Spot Solana ETF Proposal Clouded By VanEck’s Wash Trading Concerns

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As a seasoned researcher with years of experience delving into the complexities of digital assets, I have to admit that my analysis of Solana’s proposed spot ETF has been quite the ride. The landscape of cryptocurrencies is ever-evolving, and Solana, with its impressive throughput and low transaction costs, presents a unique challenge.

VanEck’s proposed spot Solana (SOL) exchange-traded fund (ETF) is facing scrutiny due to concerns over wash trading and the nature of on-chain activity. Matthew Sigel, Head of Digital Assets Research at VanEck, published an in-depth analysis on Tuesday, comparing SOL’s metrics with those of Ethereum to provide context and clarity.

Solana has earned acclaim for its exceptional transaction speed and cost-efficiency, drawing in numerous users and developers. Boasting about 111 million active wallets monthly, it outperforms Ethereum’s 5.4 million significantly. Yet, critics question whether some of these accounts could be Sybil accounts – false identities used to distort data.

Does Solana Have A Wash Trading Problem?

As an analyst, I acknowledge the difficulty in discerning genuine user activities from those orchestrated by individuals managing numerous wallets. To put it simply, it’s clear that many of these wallets appear non-organic.

It appears that a large chunk of Solana’s income comes from memecoins and NFTs, accounting for around 34.3%. In contrast, Ethereum’s current year revenue from these sources is only 6.6%, but during the peak memecoin activity between July and October 2021, it was as high as 20.3%.

When examining the practice of wash trading, which involves traders buying and selling the same asset to falsely increase transaction volumes, it’s worth noting that Solana’s reported figures are significantly greater. It’s estimated that about 41.4% of memecoin and NFT trading on Solana is due to wash trading. Meanwhile, Ethereum’s wash trading for these assets amounted to 28.9% in the year 2024, while it peaked at 44.4% during 2021.

Combining our findings, it appears that about 14.2% of Solana’s revenue is attributed to wash trading as opposed to 2% for Ethereum in the year 2024, and 9% back in mid-2021. However, Sigel emphasizes an important condition: this analysis presumes that memecoin wash trading generates Miner Extractable Value (MEV) at par with regular trades. If no MEV is generated on these transactions, the estimates would be reduced by half.

To perform this examination, the research employed Dune Analytics queries on both Solana and Ethereum blockchains to collect memecoin and NFT transactions over defined periods. Data for Maximal Extractable Value (MEV) and transaction fees were obtained from Artemis, Jito, and Flashbots to assess each chain’s gas fee revenue and MEV. To spot wash trading, the analysis applied a certain ratio of daily trading volume to a coin’s market cap as a threshold.

One reason Sigel proposes for the high volume of memecoin trading and wash trading on Solana is that transaction fees are around 1/10,000th of Ethereum’s fees, making it less costly to engage in wash trading. Another reason is that Solana’s architecture provides a more enjoyable user experience for memecoin traders due to its high processing speed and quick response time.

Thirdly, platforms such as Pump.fun streamline memecoin trading, leading to increased user engagement. Fourthly, the strategy for Maximal Extractable Value (MEV) could unintentionally boost trading statistics. As Sigel clarified, Solana’s MEV trading is based on statistical evaluations of executing transactions by submitting numerous orders for the same trade. Some of these transactions may successfully execute without capturing MEV, which might inflate trading numbers more than on Ethereum.

What Does That Mean For A Spot SOL ETF?

Sigel highlights significant similarities between SOL and well-known companies such as Alibaba, DraftKings, and the CME Group, shedding light on speculative trading practices. For instance, Alibaba encountered doubts about package volumes, which might have encompassed ’empty packages’ to inflate measurements before its IPO in 2014. On the other hand, DraftKings and the CME Group generate a significant portion of their income from speculative trading, frequently offering benefits like discounted fees or refunds to fuel activity.

Unlike some other cryptocurrencies, Solana does not motivate users through incentives in the same way. Instead, its high levels of activity can be explained by its design that offers low costs and high throughput. As Sigel points out, Solana is currently a popular destination for memecoins, making it a significant player in the speculative crypto market. However, he stresses that Solana has the capability to extend beyond speculation into more substantial applications like decentralized physical infrastructure networks (DePIN) and social media platforms.

Although memecoins currently generate a substantial portion of our income, their high valuation – roughly 250 times estimated future earnings – indicates investors’ anticipation for the expansion of these coins into non-speculative uses beyond mere entertainment.

It’s worth noting that this analysis could significantly impact VanEck’s proposed Solana ETF in the U.S., as the Securities and Exchange Commission (SEC) has flagged potential issues of fraud and manipulation within the Solana market, such as wash trading among other things.

Since a large part of Solana’s earnings could potentially come from questionable trading practices, VanEck has chosen to include extensive cautionary statements in the prospectus for our proposed SOL Exchange-Traded Product (ETP). As Sigel points out, understanding where Solana generates its revenue is crucial because it raises concerns about our ETP. This is why we have made sure to highlight potential risks in our ETF’s prospectus due to the suspicion that a significant portion of Solana’s income might stem from dubious trading activities.

Yet, Sigel remains hopeful about SOL’s future prospects: “We think the significant level of activity on Solana is due to its superior user experience. As more activities migrate to Solana, this high volume will likely transition into a smaller portion of Solana’s income sources. Ethereum’s evolution could serve as a model for how Solana’s DEX volumes can evolve over time, focusing less on meme-related assets.

At press time, SOL traded at $161.

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2024-11-05 19:42