By Kyle Samani, Founder of Multicoin Capital

Compiled by: 0xjs@Golden Finance

Multicoin Capital participated in Solana’s seed round in May 2018, and has been investing in Solana’s native asset, SOL, and the broader Solana ecosystem since then. We have previously published four investment theses on Solana. During that time. The first two versions were released about nine months before the mainnet produced the first block in March 2020. As the Solana network has grown, our frame of reference for how to think about the Solana network and the SOL asset has also been evolving.

Now that Solana has become a $100 billion asset, the fastest growing developer ecosystem and has surpassed Ethereum's most important on-chain indicators (transaction volume, daily active addresses, revenue, total economic value TEV, DePIN payments, etc.), we would like to share our thoughts on why we have been subscribing to SOL to obtain strong returns, even when Solana's market value exceeds $100 billion.

This post is the fifth in our evolving Solana paper. The first four are:

1. Separation of time and state;

2. The world computer should be logically centralized;

3. Technical scalability creates social scalability;

4. Hidden costs of modular systems.

In this article, I will argue that Solana is the leading public blockchain supporting the internet’s capital markets. Furthermore, I argue that Solana as a technology can outperform major traditional financial (TradFi) players (including NYSE, NASDAQ, CME, JPM, Goldman Sachs, and Morgan Stanley on the financial markets side, and Visa and Mastercard on the payments side) on core performance metrics like latency, while retaining the core properties of blockchain that TradFi has never offered (atomic composability and permissionless access for users, developers, and validators). Most importantly, I argue that the Solana ecosystem is able to achieve both of the following goals simultaneously, even though they appear to be contradictory:

1. Reduce 90-99% of end-user financial service costs

2. Obtain a higher total market value than existing companies in traditional finance (TradFi)

While traditional financial players like the NYSE and Nasdaq provide only a small portion of value in the financial stack, Solana already powers a functional superset of these systems through unique DeFi protocols that have been in production on Solana for years. Solana not only expands the total addressable market (TAM) for trading by increasing access and performance, but also captures value from more layers of the financial stack.

Broadly speaking, all financial services can be classified into two categories: payments and finance. I will first explain how payments are a loss leader for blockchain; after that, the bulk 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 money. Apple Pay has a great user experience. Using a physical credit card is great. Using Venmo, PayPal, or Square Cash is great. Everything else is mediocre or worse — ACH, Wires, Zelle, Bill Pay, wire transfers, etc.

But even with a good user experience, these legacy systems have ridiculous fees. Wire transfers cost $25, and credit card fees can be over 2%. It’s crazy that updating a ledger entry would cost consumers and merchants so much. It defies basic common sense and goes directly against the natural intuition that electronic transactions should be cheaper than analog transactions.

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

The market capitalization of global payment companies is about $1.4 trillion. Solana aims to reduce this cost by 90%. The only fee Solana itself charges users is gas, which is about 0.1 cents per transaction, or $0.001 per transaction. Even if the Solana network averages 50,000 transactions per second over a year, this would only cost users a total of $1.5 billion. For comparison, Visa maintains thousands of transactions per second.

Payments are blockchain’s loss-making product. Payments are critical to driving adoption, providing real utility to users and companies, but are not the primary source of profit for blockchain or its ecosystem.

However, payments are critical to the growth of blockchain. The beauty of payments is that they are inherently viral. When Alice sends money to Bob, who then sends money to Carol, this leads to a natural growth in wallet adoption.

The main source of profit for blockchain is not payments, which are effectively $0. Instead, the main source of profit for blockchain is the naturally occurring fluctuations between asset prices, which manifest themselves in the form of Maximum Extractable Value (MEV). This was further explained by my co-founder Tushar in his 2022 Multicoin Summit speech.

The rest of this article will focus on how and why Solana is able to outperform TradFi on traditional performance metrics, and how this will enable profitability for the SOL and Solana ecosystem.

Market efficiency of CeFi and DeFi

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

The correct way to measure market efficiency is not by transaction latency, but by the spreads offered by market makers (MMs). Ultimately, buyers and sellers experience price. A human user (i.e. non-bot) cannot experience the difference between a 50ms, 100ms, and 200ms financial transaction. For context, the average human eye blink is 100-150ms.

