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BTC $96,420 +2.34% ETH $3,280 +1.82% SOL $185.40 -0.92% BNB $642.50 +0.45% XRP $2.18 +3.12% DOGE $0.082 -1.50% ADA $1.05 +0.80% AVAX $42.10 +1.15%
10/03/2024

SOL's "Emperor's New Clothes": Who Is Actually Making Money on Solana?

This article digs into the underlying problems with Solana, arguing that while the network appears to boast impressive user counts and transaction volume compared to Ethereum, a deeper look at the data suggests much of that activity is driven by pump-and-dump schemes and bots — creating an illusion of prosperity. The author uses detailed on-chain data analysis of user activity, DEX volume, MEV, and more to make the case that SOL's metrics are heavily inflated and the on-chain ecosystem is

SOL's "Emperor's New Clothes": Who Is Actually Making Money on Solana?

This article digs into the underlying problems with Solana, arguing that while the network appears to boast impressive user counts and transaction volume compared to Ethereum, a deeper look at the data suggests much of that activity is driven by pump-and-dump schemes and bots — creating an illusion of prosperity. The author uses detailed on-chain data analysis of user activity, DEX volume, MEV, and more to make the case that SOL's metrics are heavily inflated and the on-chain ecosystem is facing serious structural problems.

Lately my social media timeline has been flooded with bullish takes on $SOL and various other altcoins. I started to believe the alt supercycle narrative was real and that Solana would overtake Ethereum as the dominant Layer-1 (L1) blockchain. But when I dug deeper into the data, what I found was alarming. In this article I'll share my findings and explain why Solana might be nothing more than a house of cards.

First, let's look at the bullish arguments laid out by @alphawifhat:

User Base Comparison

  • Higher user ratio
  • Relatively higher transaction fees
  • Higher decentralized exchange (DEX) volume
  • Significantly higher stablecoin transaction ratio

On the surface, SOL's numbers look impressive — over 1.3 million daily active users (DAU) versus ETH's 376,300. But when I factored in transaction counts, something strange stood out.

For example, on Friday, July 26, ETH processed 1.1 million transactions for 376,300 DAU, meaning each user averaged roughly 2.92 transactions per day. SOL, however, clocked 282.2 million transactions for 1.3 million DAU — implying each user averaged 217 transactions per day.

My initial thought was that SOL's lower fees naturally lead to more transactions per user — more frequent position adjustments and higher arbitrage bot activity. But when I compared it to another popular chain, Arbitrum, I found that on the same day Arbitrum's transaction-per-user ratio was just 4.46. The same pattern held when looking at other chains:

Since SOL has more users than ETH, I checked Google Trends, which should be relatively neutral on a per-user value basis.

The results showed ETH either matching or outpacing SOL in search interest. That didn't line up with my expectations given SOL's massive DAU lead, especially combined with the recent hype around the SOL altcoin frenzy. So what's really going on?

DEX Volume Analysis

Analyzing liquidity pools (LPs) on Raydium reveals stark discrepancies in trade counts. Even a surface-level glance shows something is off:

At first I thought this was simply wash trading through low-liquidity "honeypot" LPs designed to lure in degenerate altcoin speculators. But after looking more closely at the charts, the situation was far worse than I imagined.

Every one of these low-liquidity pool projects got rugged within the past 24 hours. Take MBGA as an example. It recorded 46,000 transactions in 24 hours with $10.8 million in volume, 2,845 unique wallets buying and selling, generating over $28,000 in fees on Raydium. (Compare that to a similar legitimate pool, $MEW, which had only 11,200 transactions.)

After examining the wallets involved, most appeared to be bots belonging to the same network, executing tens of thousands of transactions. They independently manufactured fake volume by trading random SOL amounts at random transaction counts until the project rugged, then moved on to the next target.

Within Raydium's standard liquidity pools, over 50 projects were rugged in just the past 24 hours, accounting for over $2.5 million in volume, with total generated volume exceeding $200 million and fees surpassing $500,000. Orca and Meteora had significantly fewer rug pulls, and there were effectively no meaningful-volume rug pulls on Uniswap (ETH).

It's clear that rug pulls are rampant on Solana, and the implications are significant:

  • Given the abnormal transaction-per-user ratio and the volume of wash trading and rug pulls on-chain, the vast majority of transactions are not organic. Across ETH's major L2s, the highest transaction-per-user ratio belongs to Blast (which also has lower fees and users farming Blast S2), at 15.0x. As a rough comparison, if we assume SOL's real transaction-per-user ratio is similar to Blast, that implies over 93% of transactions (and their associated fees) on Solana are inorganic.
  • The only reason these scams persist is because they're profitable. Users are therefore losing at minimum an amount equivalent to daily fees and transaction costs — running into the millions of dollars.
  • When these scams stop being profitable (e.g., when real users finally get tired of losing money), expect a significant collapse in transaction volume and fee revenue.
  • User counts, real fee revenue, and DEX transaction volume all appear significantly inflated.

