Over the past year, Solana has firmly established itself alongside Ethereum as the distinct alternative programmable smart contract chain. It distinguishes itself through unparalleled speed, affordability and a unified ecosystem. From its inception, Solana's vision was crystal clear: to create an on-chain Nasdaq operating at the speed of light. The importance of composability, the ability for applications to interact effortlessly on the same layer, is also central to Solana's appeal. This singular, high-performance network allows developers to focus on crafting applications without the burden of optimizing for various developer tooling, transaction speed or deploying across multiple networks. Solana's commitment to user experience extends beyond just the crypto-native community; it aims to be accessible to everyone, including those without prior experience in the crypto space. With near-zero transaction costs, latency comparable to Web 2 applications, and a focus on mobile-first interfaces, Solana ensures a smooth and intuitive experience. Users can seamlessly interact with multiple applications without the need to switch networks or bridge.

Over the past year, Solana’s underlying usage metrics have been encouraging to say the least. In July 2024, Solana’s monthly DEX trading volume surpassed Ethereum for the first time. It is important to recognize that this uptick in volume is evidently propelled by memecoin trading.  The question of whether memecoin trading will be a passing narrative is secondary to the larger takeaway: Solana is the best chain for permissionless issuing digital assets and facilitating trading. The narrowing gap between Ethereum and Solana’s total economic value also highlights that optimizing for high volume through low transaction cost on Solana is a viable business model, positioning the network as an ideal platform for a wide range of trading activities, regardless of the specific assets being traded.

While the underlying statistics are encouraging, Solana is still a work in progress. In the next section we want to identify high-potential sectors on Solana that we are paying close attention to. 

Payments & Stablecoins 

We are still far away from any meaningful adoption of crypto payments when compared to traditional rails. Right from the beginning, Solana has always been earmarked as an ideal platform for payment systems due to its ability to handle a very high number of transactions, ensuring swift and efficient processing. This high throughput makes it suitable for numerous payment use cases. Additionally, Solana’s transaction fees are significantly lower compared to Ethereum, making it economically feasible for everyday transactions, micropayments, and other payment-related activities where high fees would be prohibitive. The platform's capability to achieve rapid transaction finality within a few seconds enhances trust by reducing the risk of transaction reversals. 

Global payments infrastructure providers such as Stripe and PayPal have recognized the appeal of Solana as a payment network by announcing their deployments. Within the payments sector, traditional P2P payments applications such as Cashapp, Zelle and Venmo have been so cost-effective and convenient for users that there is little to no reason for them to switch to crypto payments. Unless there is a wider mainstream adoption of stablecoins, we find it hard to see any meaningful market penetration in the near term. From a longer term perspective, we remain confident that crypto payments will inevitably replace the inefficient traditional financial rails. For instance, PayPal’s strategic move into pyUSD is an indication of that. When transactions on PayPal are completed through pyUSD, it reduces their reliance on traditional financial rails which is both costly and time consuming. Firstly, transaction cost and settlement on Solana is much cheaper and faster than routing through various financial institutions. Secondly, the yield from short-term U.S. treasuries and similar cash equivalents backing pyUSD is a huge additional source of revenue for PayPal. 

On the other hand, we do see potential disruptions in the traditional cross-border payments sector in the near term. Current banking systems are opaque, slow and expensive. Transactions often move through multiple banks, each adding delays and fees without clear tracking of where the money is at any given time. Many outlier regions struggle to access global financial services due to restrictive banking infrastructure, lack of liquidity, and high barriers to entry. For instance, Sphere Labs is leveraging Solana to target businesses that need to manage large-scale cross-border transactions or want to incorporate crypto payments into their operations.