Market making in centralized finance (CeFi) is almost deterministic. Most market makers have their servers co-located with CeFi exchanges, and each market maker has an identical length of fiber optic cable connecting its servers to the exchange. Exchanges complete trades in microseconds, so market makers can understand their risk exposure in real time and with high precision.

Decentralized finance (DeFi) exchanges — such as Drift, Phoenix, Clearpools, Raydium, and Orca — by comparison, have far less certainty than CeFi exchanges because:

1. Solana’s network leaders are constantly rotating

2. The time to finalize will increase because validators around the world need to reach consensus

As a result, market makers are unable to 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 that others may take advantage of.

Therefore, DeFi spreads are generally wider than CeFi spreads.

Let’s look at how these systems are changing to make the experience better for both makers and takers.

Makers — Narrowing Spreads with Conditional Liquidity

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

How does CL work? CL stipulates that a given unit of liquidity can only be withdrawn if the taker is endorsed by a known front-end application. This includes wallets such as: Phantom, Backpack, Solflare, and Fuse as well as front-ends such as Drift, Kamino, Jupitar, and DFlow's own. This mechanism guarantees that bots cannot consume CL because bot orders are not endorsed by an endorser. This is a huge improvement for MMs because it virtually guarantees that they will not be eliminated even if their quotes are delayed by a few seconds.

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

CL let MM know that they were not facing the well-known Citadel.

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

The beauty of DFlow CL is that it combines the best of both worlds: TradFi and crypto. It is able to offer tighter spreads to retail clients like Robinhood, and provides 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 quotes in the coming years, as market makers hate being fooled by stale quotes. Market making is fundamentally about quoting based on the maximum available information. There is no reason for market makers (whether passive or active) not to incorporate more information (i.e. conditional liquidity) into their pricing.

DFlow’s CL implementation on Solana is now 100% open source and does not charge any fees or taxes. Below is the GitHub repository .

Conditional liquidity is the most significant feature improvement in DeFi since Uniswap launched the xyk automated market maker (AMM) in late 2018. As it is adopted, it will reshape all discussions in DeFi about UX, spreads, MEV, and more.

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

Takers — Leveraging Alpha by Reducing Latency

Financial markets should incorporate all publicly available information into asset prices. They generally do so. Yet price discovery for most assets happens on a single server in one place, while the information that influences prices is generated all over the world.

The TradFi market microstructure is designed around low-latency traders who want to be co-located with exchange matching engines.

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

The first correct view of this question is that an observer of this information should be able to place an order based on this new information with a validator located in Singapore rather than New Jersey. This market participant should receive this alpha for observing this information first and adding the order to the global order book the fastest.

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

Under MCL, there will not be just two leaders at any one time, but dozens. With MCL, participants who observe 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, so that people around the world can get information about updated prices.

Counterintuitively, decentralization enables takers to minimize latency in transaction times, thereby maximizing information dissemination in financial markets.

Decentralized price discovery is, by definition, better than centralized price discovery. The world is big and diverse.

Scaling TAM horizontally…

From the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, most major exchanges around the world trade one asset (such as stocks or commodities). But blockchain reveals a reality: all units of value (currencies, commodities, stocks, derivative positions, debt, 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 blockchain native assets. That is, they are natively created and issued on the chain. This includes DeFi tokens, DePIN tokens, NFTs, etc. But more and more assets are issued on the chain, which represent TradFi assets, including US stocks, bonds, real estate, US Treasuries, mezzanine debt, etc.

Eventually, nearly all assets will be traded on systems like Solana that are inherently global and permissionless. This doesn’t necessarily mean people will stop trading on the NYSE, NASDAQ, and CME, but it does mean that more and more volume will be done on-chain rather than on TradFi venues. This is natural because blockchains are inherently global, permissionless, 24/7, more accessible to retail traders, and easier for developers to integrate than TradFi.

