Public chain Solana (SOL) continues to soar in value. From the perspective of capturing value, if Solana achieves sufficient usage, its annual profits could be substantial. This article, originally published by mhonkasalo on a personal Substacks article titled “What’s the value of SOL if transactions are cheap?”, has been compiled, organized, and rewritten by Deep Tide.
(Previous Summary: Reviewing Solana’s “post-disaster” year of rebuilding: Maintaining resilience and staying in the game)
(Supplementary Background: SOL is currently priced at $58, FTT has surpassed $5! How much must the token price be for FTX to fully compensate creditors?)
One common skepticism about Solana as an investable asset is its feasibility. Some statements you may have heard on Twitter/X regarding cryptocurrencies include:
Solana may be useful, but it does not capture value.
Solana validators receive subsidies, making the system unsustainable.
Optimizing low fees will always mean that SOL has no value.
Assuming that Solana’s network is flexible and decentralized, the goal of these systems is to minimize costs as much as possible.
Fast and cheap equals practical. And considering that there are no settlement failures in these systems, calling something a settlement or execution layer doesn’t make much sense.
Our goal is to maximize practicality. This is how we maximize end-user value.
If we aim for billions of DAUs (Daily Active Users), then collecting fees from a group of about 10,000 active users is not the optimization goal we are pursuing.
Regardless, the focus of this article is not to debate which scaling path is the best, but to point out that achieving exciting profits/revenue digits is relatively easy if product-market fit is achieved.
The mathematics of SOL assets and their value capture
Several facts:
The gas fees paid by Solana users yesterday were approximately $100,000.
50% goes to validators, and 50% is burned: $50,000 goes to service providers, and $50,000 is allocated to token holders. This mechanism is similar to the burning mechanism in ETH.
Solana’s inflation rate is about 5.7%, starting from 8% and decreasing by 15% each year. The long-term target is 1.5%.
It is important to note that these parameters can be modified for all blockchains. It is crucial to have sufficient incentives to keep validators honest, and then you can start “paying” token holders:
Base fees for each transaction (in addition to which you will always have priority fees).
Revenue sharing (dynamic, algorithmic, fixed).
Inflation rate (i.e., subsidies).
Today, Solana is not profitable (similar to previous Ethereum scenarios):
Solana supply = 562,119,561 SOL
5.7% inflation = 32,040,814 SOL = $1,440,875,405
Annual revenue = $100,000 x 365 = $36,500,000
Net loss = -$36,500,000 = $1,404,375,400
Break-even point = $1,440,875,405 / $36,500,000 = 39.48 times
This means that Solana needs to increase transactions by approximately 40 times at today’s fee levels to break even.
Like any other blockchain, once the block space is filled or, in Solana’s case, access to a specific part of the state, such as NFT minting, priority fees will start to dominate.
However, let’s complete this exercise with some parameters:
Solana’s TPS today is 3,000, and it will reach 100,000+ with Firedancer. Assuming half of the block space is filled, we will have a 15-fold increase in fees from today.
Assuming additional priority fees will increase the total fees by 2 times, we now have a total of 30 times.
Honestly, Solana can double the base fee without affecting users, so we have already reached 60 times.
Overall, in this scenario, Solana’s profit is about 2 times.
Please note that this is a hypothetical calculation for estimation purposes. Solana can earn more money than this:
1 million Firedancer TPS, half-filled blocks = 150 times fee increase.
4 times boost from additional priority fees = 600 times fee increase.
Keeping the base fee unchanged (after all, Solana transactions are cheap).
Reducing emissions to the long-term 1.5% = 2,000 times profit increase.
Solana’s profit is 70 times its emissions, creating approximately $22 billion in revenue each year. Look at this profit rate.
It sounds simple. After subsidies, Solana can earn over $2 billion in profit per year before paying fees to validators (you can decide the appropriate burning amount).
The focus of this article is not mathematics. It is about how Solana can earn a significant amount of money if it successfully serves large-scale end-user applications. You only need to be optimistic about blockchain, optimize for users, and then address rent-seeking problems later.
Rent-seeking refers to economic behavior in which individuals or entities monopolize social resources or maintain a monopoly position to obtain monopoly profits without engaging in productive activities.
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