Ethereum vs Solana: My Personal Take.
Discover more from Ignas | DeFi Research
Ethereum vs Solana: My Personal Take.
And a brief overview of other L1s
Disclaimer: I hold both ETH and SOL.
Reading discussions on X, it seems that many miss the underlying core debate behind the Ethereum vs Solana religious-like fights.
The fundamental discussion here is not simply Ethereum vs Solana, but how we will scale blockchains for mass adoption. And jumping to the conclusion, I believe nothing is yet set in stone and the question one or another isn’t as simple as it seems. Which is great, because we are still early!
And the dilemma here is not simply technical but also related to cultural values. But more on this after checking out what this week’s sponsor, Reserve, has to offer for yield looking DeFi users.
Reserve Protocol, a permissionless platform to earn yield and launch and govern 1:1 asset-backed currencies (“RTokens”).
"RToken liquidity pools are consistently one of the best risk-reward yields in DeFi right now” - Hedge Fund DeFi analyst Nov 9, 2023
ETHPLUS (ETH+): safety-first diversified ETH LST index with up to 4% base APY to holders.
Electronic Dollar (eUSD): safety-first stablecoin that brings together diversified, highly liquid backing with anti-bank run overcollateralization.
High Yield USD (hyUSD): over collateralized DeFi savings flatcoin with up to 6% APY to holders.
But that’s not all. How are large capital allocators and small yield farmers getting involved in the Reserve ecosystem?
RTokens are being farmed on Curve, Convex, StakeDAO, Beefy Finance and Yearn Finance.
Farmers are stacking ETH+ at up to 15% APY, capturing almost 30% APY on their eUSD and earning over 20% APY with hyUSD.
Drop into the Reserve Discord to learn more, get support and connect with other farmers and allocators to optimize your own yield strategies.
What’s the point of non-Ethereum L1s?
To understand the bigger picture for the Ethereum vs Solana debate, I want to briefly review other main L1s and what their value propositions are. It will help us create a map of L1s in terms of their scaling solutions.
Recently, I’ve done six AMAs with prominent L1s and zkSync on the role of L1s in the era of L2s.
The main question discussed is the purpose of alt-L1s when Ethereum's L2s can scale Ethereum with fast transactions and lower fees, all while benefiting from Ethereum's security.
Not surprisingly, the most dividing question was if Ethereum has already won the L1 games. Sanket from Polygon and Alex from zkSync believe Ethereum has largely won L1 games, while, not surprisingly, Solana, Avalanche and BNB Chain teams didn’t agree.
Near's position is nuanced: Ethereum will continue to be dominant, but other Layer 1 solutions will thrive in areas where Ethereum isn't designed to excel. Near's value proposition has been somewhat unclear, but their recent partnership with Polygon to scale Ethereum on the Data Availability layer aligns with the aforementioned viewpoint.
In their podcast, Bankless stated that Near is migrating to an Ethereum Layer 2 solution, but that's not accurate. Near exists as a monolithic while also aiding in the scalability of Ethereum through Near's data availability and storage capabilities.
In fact, Near could also offer Fast finality to L2s where Arbitrum settles first to Near and then to Ethereum, while offering Ethereum + Eigenlayer security guarantees as well as decentralized sequencers to L2s.
Avalanche’s core proposition of its modular design is scaling with subnets where anybody can build their own blockchain seamlessly. Architecturally Avalanche is somewhere in between Cosmos and Polkadot with P-Chain (where validation occurs), C-Chain (smart contracts), and X-Asset (for sending and receiving funds). You can learn more on how it works in my AMA with Luigi, the Head of DeFi/DevRel at Avalanche.
When it comes to BNB Chain, it launched as a solution to Ethereum’s high gas fees. But even with sub $0.5 gas fee (and compromises on decentralization) BSC isn’t cheap enough for many use cases such as high-frequency trading. To address this, BNB launch opBNB L2 on BSC and Greenfield for data availability.
More on this in my previous blog post with BNB core development team.
Do these scaling solutions sound complicated? Welcome to the world of modular blockchains. This is at the core of the Ethereum vs Solana debate, which I genuinely care about.
The assumption here is that one single blockchain needs to compromise between three critical aspects of blockchain technology: security, scalability and decentralization. A blockchain can only have two, and Ethereum focuses on security and decentralization leading to high gas fees and slow transactions. So, it outsources scaling to execution and data availability layers.
More on it in my X thread below.
Yet, Solana has big ambitions to solve the blockchain trilemma in a single monolithic design. Impossible?
In Defence of Solana
Solana's vision is to bring together all the goodies such as cheap and fast transactions, fast finality, and low latency under one roof. In practice, this eliminates the need for cumbersome bridging, all at a fraction of the cost even the best Layer 2 solutions can currently offer.
$0.69 for single swap on Arbitrum (at the time of writing) isn’t great… We need L3s ASAP!
Now, all these goodies require powerful hardware, which makes running a validator expensive (there’s a calculator here). In fact, Lido has even withdrawn from liquid stSOL staking due to high development costs.
Additionally, there is criticism regarding SOL allocation, with 48% allocated to insiders/VCs. Finally, Solana lacks a second production client (only one blockchain software client exists in Solana, meaning only one program needs modification to remove property rights).
Due to mainly the above features Ethereum community (note, that most of my portfolio sits in ETH) claim that Solana isn’t as decentralized as Ethereum is. It’s a sensitive topic but my current mid-curve thoughts are the following:
Ethereum L2s aren’t really decentralized either (Sequencer centralization);
Hardware prices tend to fall, benefiting Solana in the long term;
Solana will launch Firedancer, a second validator to decentralize the network;
One can claim that Ethereum’s scaling future is in the hands of VCs for funding L2s, DA protocols etc.
