VanEck's proposed Solana exchange-traded fund (ETF) (SOL) is facing scrutiny due to concerns about wash trading and the nature of on-chain activity. Matthew Sigel, Head of Digital Asset Research at VanEck, x.com/matthew_sigel/status/1853456012734591462″ target=”_blank” rel=”noopener nofollow”>published an in-depth analysis on Tuesday, comparing SOL's metrics to ethereum's to provide context and clarity.
Solana has been recognized for its high performance and low transaction costs, which has attracted a significant number of users and developers. With approximately 111 million monthly active wallets, it far exceeds ethereum's 5.4 million. However, skeptics argue that a large portion of these wallets may be Sybil accounts: fake identities created to manipulate metrics.
Does Solana have a problem with the laundry trade?
In his analysis, Sigel recognizes the challenge of distinguishing between organic user activity and that arising from individual users controlling multiple wallets. “We agree that a large portion of these portfolios are not organic,” he says.
The analysis reveals that memecoin and non-fungible token (nft) activities make up a significant portion of Solana's revenue. Approximately 34.3% of Solana's revenue is derived from these sources, compared to 6.6% for ethereum in the current year and 20.3% for ethereum during its peak memecoin activity between July and October 2021.
When evaluating wash trading (a practice where traders buy and sell the same asset to artificially inflate volumes), Solana's numbers are noticeably higher. An estimated 41.4% of memecoin and nft volume on Solana is attributed to wash trading. In contrast, ethereum wash trading for these assets stands at 28.9% in 2024 and 44.4% during its 2021 peak.
“Collectively, we assess that 14.2% of Solana's revenue comes directly from wash trading compared to 2% for ethereum in 2024 and 9% in mid-2021,” notes Sigel. He adds a crucial caveat: the analysis assumes that memecoin wash trading generates mining extractable value (MEV) in line with normal trading. Without MEV in these operations, estimates would fall by 50%.
To perform this analysis, the study used Dune Analytics queries of the Solana and ethereum blockchains to accumulate memecoin and nft activity over specific periods. MEV and transaction fee data was obtained from Artemis, Jito and Flashbots to evaluate each chain's MEV and gas fee revenue. To identify wash trading, the analysis employed a threshold relationship between the daily trading volume and the market capitalization of a coin.
Sigel cites several reasons for the high levels of memecoin trading and laundering on Solana. First, SOL's transaction fees are about one-tenth of ethereum's, reducing the opportunity cost of wash trading. Secondly, the architecture offers a superior user experience for memecoin trading due to its high performance and low latency.
Third, platforms like Pump.fun simplify memecoin trading, encouraging higher levels of activity. Fourth, the MEV approach may inadvertently inflate trading volumes. “Solana's MEV trading is based on statistically based assessments of how to get a trade by submitting many orders for the same trade. Some of these will likely land without capturing MEV, and this may increase trading numbers more than on ethereum,” Sigel explained.
What does that mean for a spot SOL ETF?
Sigel makes crucial comparisons between SOL and established companies like Alibaba, DraftKings, and CME Group to provide insight into speculative trading activities. In the case of Alibaba, there was initial skepticism about package volumes that might have included “empty packages” to improve metrics ahead of its 2014 IPO. DraftKings and CME Group make substantial revenue from speculative trading, often offering incentives such as fees reduced discounts or refunds to stimulate activity.
On the contrary, Solana does not incentivize users in the same way. Its high activity levels are attributed to its low-cost, high-performance design. “Solana's on-chain activity is primarily focused on memecoins, making it a hub for speculative assets in the cryptocurrency world,” Sigel notes. However, he emphasizes that Solana has the potential to expand beyond speculation into impactful use cases such as decentralized physical infrastructure networks (DePIN) and social media applications.
While memecoins contribute significantly to current revenue, their valuation (approximately 250 times future revenue) reflects investors' expectations for future growth in non-speculative applications.
In particular, the analysis has direct implications for VanEck's proposed SOL spot ETF in the United States. The US Securities and Exchange Commission (SEC) has “identified potential sources of fraud and manipulation in the SOL market generally, including, but not limited to, wash trading.”
Because a substantial portion of revenue may be derived from suspicious trading activities, VanEck has included important risk disclosures in its prospectus. “The analysis of Solana's revenue sources is important because it brings to light concerns about our SOL ETP proposal,” says Sigel. “As there is reason to believe that a significant portion of SOL's revenue is derived from suspicious trading, our ETF prospectus includes important risk disclosures.”
However, Sigel also expressed optimism about SOL's future: “We believe this large amount of activity stems from Solana's high-quality user experience and will become a less important part of Solana's revenue base as Let new activity arrive in Solana. ethereum’s transformation should be a guide to how Solana DEX volumes can mature over time to trade fewer meme-related assets.”
At press time, SOL was trading at $161.
Featured image from Shutterstock, chart from TradingView.com