In comparison to Ethereum and Tron, the aggregate market cap of stablecoins on Solana is still considerably lagging behind. Recognizing Solana as a premier venue for trading assets, particularly stablecoins, we anticipate a significant increase in both stablecoin market capitalization and trading volume in the near future. We also foresee a rise in the issuance of more stablecoins, particularly those that are yield-bearing. Already, platforms like Mountain Protocol, Ondo, PayPal, and Ethena have launched their respective stablecoins on Solana. Beyond these new issuers of innovative stablecoins, we're closely monitoring infrastructure projects that aim to capitalize on the growing stablecoin market. One such project is Perena, a stablecoin infrastructure protocol on Solana designed to address key challenges faced by stablecoin issuers, including liquidity fragmentation and regulatory compliance. By consolidating various stablecoins into a single fungible, liquid token, such as qUSD, Perena enhances both capital efficiency and liquidity within the stablecoin ecosystem.

Defi

Defi superapps and aggregators

DeFi protocols like Jupiter and Drift are broadening their product offerings with the ambition of becoming all-in-one "onchain Binance" DeFi superapps. Jupiter, which initially started as a DEX aggregator, has expanded into perpetual trading and has also acquired a wallet to integrate within its ecosystem. Drift, which began as a platform focused on perpetual futures trading, has since diversified into lending/borrowing, spot markets, and even prediction markets. These expansions reflect a strategic move to provide a comprehensive suite of financial services under one platform, aiming to attract and retain a broader user base by offering more functionalities in a single location. As more DeFi protocols seek to mimic this approach, the competition to be the leading DeFi superapp intensifies.

Aggregators have found a natural alignment on Solana, where the high throughput and low latency create an optimal environment for these protocols to thrive. This infrastructure allows aggregation platforms to deliver near-instantaneous, cost-effective transactions, a crucial advantage for ensuring speed and efficiency in finding the best prices across various venues. The composability of Solana’s programs further enhances this synergy, enabling platforms like Jupiter to seamlessly integrate with other protocols. This integration empowers developers to craft more complex and user-friendly DeFi applications, leveraging Jupiter’s robust aggregation capabilities. As Solana's DeFi ecosystem continues to expand, the demand for efficient, reliable, and integrated aggregation services is set to grow, as evidenced by Lulo's success in aggregating lending and borrowing yields, and the anticipated impact of Ranger, which will aggregate perpetual trading across multiple venues.

Perps

Despite the rapid growth, Solana DeFi is still in its early stages, with significant room for improvement. Jupiter and Drift are currently leading in perpetual trading volume, with Jupiter focusing on major assets like ETH, BTC, and SOL, while Drift also caters to broader longer tail assets. However, challenges such as liquidity issues, large spreads on longer-tail assets, and high borrowing costs persist. These gaps present opportunities for new entrants to innovate and address these shortcomings, potentially attracting more users to Solana. For example, the popularity of GMX-style perpetual trading platforms like Jupiter and Flash Trade suggests that similar models could thrive on Solana. Upcoming platforms like Adrena, which plan to implement a full GMX-style 100% revenue share model, demonstrate the potential for innovative solutions to disrupt the market. The success of GMX on Arbitrum has catalyzed the development of an ecosystem of DeFi protocols, such as Pendle, Jones DAO, and Rage Trade. These protocols, built on top of GMX, demonstrate the potential for a similar ecosystem to emerge on Solana. Yield trading has also yet to fully take off on Solana - we expect that to change with the increasing popularity of yield tokens such as  JLP, FLP, liquid staked tokens like jupSOL, jitoSOL and also the upcoming liquid restaking tokens enabled by Jito restaking & Solayer. 

Orderbooks

On-chain orderbooks, such as Phoenix, will play a pivotal role in on-chain price discovery. Unlike AMMs, where price discovery falters as soon as multiple pools are involved, orderbooks offer superior capital efficiency and support more sophisticated trading strategies. The inherent complexities of providing liquidity and mitigating impermanent loss on AMMs make them less accessible, and their general lack of support for advanced order types further limits their effectiveness. However, it’s important to acknowledge that Phoenix still trails behind AMMs like Raydium and Orca in terms of volume on Solana’s most liquid trading pair, SOL/USDC. We are keenly anticipating advancements in orderbooks that will make it more appealing for both traders and market makers. One example is Phoenix’s plans to implement customizable order hooks. These tools could empower market makers with the ability to implement more advanced pre- and post-trade conditions, enabling dynamic price adjustments, automated cancellation rules, and conditional order placements that respond to market volatility, all of which could significantly enhance the efficacy and appeal of on-chain orderbooks.