I’m playing a devil’s advocate here.
In fact, by Nakamoto Coefficient Solana scores better than Ethereum. It indicates the how many entities need to control a 33% stake in a blockchain, reflecting its decentralization and security. A higher value means greater network resilience against manipulation. Solana scores 22 and Ethereum just 2.
Yet decentralization is a spectrum and if you really care about decentralization, you should buy and hold Bitcoin. I hold it too as an insurance against failure of Ethereum, fiat or other black swan events.
In practice, the primary aspect of DeFi that I find most important is self-custody. I want the assurance that neither the Solana foundation nor governments can seize or freeze my funds. I actually more confident holding SOL on Solana than ETH on Coinbase's Base (it’s not about the price). Unfortunately, high gas fees on Ethereum pushes people to L2s where security & decentralization are compromised.
BTC on Bitcoin > Ethereum on ETH > SOL on Solana > ETH on Coinbase’s Base
What's more, the discussions on decentralization are dominated by Western Anglophones. However, the success of platforms like Tron and BSC in non-western countries, and even social network Farcaster in the West, shows that there are use cases for blockchains that require sufficient decentralization. Not everyone can afford paying 18 USD for a simple swap, you know? Ethereum and L2s are currently the networks for the rich. Anyway…
I want to see use case diversification for blockchains.
Although I feel more confident using DeFi on the Ethereum mainnet for lending and staking significant sums of money or holding expensive NFTs, I am happier trading perps on Solana and using it for micro or non-financial transactions.
Solana seems to be a good fit for most GameFi, Metaverse, P2E, derivatives, options, etc. dApps. This is precisely why Solana launched the Solana Phone with the dApp store. STEPN is a good example, and I am eager to see more consumer-facing apps launch on Solana to validate my Solana thesis.
That’s also why TVL is not the perfect metric for Solana ecosystem. Ethereum holds the most assets, as it’s a store of value blockchain. But those assets are sitting passively in smart contracts generating yield, while Solana emphasizes velocity of capital - Volume per dollar of TVL.
With its high scalability and low transaction fees, Solana enables rapid value movement and capital rotation. This velocity of capital demonstrates the efficiency and appeal of Solana's infrastructure for users and investors alike. - Michelle, DeFi BD at Solana Foundation.
Modular vs Monolithic Future: Why Not Both?
To be fair, Solana isn’t the only monolithic blockchain. NEAR, Algorand (AFAIK) are other two examples, and Fantom is moving towards monolithic scaling design.
But things get more interesting here as NEAR is a monolithic AND modular blockchain, offering Data Availability to Ethereum L2s. And Algorand has Co-chains for private permissioned blockchains.
The bipolar framework above is too simplistic, and I recommend following Justin who shares great (and often hot) takes on the issue. He favors execution sharding or enshrined roll-ups for scaling.
Others like Tyler Reynolds shifted to the belief that monolithic blockchains are the right answer.
But as you can see there are multiple scaling solutions, with the community still split over which one will prevail. So, my main point is this:
There are various approaches to scaling blockchains, each with its own trade-offs. However, I'm a practical person who wants to maximize my returns by investing in solutions that are likely to dominate in the near future and have higher upside.
Especially in the current environment where Ethereum transaction fees during busy times are outrages and L2s aren’t as cheap to use, and they bring downsides to user experience. I hope Ethereum community manages to abstract and obfuscate the user experience in the near future. We are not here yet.
So, I cannot overlook the potential upside of Solana's grand vision for scaling through a monolithic design. If they succeed in attracting more devs, dApps, and users, the opportunities for growth are too big to ignore.
And if you read my blog, you’ll know that I focus on ecosystems that have 1) technical innovations; 2) money printing opportunities; 3) compelling storytelling.
Solana meets all three criteria. It offers a unique scaling vision, that managed to captivate a big group of believers and haters as well. Hating is a useful measure for attention as it shows that even sceptics care about Solana.
Finally, Solana’s ecosystem has been wiped out during in the bear market and even NFT projects like DeGods and yOOts left Solana. It’s like a country ravaged by the war and is currently rebuilding. This presents opportunities as there are only a few dApps that manage to attract user 1) attention; 2) money inflow. You can see the list of projects in this post by Jacob.
In a world where we constantly debate Windows vs Mac and Android vs iOS, it's easy to get caught up in the bipolarity of the discussion. But as investors, the question shouldn't be about choosing one over the other. Instead, we can allocate a portion of our portfolio to strike a balance that feels comfortable, which includes other L1s as well.
Personally, I find Solana's vision attractive enough to deserve some allocation. Taking an extreme stance goes against my belief in being open-minded and continuously reassessing my perspective when new information arises.
Maybe I’m wrong on this take, so please let me so in the comments.
I also care about a hands-on approach and believe in trying out Solana before dismissing it solely based on the opinions of those who dislike it.
I’m extremely bullish on Ethereum, and most you are probably as well. That’s why I even skiped the “In Defense of Ethereum” blog section as the value proposition of Ethereum is strong. But that doesn't mean I won't consider investing in other Layer 1 solutions too.
Ethereum vs Solana: My Personal Take.
End-users will not care, will not need to know, and will not understand the difference in the infrastructure they interact with.
There will be no "select chain".
All this is just for geeks to geek on (me included) :P
Developers creating apps should not "marry" an ecosystem. Just use what's working today, then, when something "better" becomes available, migrate to that without the end-user even knowing. Also, plan this from the start so that all chain interactions are abstracted and can easily be swapped out.
Because of this, I can't see infrastructure capturing much value in the long run. Value is for the app layer.
I don’t believe that Ethereum’s sharding is really possible.
Even if sharding is implemented, it will likely take more than 10 years.