering from a dip post-memecoin frenzy.
• USDC supply grew by $620M and USDT by $350M in March alone.
• Carlos suggests this stickiness reflects “growing liquidity on the network” but could also indicate users de-risking into stablecoins amidst “bare market conditions” while keeping funds within the Solana ecosystem. High USDC borrow rates on Camino further suggest users might be leveraging stablecoins to long SOL.
• Strategic Insight: Stablecoin supply is a critical indicator of an L1's utility for trading and DeFi. Solana's ability to attract and retain substantial stablecoin liquidity, even during downturns, underscores its growing role as a key venue for crypto-native financial activity.

New Stablecoins & Incentive Programs (USDG vs. PYUSD)

• New institutional players are entering Solana's stablecoin market, such as the Paxos-issued USDG (backed by Anchorage, Galaxy, Kraken, Robin Hood, etc.), which quickly reached $100M supply, partly via an incentive program on Camino.
• Carlos contrasts USDG's incentive strategy with PayPal's PYUSD launch. PYUSD heavily incentivized supplying the stablecoin, leading to mercenary capital flight when rewards ended. USDG's program incentivizes borrowing USDG against JitoSOL collateral.
• Carlos argues the USDG approach is potentially “a little bit more sticky” as it targets the demand side and integrates with other ecosystem components (JitoSOL), rather than just passive supply.
• Strategic Insight: Stablecoin adoption strategies are evolving. Evaluating incentive programs requires looking beyond headline yield (APY - Annual Percentage Yield) to understand whether they stimulate genuine, sustainable usage (demand-side) or just attract temporary, yield-seeking capital (supply-side).

Challenges for New Stablecoins vs. Incumbents

• Jack questions whether new fiat-collateralized stablecoins (like USDG) can realistically challenge the dominance of USDT (Tether) and USDC (Circle).
• Carlos is skeptical, stating, “I don't think you can beat USDT and USDC at their own game” due to their massive network effects, liquidity, and acceptance. He believes a challenger needs a differentiated approach.
• He points to Ethena's USDe as an example of differentiation, offering yield generated from derivatives positions, unlike traditional stablecoins where yield accrues to the issuer. He also notes the importance of distribution, citing Robin Hood's potential to favor USDG or Ethena's success in getting USDe integrated as collateral on exchanges.
• Strategic Insight: The stablecoin market exhibits strong network effects favoring incumbents. New entrants likely need significant differentiation (e.g., novel yield mechanisms like USDe) or powerful distribution advantages (e.g., integration by major exchanges or platforms like Robin Hood) to gain meaningful traction against USDT and USDC.

Reflective and Strategic Conclusion

• Solana's ecosystem demonstrates resilience, with application revenue and stablecoin liquidity growing despite significant price volatility. Investors and researchers should monitor the app/network revenue ratio, evolving stablecoin strategies, and ongoing network upgrades as key indicators of Solana's fundamental health and competitive positioning.