Multicoin's Latest Investment Thesis: Solana Aims for the Internet-native Capital Market

Original Title: The Solana Thesis: Internet Capital Markets

Original Author: Kyle Samani, Founder of Multicoin Capital;

Original Translation: Golden Finance

Multicoin Capital participated in the Solana seed round financing 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 theses on Solana. The first two versions were released approximately nine months before the production of the mainnet's 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 evolved.

Now that Solana has become a $100 billion asset, the fastest growing developer ecosystem, and has surpassed Ethereum's key on-chain metrics (transaction volume, daily active addresses, revenue, total economic value TEV, DeFi payments, etc.), we want to share our thoughts on why we have been subscribing to SOL to achieve strong returns, even as Solana's market capitalization exceeds $100 billion.

This article is the fifth in our evolving series of Solana theses. The first four were: 1. Time and state separation; 2. The world computer should be centralized in logic; 3. Technical scalability creates social scalability; 4. Implicit costs of a modular system.

In this article, I will argue that Solana is the leading public blockchain supporting Internet capital markets. Furthermore, I believe that Solana as a technology can outperform major traditional finance (TradFi) participants on core performance metrics such as latency, including financial market entities like NYSE, NASDAQ, CME, JPMorgan, Goldman Sachs, and Morgan Stanley, as well as payment entities like Visa and Mastercard, while retaining core blockchain attributes never offered by TradFi (atomic composability and permissionless access for users, developers, and validators). Most importantly, I believe the Solana ecosystem can achieve both of the following seemingly contradictory goals simultaneously:

1. Reduce the cost of end-user financial services by 90-99%

2. Attain a higher total market value than existing Traditional Finance (TradFi) enterprises

While traditional financial participants such as the NYSE and Nasdaq only provide a small portion of value in the financial stack, Solana has already supported a superset of these systems' functionalities through unique DeFi protocols built on Solana over the years. Solana not only expands the Total Addressable Market (TAM) of transactions by increasing throughput and performance but also captures value from more layers of the financial stack.

Broadly speaking, all financial services can be categorized into two major groups: payments and finance. I will first explain how payments have become the loss leader of blockchain products; thereafter, the majority of this article will focus on the core infrastructure of Wall Street finance.

Delivering the Best Global Payment Experience

There are various ways to move funds. Apple Pay offers a great user experience. Using a physical credit card is great. Venmo, PayPal, or Square Cash are also good options. Other methods are mediocre at best, or worse—ACH, Wires, Zelle, Bill Pay, wire transfers, etc.

However, even with these traditional systems providing a good user experience, their costs are exorbitant. Wire transfer fees are $25, and credit card fees can exceed 2%. Updating ledger entries comes at such a high cost for both consumers and businesses; it's insane. This defies basic common sense, directly contradicting the natural intuition that electronic transactions should be cheaper than analog ones.

Solana has streamlined the payment process, making the user experience great. Furthermore, the fees are almost negligible. Watch the video (https://youtu.be/LaNwHW_NBIs), Sling Money is built entirely on Solana. This is the future of money flow.

The market cap of global payment companies is around $1.4 trillion. Solana aims to reduce this cost by 90%. The only fee Solana itself charges users is gas, which is approximately $0.1 per transaction or $0.001 per transaction. Even if the Solana network processes an average of 50,000 transactions per second throughout the year, this would only amount to a total of $1.5 billion for users. In comparison, Visa sustains thousands of transactions per second.

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

However, payments are crucial for the development of blockchain. The beauty of payments is that it is inherently viral. When Alice sends money to Bob, who then sends money to Carol, this naturally drives wallet adoption.

The primary source of revenue for blockchain is not payments; in fact, payments are essentially $0. Instead, the primary source of revenue for blockchain is the natural volatility between asset prices, which manifests in the form of Maximum Extractable Value (MEV). My co-founder Tushar has further elaborated on this in his 2022 Multicoin Summit talk.

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 SOL and the Solana ecosystem to capture value.