I'm not alone in this conclusion; @gphummer recently shared similar observations:

MEV on Solana

MEV occupies a unique position on Solana. Unlike Ethereum, Solana has no native mempool; instead, projects like @jito_sol (since discontinued) built off-chain infrastructure to simulate a mempool, thereby creating opportunities for MEV such as front-running and sandwich attacks. Helius Labs has written an insightful piece explaining MEV on Solana.

The problem for Solana is that most transactions involve highly volatile, low-liquidity altcoins, where traders routinely set slippage tolerance above 10% just to get their trades filled. This creates an extremely attractive attack surface for MEV to extract value:

When we look at blockspace profitability, it becomes clear that the bulk of current value comes from MEV tips:

While technically "real" value, MEV only gets extracted when it's profitable — meaning it persists only as long as retail investors keep participating (and losing net) in altcoin trading. When the altcoin frenzy cools, MEV fee revenue is expected to collapse along with it.

I see plenty of arguments that SOL will eventually transition toward infrastructure-based projects like $JUP, $JTO, and so on. While that shift may happen, it's worth noting that these tokens have lower volatility and higher liquidity, and they won't offer the same MEV opportunities.

Sophisticated actors are incentivized to build the best infrastructure to exploit this. During my research, several sources mentioned rumors that these actors invest to control the transaction pool space and then sell access to third parties — though I was unable to verify this. The perverse incentives aren't hard to see: drawing as much altcoin activity to SOL as possible lets certain sophisticated entities continue extracting MEV profits, engage in insider trading on these altcoins, and benefit from SOL's price appreciation.

Stablecoins

Another anomaly emerges when looking at stablecoin transaction volume and total value locked (TVL). Stablecoin volume on Solana is significantly higher than ETH's, but when we look at stablecoin data from @DefiLlama, ETH has $80 billion in stablecoin TVL versus SOL's $3.2 billion. I believe stablecoin TVL (and TVL more broadly) is a harder metric to manipulate than transaction volume and fees on a low-fee platform — and it better reflects how much capital serious actors actually have deployed in these ecosystems.

Stablecoin volume dynamics underscore this further — @WazzCrypto highlighted a sudden drop in volume when the CFTC announced it was investigating Jump.

Retail Value Extraction

Beyond rug pulls and MEV, the broader retail market landscape remains bleak. High-profile figures have chosen Solana as their preferred chain, but the results speak for themselves:

Andrew Tate's DADDY is the best-performing celebrity token — and it's still down -73%. On the other side of the boxing skill spectrum, things are equally bad:

A quick search on X also reveals rampant insider trading and evidence of developers dumping tokens on buyers:

My timeline is full of people claiming to have made millions trading altcoins on Solana.

I don't believe KOL posts on X represent the full user base — which is easily lured into a position, hyped up on their tokens, milked by those with followings, and then cycled through again in the current frenzy. There's clearly survivorship bias at play: winners talk loudly; losers go quiet, distorting the perception of reality.

Objectively speaking, retail investors are losing millions of dollars every day to scammers, developers, insider traders, MEV bots, KOLs, and so on — not to mention that most of the tokens they're trading on Solana are simply unsupported altcoins. It's hard to argue that most altcoins won't eventually follow the path of $boden.

Additional Considerations

Markets are fickle, and when sentiment shifts, the red flags that buyers once dismissed become impossible to ignore:

  • Poor chain stability with frequent outages.
  • High transaction failure rates.
  • Block explorers that are difficult to read.
  • High barrier to entry for development — Rust is far less developer-friendly than Solidity.
  • Poor interoperability with EVM. I think a multi-chain world where chains can compete interoperably is healthier than being locked into a single (relatively centralized) chain.
  • Low probability of an ETF, both from a regulatory and demand standpoint. @malekanoms also raised several points I find relevant from a traditional finance perspective (with rebuttals from @0xmert):
    • High issuance of up to 67,000 SOL per day (roughly $12.4 million).
    • 41 million SOL (roughly $7.6 billion) still locked from FTX sales. 7.5 million (roughly $1.4 billion) will unlock in March 2025, with 609,000 (roughly $113 million) unlocking monthly through 2028. Most of those tokens were purchased at around $64 each.

Conclusion

As always, the picks-and-shovels sellers are the ones cashing in on the Solana altcoin frenzy, while speculators are typically left holding empty bags — unaware of just how inflated SOL's most commonly cited metrics really are. On top of that, the majority of organic users are being exploited by bad actors and are rapidly losing money on-chain. We're currently in the euphoria phase, where retail inflows still exceed outflows from these sophisticated players, creating a positive glow. When users grow weary of mounting losses, these metrics will unravel fast.

As discussed above, SOL also faces several structural headwinds that will become apparent once sentiment shifts, and any price appreciation will only compound inflation pressure and unlock overhang. Ultimately, SOL is overvalued on a fundamental basis, and while current sentiment and momentum may push the price higher in the short term, the long-term outlook is far more uncertain.