Why Solana will beat Ethereum eventually

A fierce fight is on between the two layer 1 blockchains, and Solana will be the victor

Why Solana? More specifically, why Solana over Ethereum? Before I explain why I am bearish on Ethereum and mega bullish on Solana, I want to talk about Bitcoin. The cryptocurrency that started it all.

Bitcoin has firmly ensconced itself into the hearts and minds of a critical mass of people around the world. Its narrative as a store of value is deeply entrenched. It’s a simple piece of open-source software, does its job well, and has a bright future ahead of it.

It’s been a decade since the Winklevoss twins filed a Bitcoin ETF, and while not even one has been approved thus far, recently BlackRock joined in the fray. Which changes the calculus significantly. BlackRock, the world's largest asset manager. Yeah, the one that has a track record of 575 successful applications out of 576 attempted. Larry Fink plays to win.

Gold is the incumbent; Bitcoin is the challenger. The very first Gold ETF listed on NYSE was in November 2004 via the State Street Global Advisors (GLD). In 2023, there are three major competing ETFs as far as gold exposure goes. GLD commands over $58B. BlackRock’s spot Gold ETD (IAU) oversees over $28B. And a younger upstart issued by Granite hares (BAR) sits at a shade under $1B. With 35 ETFs traded on the U.S. markets, Gold ETFs have total assets under management of $110.82B.

While buying gold metal is the direct investment route, it involves storage and insurance considerations. The ETFs bring exposure to investors’ standard stock market accounts, with the administrators covering the insurance and storage costs. Similar analogy works for Bitcoin.

Yes, the puritans will say “not your keys, not your crypto” – and they will be right. However, for many investors, ETFs will be their way into the asset class. Tremendous amounts of liquidity waiting to enter! Now, Bitcoin will keep doing its thing. As long as the core developers keep on maintaining the software, it will keep running. I would expect Bitcoin to keep doing well against other fiat currencies.

So, what about the others? Namely, Ethereum. It stands to reason that if a Bitcoin ETF gets approved, an Ethereum ETF would be approved as well. If Bitcoin were to be the local farmer’s market, Ethereum would be the corner store. It can scale better compared to Bitcoin.

Ever since Bitcoin came into the picture, there have been numerous discussions on how to scale it. No technical solution has really been able to solve this problem. Which is the entire reason why Ethereum came into existence to begin with.

Ethereum promised a lot. It promised to be the first truly global singleton – the one computer for the entire planet now and forever. It promised that it cannot fail, be stopped, or be censored. Ethereum promised that no authority, government or corporation would be behind it, and it would be resistant to all attacks. It promised to be ubiquitous. Wherever there’s internet, there would be Ethereum.

In 2023, I’d say Ethereum has failed to deliver on its promises. It oscillates between confusing narratives. It competes against Bitcoin as a store of value. It competes against modern blockchains that are architected to scale. It is in no man’s land. It has lost its identity and is neither here nor there.

Are there incredibly smart people working on the protocol? Absolutely. Will they succeed? I don’t think so. It may succeed in a narrow area of traditional finance but not as a general purpose blockchain. Solana exists because of Ethereum’s failures.

To explain where I think Ethereum will find market share when it comes to displacing traditional finance, I must talk about settlement. What does settlement mean in traditional finance?

Here's a breakdown of the settlement process in traditional finance:

1. Trade Execution: The settlement process begins after a financial trade has been executed. This could involve buying or selling stocks, bonds, commodities, or other financial instruments.

2. Confirmation: After the trade is executed, both the buyer and the seller receive trade confirmations detailing the specifics of the trade, such as the quantity, price, and settlement date.

3. Clearing: The trade information is sent to a clearinghouse, which acts as an intermediary between the buyer's and seller's financial institutions. The clearinghouse validates the trade details and ensures that both parties have the necessary funds and securities to complete the transaction.

4. Netting: If parties have multiple trades with each other, a process called netting is often used to consolidate these trades into a single obligation. This reduces the number of transactions that need to be settled and simplifies the process.

5. Settlement Instructions: Settlement instructions are generated based on the confirmed trade details, specifying the movement of funds and securities between the buyer's and seller's accounts. These instructions include information about the financial institutions involved, the settlement date, and the securities being transferred.

6. Delivery vs. Payment (DVP): In a DVP settlement, the transfer of securities is synchronized with the transfer of funds. This ensures that the buyer's payment is only made if the seller delivers the promised securities and vice versa. This minimizes the risk of one party fulfilling their obligation without the other doing so.

7. Settlement Date: This is the agreed-upon date on which the actual exchange of funds and securities takes place. It's important because it marks the legal transfer of ownership.

8. Custody and Record Keeping: Financial institutions, often referred to as custodians, hold and safeguard the assets on behalf of their clients. They also maintain records of ownership, transactions, and account balances.

9. Reconciliation: After settlement, both parties reconcile their records to ensure that the transaction was executed correctly. Any discrepancies or issues are addressed and resolved during this phase.

10. Confirmation of Settlement: Once the settlement process is complete, both parties receive confirmation that the transaction has been successfully settled. Ownership of assets and funds has been transferred as agreed upon.

