Author: Kyle Samani, Founder of Multicoin Capital

Translated by: 0xjs@Golden Finance

Multicoin Capital participated in the seed round financing of Solana in May 2018, and since then, Multicoin Capital has been investing in Solana's native asset SOL and the broader Solana ecosystem. We have previously published four investment papers on Solana. The first two versions were released about nine months before the mainnet produced its first block in March 2020. As the Solana network has evolved, our reference framework for thinking about the Solana network and the SOL asset has also been continuously developing.

Now that Solana has become a $100 billion asset, the fastest-growing developer ecosystem, and has surpassed Ethereum in the most significant on-chain metrics (transaction volume, daily active addresses, revenue, total economic value TEV, DePIN payments, etc.), we want to share our thoughts on why we have been subscribing to SOL for strong returns, even with Solana's market cap exceeding $100 billion.

This article is the fifth in our evolving Solana papers. The previous four are:

1. Separation of time and state;
2. The world computer should logically be centralized;
3. Technical scalability creates social scalability;
4. The hidden costs of modular systems.

In this article, I will argue that Solana is the leading public chain supporting internet capital markets. Furthermore, I believe that Solana, as a technology, can outperform major traditional financial (TradFi) participants (including NYSE, NASDAQ, CME, JPM, Goldman Sachs, and Morgan Stanley in financial markets, as well as Visa and Mastercard in payments) on core performance metrics such as latency, while retaining the core attributes of blockchain that TradFi has never provided (atomic composability and permissionless access for users, developers, and validators). Most importantly, I believe the Solana ecosystem can achieve the following two goals simultaneously, even though they may seem contradictory:

1. Reduce end-user financial service costs by 90-99%
2. Achieve a higher total market cap than existing TradFi enterprises

While traditional financial participants like the NYSE and NASDAQ provide only a small portion of value in the financial stack, Solana has supported a functional superset of these systems through unique DeFi protocols that have been put into production on Solana over the years. Solana not only expands the total addressable market (TAM) for transactions by increasing access and performance but also extracts value from more layers of the financial stack.

Broadly speaking, all financial services can be categorized into two main types: payments and finance. I will first explain how payments become a loss leader for blockchain; thereafter, most of this article will focus on the core infrastructure of Wall Street finance.

Providing the Best Global Payment Experience

There are many ways to transfer funds. The user experience of Apple Pay is excellent. Using a physical credit card is great. Using Venmo, PayPal, or Square Cash is also good. Other methods are mediocre or even worse—ACH, Wires, Zelle, Bill Pay, remittances, etc.

But even when these traditional systems have a good user experience, their fees are exorbitant. Wire transfer fees are $25, and credit card fees can exceed 2%. Updating ledger entries incurs such high costs for consumers and merchants that it is insane. This contradicts basic common sense and directly opposes the natural intuition that electronic transactions should be cheaper than analog transactions.

Solana simplifies the payment process, making the user experience exceptional. Moreover, the fees are almost zero. Please watch the video (https://youtu.be/LaNwHW_NBIs), where Sling Money is entirely built on Solana. This is the future of money flow.

The market capitalization of global payment companies is approximately $1.4 trillion. Solana aims to reduce this cost by 90%. The only fee that Solana charges users is gas, which is about $0.001 per transaction. Even if the Solana network processes an average of 50,000 transactions per second over a year, this would only total $1.5 billion for users. In comparison, Visa maintains thousands of transactions per second.

Payments are a loss leader for blockchain. Payments are crucial for driving adoption, providing real utility for users and companies, but they are not the primary profit source for the blockchain or its ecosystem.

However, payments are essential for the development of blockchain. The beauty of payments lies in their inherent virality. When Alice sends money to Bob, and then Bob sends money to Carol, it leads to natural growth in wallet adoption.

The primary profit source for blockchain is not payments; in fact, payments are effectively $0. Instead, the primary profit source for blockchain comes from the natural fluctuations in asset prices, which manifest as maximum extractable value (MEV). My co-founder Tushar further explained this in his 2022 Multicoin Summit talk.