LST

The liquid staking ratio on Solana currently stands at a modest 6%, indicating substantial growth potential in this area. The recent surge in liquid staking has been significantly driven by Sanctum, a crucial infrastructure player that supports the expansion of longer-tail Liquid Staking Tokens (LSTs), with jupSOL being a prime example. Several growth levers are poised to accelerate this trend. First, institutional support is paramount, especially as more institutions and liquid funds hold SOL. Building partnerships with custodians, educating stakeholders on the unique aspects of liquid restaking on Solana compared to Ethereum, and enhancing the integration of LSTs with DeFi protocols are critical steps in this evolution.

Sanctum is also pioneering new use cases for LSTs that are unparalleled in other ecosystems. One such innovation is their collaboration with BasedApp to launch the first-ever Liquid Staking Token-powered debit card. This groundbreaking card will allow users to spend their staking rewards directly, converting yields from cardSOL into USDC, effectively eliminating the need for traditional off-ramping processes. Another intriguing development is the use of LSTs as a superior tool for capital formation. The Sanctum team is partnering with the Pathfinders NFT project to introduce the first "unruggable" mint, powered by their pathSOL LST. In this model, the SOL used for minting the NFT is locked within the NFT itself, allowing holders to burn the NFT at any time to reclaim their original mint cost. This ensures that the project remains incentivized to maintain the SOL within the NFT, guaranteeing a steady stream of staking rewards while minimizing risk for the holders. This concept has the potential to extend beyond NFTs, offering innovative solutions for creators and even early-stage protocol fundraising. In the near term, strategies like those employed by jupSOL, which combine competitive yields with the prestige of the issuing protocol, are likely to gain the most traction. The space is ripe for further disruption, and we anticipate seeing even more groundbreaking developments in the near future.

Scaling Infra

L2s and Appchains

Solana has faced congestion issues, and while this presents a challenge, it also opens the door for innovative, Solana-native solutions to address scalability. Recently, there have been teams developing L2 solutions that settle onto Solana, but we believe that adopting a general-purpose L2 approach similar to Ethereum's rollup-centric roadmap—exemplified by projects like Arbitrum, Optimism, Base, and Blast—is not the right path for Solana. The core strength of Solana lies in its composability, where applications and assets can seamlessly interact on the base layer. Sacrificing this composability for scalability is not an ideal tradeoff 

A promising concept that works around that trade off is Magic Block's idea of ephemeral rollups. These rollups allow applications to scale specific operations without losing the composability of the base layer. By leveraging the SVM account structure and parallelization capabilities, developers can temporarily lock one or more accounts and transfer the state to an ephemeral rollup. The sequencer can then modify these accounts in the rollup, while other undelegated accounts remain free to interact with programs on the base layer.

The benefits of using an ephemeral rollup are significant: it preserves base layer composability, allowing programs to continue interacting with existing protocols and assets. Developers can also utilize all existing Solana infrastructure, such as the Anchor Framework, RPCs, and libraries. Additionally, the specialized runtime in ephemeral rollups can introduce gasless transactions, quicker block times, and smart contract automation without fees, all while enabling horizontal scaling on demand. Once the dedicated runtime environment is no longer needed, it can be collapsed, with state transitions settled back onto the base layer, ensuring scalability without compromising the network’s composability. For example, orderbook protocols can deploy ephemeral rollups for batch order matching. Liquidity providers and market makers can deposit Sol and Usdc into the program (which is on solana base layer) for Sol/Usdc markets, they can spin up an ephemeral rollup where the program state will be replicated onto the rollup just for order matching. The transfer of Sol and Usdc will only take place on the base layer once transactions are batched back from the ephemeral rollup. 

