VanEck’s proposed spot Solana (SOL) exchange-traded fund (ETF) is under scrutiny due to concerns about wash trading and the nature of on-chain activities. Matthew Sigel, Head of Digital Assets Research at VanEck, published an in-depth analysis on Tuesday, comparing SOL’s metrics to Ethereum’s to provide context and clarity.
Solana is known for its high throughput and low transaction fees, attracting a significant number of users and developers. With approximately 111 million monthly active wallets, it easily surpasses Ethereum’s 5.4 million. However, skeptics claim that a large portion of these wallets may be Sybil accounts: fake identities created to manipulate statistics.
Does Solana have a wash trading problem?
In his analysis, Sigel recognizes the challenge of distinguishing between organic user activity and activity that stems from individual users managing multiple wallets. “We agree that a very large portion of these portfolios are not organic,” he says.
The analysis shows that memecoin and non-fungible token (NFT) businesses make up a significant portion of Solana’s revenue. About 34.3% of Solana’s revenue comes from these sources, compared to 6.6% for Ethereum in the current year and 20.3% for Ethereum during the peak of memecoin activity between July and October 2021.
When assessing wash trading – a practice where traders buy and sell the same assets to artificially inflate volumes – Solana’s numbers are significantly higher. An estimated 41.4% of memecoin and NFT volume on Solana is attributed to wash trading. In contrast, Ethereum’s wash trading for these assets is 28.9% in 2024 and 44.4% during the 2021 peak.
“Taking it all together, we estimate that 14.2% of Solana revenue will come directly from wash trading, compared to 2% for Ethereum in 2024 and 9% in mid-2021,” Sigel notes. He adds a crucial caveat: the analysis assumes that memecoin generates wash trading miner extractable value (MEV) in line with normal trading. Without MEV on these transactions, estimates would drop by 50%.
To conduct this analysis, the study used Dune Analytics queries of both Solana and Ethereum blockchains to accumulate memecoin and NFT activity over certain time periods. MEV and transaction fee data comes from Artemis, Jito, and Flashbots to evaluate each chain’s gas fee and MEV revenue. To identify wash trading, the analysis used a threshold ratio between daily trading volume and a coin’s market capitalization.
Sigel cites several reasons for the increased levels of memecoin trading and wash trading on Solana. First, SOL’s transaction fees are approximately 1/10,000th that of Ethereum, reducing the opportunity cost of wash trading. Second, the architecture provides a superior user experience for trading memecoins due to its high throughput and low latency.
Third, platforms like Pump.fun simplify memecoin trading, encouraging higher levels of activity. Fourth, MEV’s approach may unintentionally increase trading volumes. “Solana’s MEV trading is driven by metrics-based assessments of winning a trade by submitting many orders for the same trade. Some of these are likely to land without capturing MEV, and this could drive trading numbers higher than on Ethereum,” Sigel explains.
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 perspective on speculative trading activities. In Alibaba’s case, there was initial skepticism prior to its 2014 IPO about package volumes potentially containing “empty packages” to improve metrics. DraftKings and CME Group generate significant revenue from speculative trading, often offering incentives such as lower fees or discounts to stimulate activity.
Solana, on the other hand, does not incentivize users in the same way. The high activity levels are attributed to the low-cost, high-throughput design. “Solana’s on-chain activity focuses primarily on memecoins, making it a hub for speculative assets in the crypto space,” 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 revenues, their valuation – around 250 times future revenues – reflects investors’ expectations for future growth in non-speculative applications.
In particular, the analysis has direct implications for VanEck’s proposed spot SOL ETF in the United States. The U.S. Securities and Exchange Commission (SEC) has identified “potential sources of fraud and manipulation in the SOL market generally, including, among other things, wash trading.”
Since a substantial portion of the revenue may come from suspicious trading activities, VanEck has included significant risk information in its prospectus. “The analysis of Solana’s revenue sources is important because it highlights concerns about our proposed SOL ETP,” Sigel said. “Given that there is reason to believe that a significant portion of SOL’s revenue comes from suspicious trading, our ETF prospectus contains significant risk information.”
However, Sigel also expressed optimism about SOL’s future: “We believe this high volume of activity stems from Solana’s high-quality user experience and will become a less important part of Solana’s revenue base as new business comes to Solana. Ethereum’s transformation should be a guiding light for how Solana’s DEX volumes can mature over time to trade fewer meme-related assets.”
At the time of writing, SOL was trading at $161.
Featured image from Shutterstock, chart from TradingView.com