The remainder of this article will focus on how and why Solana can outperform TradFi on traditional performance metrics and how this will allow SOL and the Solana ecosystem to profit.

Market Efficiency of CeFi and DeFi

Solana is a decentralized network composed of thousands of nodes that reach consensus on a series of financial transactions at a rolling speed of 400 milliseconds (and is expected to reduce to 120ms in the coming years).

The correct way to measure market efficiency is not through transaction latency but through the spreads provided by market makers (MM). Ultimately, buyers and sellers experience prices. Human users (i.e., non-bots) cannot perceive the differences between financial transactions of 50 milliseconds, 100 milliseconds, and 200 milliseconds. For context, the average time it takes for a human to blink is 100-150 milliseconds.

Market making in centralized finance (CeFi) is almost deterministic. Most market makers' servers are located in the same place as CeFi exchanges, and each market maker has an identically long fiber optic cable connecting their server to the exchange. Exchanges complete transactions in microseconds, allowing market makers to understand their risk exposure in real-time and with high precision.

In contrast, decentralized finance (DeFi) exchanges—such as Drift, Phoenix, Clearpools, Raydium, and Orca—have far less determinism compared to CeFi exchanges because:

1. The network leader of Solana constantly rotates
2. The finalization time increases due to the need for validators around the world to reach consensus

As a result, market makers cannot understand their risk exposure in real-time with the same precision. In many cases, market makers may leave outdated prices on the blockchain order book, which others may exploit.

Therefore, DeFi spreads are often wider than CeFi spreads.

Let’s look at how these systems are changing to provide a better experience for makers and takers.

Makers—Narrowing Spreads Through Conditional Liquidity

Things are changing. DFlow has just quietly launched Conditional Liquidity (CL) on Solana. As the name suggests, conditional liquidity refers to liquidity that is only available when the taker’s order meets certain predefined conditions. In this article, the important condition is toxic versus non-toxic order flow.

How does CL work? CL stipulates that liquidity for a given unit can only be extracted when the taker is endorsed by known front-end applications. This includes the following wallets: Phantom, Backpack, Solflare, and Fuse, as well as front-ends like Drift, Kamino, Jupiter, and DFlow itself. This mechanism ensures that bots cannot consume CL because bot orders lack endorsements. This is a significant advancement for market makers, as it effectively guarantees that they will not be outcompeted even if their quotes are delayed by a few seconds.

While CL is a new concept in mechanism, it is directly inspired by widely adopted practices in TradFi. Robinhood is a pioneer in this regard. Robinhood consistently offers customers better prices than the national best bid and offer (NBBO) on the NYSE and NASDAQ. They have proven this pricing improvement through trillions of dollars in trades over the past decade. This makes sense because market makers have ample statistical reasons to believe that the average toxicity of Robinhood users is lower than those trading directly on the NYSE or NASDAQ. In short, who would you rather face in a trade: Joe watching YouTube videos or Citadel?

CL lets market makers know they are not facing the well-known Citadel.

For more background on how order flow segmentation can provide better prices for retail traders, see here.

The advantage of DFlow CL is that it combines the benefits of TradFi and cryptocurrency. It can provide tighter spreads for retail customers like Robinhood while offering real-time permissionless access and open auditability of the blockchain.

CL is an emerging concept. However, we expect it to become the dominant paradigm for on-chain liquidity quoting in the coming years, as market makers hate being deceived by stale quotes. Market making is fundamentally based on quoting with the maximum available information. Market makers (whether passive or active) have no reason not to incorporate more information (i.e., conditional liquidity) into their pricing.

DFlow's implementation of CL on Solana is currently 100% open source and does not charge any fees or taxes. Here is the GitHub repository.

Since Uniswap launched the xyk automated market maker (AMM) at the end of 2018, conditional liquidity has been the most significant functional improvement in DeFi. As it gains adoption, it will reshape all discussions in DeFi regarding UX, spreads, MEV, and more.