Restaking 

Restaking on Solana is poised to take a distinctly different form compared to Ethereum, largely due to Solana's low transaction costs and high-speed infrastructure. These characteristics enable a higher volume of on-chain activity, allowing Node Consensus Networks (Jito’s definition of AVS) to function fully on-chain. This contrasts sharply with Ethereum, where higher costs and slower transaction speeds often push restaking activities to scaling the base layer and securing additional layers. On Jito, restaking can be harnessed to decentralize specific operational stacks within existing applications, such as or oracle publisher accuracy and keeper networks. Take for example, keeper networks are vital for automating tasks like liquidations, arbitrage, and other time-sensitive on-chain activities that are crucial for maintaining the stability and efficiency of DeFi protocols.

By leveraging Solana's restaking mechanisms, the security and reliability of these keeper networks can be significantly enhanced. Restakers can contribute additional layers of security by staking their assets to support the operations of the keeper network, ensuring that the network remains decentralized and resilient against manipulation or failure. Furthermore, Solana's restaking model allows for the implementation of slashing mechanisms to penalize incorrect or malicious behavior by keepers, ensuring that only those who perform their tasks accurately and promptly are rewarded. This not only improves the reliability and efficiency of the network but also incentivizes high performance within these crucial operational stacks. Additionally, Jito’s implementation of multi-collateral staking also provides additional utility to protocol tokens that are traditionally seen as governance-only tokens. Instead of tokens being limited to governance functions, restaking allows these tokens to be used to secure certain decentralized operational stacks mentioned above, thereby giving them a broader role within the network. We are particularly excited about the potential developments in Solana native NCNs, as they could redefine how decentralized applications and infrastructure operates on the network

Consumer 

Memecoins + social

Memecoins continue to hold significant potential, largely due to their simplicity and appeal, making them incredibly retail-friendly and easy to understand and speculate on. While memecoins are often dismissed as mere speculative assets with zero utility, there is value in their ability to foster social connections, much like how NFTs have brought communities together. This social aspect of memecoins remains underexplored, but it presents exciting opportunities for innovation especially on Solana. For instance, memecoins could be used for token-gated social features, allowing communities to interact in exclusive ways. Additionally, these tokens could enable subscriptions to exclusive content, merging service payment with the thrill of speculative earning. Furthermore, integrating memecoins into prediction markets could introduce a new dynamic, where users not only speculate on the value of the coin but also on outcomes in various domains. These possibilities demonstrate that memecoins have the potential to evolve beyond mere speculation, offering unique and engaging use cases that can deepen their cultural and economic significance.

Token Distribution

Unique token distribution models are particularly important because it’s a means of attracting fresh capital but also brings new participants into the ecosystem. By offering novel ways to earn and distribute tokens, such mechanisms can significantly incentivize user engagement and developer participation. For instance, in the current cycle, methods like points-based rewards, and tap-to-earn models, such as NOTcoin, have gained considerable popularity. These approaches make it easier for users to get involved and start earning, fostering a broader user base. A notable example on Solana is Ore, which allows individuals to participate in a proof-of-work system using laptops or phones, providing a straightforward way to acquire tokens through computational power. Mining pools that congregate computational power from groups of users have also emerged on top of the Ore ecosystem in a bid to lower transaction cost and improve unit economics. By lowering the barriers to entry and offering diverse ways to earn tokens, these distribution methods not only drive market cycles but also help democratize access to the crypto economy, paving the way for broader adoption and innovation.

Conclusion

Solana is far from perfect, facing its share of challenges discussed above, but the rapidly growing ecosystem and the recent memecoin mania are creating a powerful network effect that is difficult to replicate, even for other high-performance monolithic L1s. The vibrancy of Solana's community, combined with its unique strengths is attracting a diverse range of developers, projects, and users, all contributing to a self-reinforcing cycle of growth. This burgeoning ecosystem is not just riding the wave of existing narratives but is also pioneering new ones in a distinctly Solana-native fashion. As these narratives unfold, we are excited to see how Solana continues to evolve and carve out its unique space in the crypto landscape. If you're a founder building on Solana, we'd love to hear from you and explore how we can contribute to this dynamic ecosystem together.