Market Efficiency of CeFi and DeFi

Solana is a decentralized network of thousands of nodes that achieves consensus on a series of financial transactions at a speed of 400 milliseconds (with a goal to reduce it to 120ms in the coming years).

The correct way to measure market efficiency is not through transaction latency but through the spread provided by Market Makers (MM). Ultimately, buyers and sellers experience the price. Human users (non-bots) cannot experience the difference between 50 milliseconds, 100 milliseconds, and 200 milliseconds of financial transactions. For context, the average human blink lasts 100-150 milliseconds.

The market-making in Centralized Finance (CeFi) is almost deterministic. Most market makers' servers are in the same location as CeFi exchanges, with each market maker having a fiber-optic cable of the exact same length connecting their server to the exchange. Exchanges execute trades in microseconds, allowing market makers to know their risk exposure in real-time with high precision.

On the other hand, decentralized finance (DeFi) exchanges like Drift, Phoenix, Clearpools, Raydium, and Orca have much lower determinism compared to CeFi exchanges because:

1. Solana's network leader is constantly rotating

2. The eventual finality time increases due to the need for validators worldwide to reach consensus

Therefore, the market maker cannot have the same level of real-time understanding of its risk exposure. In many cases, the market maker may leave stale prices on the blockchain order book, which others may take advantage of.

As a result, DeFi spreads are typically larger than CeFi spreads.

Let's take a look at how these systems are evolving to bring a better experience to makers and takers.

Maker — Narrowing the Spread Through Conditional Liquidity

Things are changing. DFlow has just quietly introduced 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 context, the critical condition is the toxic vs. non-toxic order flow.

How does CL work? CL specifies that liquidity can only be extracted when the taker is endorsed by a known front-end application. These wallets include: Phantom, Backpack, Solflare, and Fuse, as well as front-ends like Drift, Kamino, Jupitar, and DFlow's own front-end. This mechanism ensures that bots cannot consume CL, as bot orders do not have an endorser. This is a significant advancement for market makers, as it effectively guarantees that even if their quotes are delayed by a few seconds, they will not be front-run.

While CL is a novel concept in its mechanics, it is directly inspired by practices widely adopted in TradFi. Robinhood is a pioneer in this regard. Robinhood has always provided customers with better prices than the National Best Bid and Offer (NBBO) on the NYSE and Nasdaq. Over the past decade, they have validated this pricing improvement through trillions of dollars in trading. This makes sense, as market makers have ample statistical reason to believe that the average toxicity of Robinhood users is lower than trading directly on the NYSE or Nasdaq. In essence, in a trade, who would you rather face: Joe watching YouTube videos or Citadel?

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

For more background on how order flow segmentation brings more favorable prices to retail traders, you can read more here.

The advantage of DFlow's Conditional Liquidity (CL) is that it combines the strengths of TradFi and cryptocurrency. It can provide tighter spreads for retail clients like Robinhood and offer blockchain's real-time permissionless access and open auditability.

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

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

Since Uniswap introduced the Automated Market Maker (AMM) with XYK in late 2018, conditional liquidity has been the most significant functional improvement in DeFi. With its adoption, it will reshape all discussions in DeFi regarding UX, spreads, MEV, etc.

To reiterate, CL will enable market makers to offer tighter quotes to retail users. We hope this is beneficial for market makers, users, SOL, and the Solana ecosystem.

Takers — Harnessing Alpha through Latency Reduction

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

TradFi market microstructure is designed around low-latency traders hoping to colocate with exchange matching engines.

If you, as a retail trader, observe an event in Singapore that will impact TSLA's price, you still have to send the information to the market maker next to you 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 this information should be able to place an order with validators in Singapore, not New Jersey, based on that new information. Market participants should gain that alpha for observing the information first and adding the order to the global order book at the fastest speed.

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

Under MCL, there will not be just two Leaders at any given time, but several dozen. With MCL, participants observing real-world information can and will incorporate this 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, enabling people worldwide to access updated price information.

Contrary to intuition, decentralization allows recipients to minimize transaction time latency, thereby maximizing the spread of information in financial markets.