Integrating private keys and tokens into any application is a piece of cake, whether that application is a Telegram bot, a lightweight Android app, or a WeChat applet. Interfacing with the large number of heterogeneous systems representing the global TradFi system is exponentially more difficult. Their APIs are much more complex, settlement times are slow and inconsistent, and in many cases, TradFi institutions do not face retail traders at all.

Because blockchain is public and permissionless, it explicitly increases participation in all forms of financial markets. Ultimately, asset issuers don’t care what rail their assets are traded on. Asset issuers just want to make sure that anyone who wants to buy their assets can. Today, most company CEOs don’t think that issuing shares on-chain will increase their potential shareholder base, but this will change in the coming years as global cryptocurrency users grow from about 500 million to billions.

Not only do we believe crypto will underpin all TradFi assets, we also foresee it will underpin many new assets that simply could not have existed before. One of my favourite examples is Parl, which offers perpetual contracts benchmarked to the average price per square foot of closed real estate transactions in a particular market over a rolling 30-day period. Parcl allows you to go long Austin, short San Francisco, and use the equity value of each position to collateralise the other!

There are even teams developing products that issue NFTs to represent individual bottles 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 all kinds of new financial markets on-chain.

…and extract value from innovation

So far, everything in this post has treated Solana as a matching engine. But with DeFi protocols like Drift, Jupiter, Kamino, marginfi, etc., the Solana ecosystem can provide:

1. All imaginable financial services

2. For everyone in the world

3. Improve transparency and auditability, thereby significantly reducing the risk of chain contagion

4. Higher capital efficiency than TradFi.

Today, the biggest DeFi primitives on Solana are 1) spot trading, 2) lending, and 3) perpetual futures trading. These are roughly equivalent to 1) NYSE/NASDAQ, 2) large banks and FCMs that provide consumer and prime lending services, and 3) CME. These are only available in the US. Solana is racing to provide financial services to everyone in the world.

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

What’s incredible about Solana is that all of these different financial instruments can be natively and atomically combined with one another without explicit approval or support from application developers. This concept of using existing smart contracts as Lego blocks to build more useful services is what most people in the industry call composability. This enables faster experimentation and growth because developers can build on top of a set of base contracts, integrations, and liquidity, all of which create value for stakeholders in the Solana ecosystem in a virtuous cycle. This means products built on Solana can innovate faster and provide better consumer experiences.

Solana itself does not provide financial services. But the stack created by Solana supports hundreds (soon to be thousands) of financial services that facilitate trillions of dollars in risk transfer each year. While gas costs are near 0 and trending downward, Solana directly profits from the growth of these financial services through Maximum Extractable Value (MEV).

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

In Q4 2024, the Solana network earned over $800 million in REV (this does not include SOL inflation), which is about $3.2 billion on an annualized basis. This is still the case despite the fact that there are almost no TradFi assets issued on Solana and the relative immaturity of the major DeFi protocols on Solana, most of which are only a few years old.

Solana’s TAM is growing in three dimensions:

1. DeFi protocols continue to mature, adding new features and functionality and creating more MEV opportunities.

2. Entrepreneurs are building new financial markets on the chain, such as computing, telecommunications, energy markets, and Blockchain-Enabled Collectibles Marketplaces (BECMs).

3. From memecoin to US stocks, more and more assets are being issued on-chain.

These not only increase Solana’s TAM, but also reinforce each other. For example, the more assets issued, the more collateral available for lending.

Solana's compounding rate is getting faster and faster.

Internet Capital Market

The Solana ecosystem is moving full steam ahead with its vision of enabling the Internet of Capital Markets. Solana simultaneously improves execution for market makers through conditional liquidity and for takers through multiple concurrent leaders. Additionally, the Solana ecosystem is expanding its TAM horizontally (by supporting a wider range of TradFi and crypto-native assets) and vertically (by capturing some of the MEV from the many financial services built on Solana).

This is a great opportunity to create a global, permissionless financial system:

1. Enable those with information advantage to capture alpha in each asset class

2. Cross the smallest price gap at the same time

3. Enjoy the lowest fees

4. Leverage from global sources, transparent and auditable in real time

5. Maximize capital efficiency through atomic composability across locations and protocols.

This is the vision of the Internet capital market. This is the vision of Solana.