Ethereum will prove to be a better settlement layer relative to traditional finance from a speed and efficiency perspective.

But the win will be short lived. Solana takes care of all the 10 steps I outlined within 400 milliseconds. Solana excels in execution, but there is no reason why it can’t win the settlement wars as well.

The value proposition for Solana is the lowest possible latency possible because it provides a global atomic state machine as the backend. Users will pay for priority access to the state because that environment will have a better post impact price than NYSE or NASDAQ.

Bold statement, but I wouldn’t bet against cracked Solana developers all over the world shipping. After all, chewing glass is part of the DNA. The culture is reminiscent of what Ben Horowitz paints in his book: “The hard thing about hard things.”

So, Solana and Ethereum are competing. How do I view these two networks? An epic battle is brewing, and it reminds me of the war between Hechinger vs Home Depot. Hechinger who? I understand the confusion. Hechinger Hardware opened its first hardware store in 1919, focusing on the retail consumer rather than contractors.

It played a huge role in fueling the growth of the do-it-yourself hardware business. The family-owned company went public in 1972 and by FY1984, it had the enviable track record of 39 consecutive quarters of positive earnings per share comparisons.

The company had $130M in cash and 150 managers across the chain with 9 or more years of experience. Company management felt bullish on their ability to build market share. Strong parallels to Ethereum of today. But Hechinger did not see a small southern competitor coming. Yes, I am talking about Home Depot.  Home Depot is the Solana of the old in this story.

They had a novel idea – focusing on building a warehouse hardware superstore model intended for both retail shoppers and contractors. Hechinger, being the savvy incumbent, hired McKinsey to investigate their young competition. Here’s what McKinsey found upon further investigation:

Home Depot had lower overheads and lower cost of goods sold, but it also had lower gross margins: it was following a low cost/low price strategy. Home Depot had higher asset productivity, meaning it generated more sales per dollar invested. Home Depot was also growing faster. It was obvious that Home Depot was making up for lower margins by having lower overhead costs and higher asset productivity, generating a similar return to the long-established Hechinger.

Why was Home Depot growing so quickly? It was growing so quickly precisely because it had much lower prices. By about 15-18% lower. Solana multiplies that price reduction compared to Ethereum by almost a factor of 1000. The same thesis holds. It is indeed incredibly undervalued right now in 2023.

So, what was Home Depot’s innovation? It had built a state-of-the-art inventory management system. The store design housed inventory on 20-foot racks on the retail floor compared to Hechinger’s 8-foot racks. This allowed Home Depot to do away with backroom storage and labor-intensive restocking. In addition, Home Depot negotiated with suppliers to direct ship to stores, or cross-dock goods.

This allowed Home Depot to operate with 5-7% less shipping and logistics cost than Hechinger. It also allowed them to negotiate as much as 5% lower costs for the same goods by concentrating volume on orders of fewer retail items.

Hechinger was in deep trouble. The combination of lower distribution costs, cheaper sourcing, lower store and central overheads, and much higher asset productivity was irresistible. Lower prices were driving much higher sales per store and a much higher company growth rate.

Hechinger tried to compete. But Home Depot’s sales were accelerating so much that it opened new markets and made nearly twice as the sales per store than Hechinger. Home Depot’s asset productivity continued to climb. Hechinger offered sales and promotions, heck they even purchased Home Quarters, a similar warehouse chain. But it wasn’t enough. The company failed to make deep business model changes required to compete.

By 1997, Hechinger was out of business.

I predict that the same will hold true for Ethereum. Ethereum is the old Hechinger, and Solana is Home Depot.

What innovations does Solana bring to the table? There are 8 of them that stand out:

1)      Proof of History (PoH)– a form of verifiable delay function that allows blockchain to leverage a clock for consensus.

2)      Tower Byzantine Fault Tolerance – a PoH optimized version of PBFT.

3)      Turbine – a modern block propagation protocol.

4)      Gulf Stream – A mempool-less transaction forwarding protocol.

5)      Sealevel – A parallel smart contracts run time.

6)      Pipelining – A transaction processing unit for validation optimization.

7)      Cloudbreak – A horizontally scaled accounts database.

8)      Replicators – A distributed ledger store.

The arc of technology is fascinating. Blockchains, at their core, attempt to massively disintermediate traditional finance. And the ones that remain at the bleeding edge of technology, the ones that continue to iterate fast and are cheaper for users, pushing value accrual to the application layer will win.

Solana is barely a smidge over 3 years old, but my bet is that within 5-6 years it will be the most dominant blockchain in the world, rubbing shoulders with Bitcoin. As far as Ethereum goes, it’s simply NGMI. Yes, it will stick around. But it will become a ghost chain, resembling an empty mall with no users. I hope it succeeds by the way, but I just don’t see a way out of this.

A freight train called Solana is coming. It is faster, stronger and packs a massive punch socially, technologically and financially. It is taking over the market as we speak with scores of applications deciding to build on top of it.

The narrative of Only Possible on Solana (OPOS) has taken center stage as far as Crypto Twitter (CT) goes and it’s a good one. An accurate narrative, indeed. I am curious if my prediction turns out to be true. Ideally both chains find their markets and do well. We shall see – the market will decide who wins.