To reiterate, CL will enable market makers to provide tighter quotes for ordinary users. We hope this benefits market makers, users, SOL, and the Solana ecosystem.

Takers—Utilizing Alpha by Reducing Latency

Financial markets should incorporate all publicly available information into asset prices. They usually do. However, the price discovery for most assets occurs on a single server in one location, while the information affecting prices is generated worldwide.

The microstructure of the TradFi market is designed around low-latency traders who wish to co-locate with the exchange matching engine.

If you, as a retail trader, observe an event in Singapore that will affect the price of TSLA, you still have to send information to a market maker located in New Jersey. This is fundamentally unfair to the taker and unnecessary for the market maker.

The first correct perspective on this issue is that the observer of the information should be able to place an order with a validator located in Singapore rather than New Jersey based on that new information. That market participant should earn the alpha for being the first to observe the information and add the order to the global order book as quickly as possible.

Today, Solana, like other leading blockchains, has only one Leader at any given time. But this will soon change as Solana is moving towards Multiple Concurrent Leaders (MCL).

Under MCL, there will never be just two Leaders at any time, but rather dozens. With MCL, participants observing real-world information can and will incorporate that information into asset pricing more quickly.

The key to optimizing price discovery is not to reduce the latency of a single matching engine by a nanosecond, but to push price discovery to the edge, allowing people around the world to access updated price information.

Contrary to intuition, decentralization allows takers to minimize the latency of transaction times, thereby maximizing the dissemination of information in financial markets.

By definition, decentralized price discovery is superior to centralized price discovery. The world is large and diverse.

Horizontally Expanding TAM…

From the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, most major exchanges globally trade a single asset (such as stocks or commodities). But blockchain reveals a reality: all units of value (currencies, commodities, stocks, derivative positions, debts, meme coins, governance tokens, utility tokens, NFTs, etc.) can be represented as standardized tokens on a permissionless blockchain.

Today, most assets traded on the blockchain are native blockchain assets. That is to say, they are created and issued natively on-chain. This includes DeFi tokens, DePIN tokens, NFTs, etc. However, an increasing number of assets are being issued on-chain that represent TradFi assets, including U.S. stocks, bonds, real estate, U.S. Treasury bonds, mezzanine debt, and more.

Ultimately, almost all assets will be traded on systems like Solana that are inherently global and permissionless. This does not necessarily mean that people will stop trading on the NYSE, NASDAQ, and Chicago Mercantile Exchange, but rather that an increasing volume of trades will occur on-chain rather than in TradFi venues. This is natural because blockchain is inherently global, permissionless, and available 24/7, making it easier for retail traders to access and for developers to integrate compared to TradFi.

Integrating private keys and tokens into any application is straightforward, whether that application is a Telegram bot, a lightweight Android app, or a WeChat mini-program. The difficulty of interfacing with a multitude of heterogeneous systems representing the global TradFi system increases exponentially. Their APIs are much more complex, settlement times are slow and inconsistent, and in many cases, TradFi institutions do not even face retail traders.

Because blockchain is public and permissionless, it explicitly increases participation in various forms of financial markets. Ultimately, asset issuers do not care what venue their assets trade on. Asset issuers just want to ensure that anyone who wants to buy their assets can do so. Today, most CEOs of companies do not believe that issuing stock on-chain will expand their potential shareholder base, but as the number of global cryptocurrency users grows from around 500 million to billions, this will change in the coming years.

We not only believe that cryptocurrency will support all TradFi assets, but we also expect it to support many new assets that were previously impossible. One of my favorite examples is Parcl, which offers perpetual contracts based on the average price per square foot of completed real estate transactions in a specific market over a rolling 30-day period. Parcl allows you to go long on Austin, short on San Francisco, and use the equity value of each position to collateralize another position!

There are even teams developing products that issue NFTs to represent a single bottle of whiskey, wine, and watches on-chain!

Solana's TAM is expanding in all directions. Wall Street is slowly moving on-chain, and developers are building various new financial markets on-chain.

…and Extracting Value from Innovation

So far, everything in this article has viewed Solana as a matching engine. However, with DeFi protocols like Drift, Jupiter, Kamino, and marginfi, the Solana ecosystem can provide:

1. All imaginable financial services
2. For everyone in the world
3. Increased transparency and auditability, significantly reducing the risk of contagion
4. Capital efficiency that surpasses TradFi.

Today, the largest DeFi primitives on Solana are 1) spot trading, 2) lending, and 3) perpetual futures trading. These roughly correspond to 1) NYSE/NASDAQ, 2) large banks providing consumer and prime loan services and FCMs, and 3) the Chicago Mercantile Exchange. These apply only to the U.S. Solana is racing to provide financial services for everyone in the world.

Although many Solana supporters, including Anatoly (co-founder and CEO of Solana Labs) and I, have referred to Solana as a decentralized NASDAQ, the TAM of Solana and its ecosystem is far greater than that of NASDAQ. Solana is trying to power all financial services globally; it is far more than just a matching engine.

What is incredible about Solana is that all these different financial tools can natively and atomically interoperate without explicit approval or support from application developers. This concept of using existing smart contracts as building blocks to create more useful services is what most in the industry refer to as composability. This enables faster experimentation and growth, as developers can build on a set of foundational contracts, integrations, and liquidity, all of which create value for stakeholders in the Solana ecosystem in a virtuous cycle. This means that Solana-based products can innovate faster and provide a better consumer experience.

Solana itself does not provide financial services. However, the stack created by Solana supports hundreds (soon to be thousands) of financial services that facilitate trillions of dollars in risk transfer each year. Despite gas costs being close to 0 and trending downward, Solana profits directly from the growth of these financial services through maximum extractable value (MEV).

As my partner Tushar mentioned at the Multicoin Summit in 2022 and 2024, asset ledgers like Solana can be valued based on the MEV they capture. Each new financial service generates incremental MEV, and Solana can capture a portion of that. Today, Solana has already generated over $100 million in MEV for individual applications, and everything here is still in its infancy beyond the revenues of those specific applications.

In Q4 2024, the Solana network is expected to generate over $800 million in REV (not including SOL inflation), which annualizes to about $3.2 billion. This is up from approximately $0 a year prior. Despite the fact that there are almost no TradFi assets issued on Solana and that the major DeFi protocols on Solana are relatively immature, most of which are only a few years old, this is still the case.

Solana's TAM is growing along three dimensions:

1. DeFi protocols are maturing, adding new features and functionalities, and creating more MEV opportunities.
2. Entrepreneurs are building new types of financial markets on-chain, such as computing, telecommunications, energy markets, and Blockchain-Enabled Collectibles Marketplaces (BECMs), among others.
3. An increasing number of assets are being issued on-chain, from memecoins to U.S. stocks.

These not only increase Solana's TAM but also enhance each other. For example, the more assets that are issued, the more collateral is available for lending.

The compounding speed of Solana is accelerating.

Internet Capital Markets

The Solana ecosystem is fully committed to realizing the vision of internet capital markets. Solana improves execution for market makers through conditional liquidity and enhances takers' experience through multiple concurrent leaders. Additionally, the Solana ecosystem is horizontally expanding its TAM (by supporting a broader range of TradFi and crypto-native assets) and vertically expanding its TAM (by capturing some MEV from the numerous financial services built on Solana).

This presents a tremendous opportunity to create a global, permissionless financial system:

1. Allowing those with information advantages to capture alpha across every asset class
2. While crossing the smallest spreads
3. And enjoying the lowest fees
4. With globally sourced leverage that is transparent and auditable in real-time
5. Maximizing capital efficiency through atomic composability across locations and protocols.

This is the vision of internet capital markets. This is Solana's vision.

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