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

Scalable TAM...

From the London Stock Exchange to the Chicago Mercantile Exchange to the Tokyo Stock Exchange, most major exchanges globally trade in a single asset (e.g., stocks or commodities). However, blockchain has revealed a reality: all units of value (currency, commodities, stocks, derivative positions, debt, meme coins, governance tokens, utility tokens, NFTs, etc.) can be represented on a permissionless blockchain as standardized tokens.

Today, most assets traded on the blockchain are native to the blockchain. This means they are created and issued natively on-chain. This includes DeFi tokens, DePIN tokens, NFTs, and more. But an increasing number of assets are being issued on-chain, representing TradFi assets like U.S. stocks, bonds, real estate, Treasury securities, mezzanine debt, etc.

Ultimately, almost all assets will trade on inherently global and permissionless systems like Solana. This does not necessarily mean people will stop trading on the NYSE, Nasdaq, and CME, but rather that more and more trading volume will occur on-chain rather than in TradFi venues. This is natural as blockchains are inherently global, permissionless, and 24/7, making them more accessible to retail traders and easier for developers to integrate compared to TradFi.

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

Since blockchain is public and permissionless, it significantly enhances the participation in various forms of financial markets. Ultimately, the asset issuer does not care about where its asset trades. The asset issuer only wants to ensure that anyone looking to buy its asset can do so. Today, most company CEOs do not believe that issuing stock on-chain would expand their potential shareholder base, but as the global cryptocurrency user base grows from around 500 million to several billion, this will change in the coming years.

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

There are even teams developing products issuing NFTs to on-chain represent single bottles of whiskey, wine, and watches!

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

...and extract value from innovation

So far, all the content in this article has considered Solana as a matching engine. But with DeFi protocols like Drift, Jupiter, Kamino, marginfi, the Solana ecosystem can provide:

1. Every imaginable financial service

2. For everyone in the world

3. Increased transparency and auditability, significantly reducing systemic risk

4. Higher capital efficiency compared to TradFi.

Today, the major DeFi primitives on Solana are 1) spot trading, 2) lending, and 3) perpetual futures trading. These roughly equate to 1) NYSE/Nasdaq, 2) large banks offering consumer and prime loans and FCM, and 3) the Chicago Mercantile Exchange. These are only applicable to the US. Solana is aiming 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 the decentralized Nasdaq, Solana, and its ecosystem's TAM are much larger than Nasdaq. Solana is attempting to power all global financial services; it is much more than just a matching engine.

The incredible thing about Solana is that all these different financial tools can be natively and atomically composited without the explicit approval or support of application developers. The concept of using existing smart contracts as LEGO 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 that all contribute value in a virtuous cycle for stakeholders in the Solana ecosystem. This means Solana-based products can innovate faster and provide a better consumer experience.

Solana itself does not offer financial services. However, the stack created by Solana supports hundreds (soon to be thousands) of financial services that facilitate tens of trillions of dollars in risk transfer annually. Despite gas costs approaching 0 and trending downward, Solana profits directly from the growth of these financial services through Maximum Extractable Value (MEV).

As my colleague Tushar mentioned in 2022 and 2024 at the Multicoin Summit, asset ledgers like Solana can be valued based on the MEV they capture. Each new financial service generates incremental MEV, of which Solana can capture a portion. Today, individual applications on Solana have generated over $100 million in MEV, and this is all still early days beyond the revenue of those specific applications.

By the fourth quarter of 2024, the Solana network garnered over $800 million in REV (excluding SOL inflation), representing an annualized rate of around $3.2 billion, up from basically $0 just a year ago. Despite the almost non-existent issuance of TradFi assets on Solana and the relative immaturity of the major DeFi protocols on Solana, most of which have only been around for a few years, the situation persists.

Solana's TAM is growing in three dimensions:

1. DeFi protocols continue to mature, 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).

3. From memecoins to U.S. stocks, an increasing number of assets are being issued on-chain.

This not only increases Solana's TAM but also reinforces each other. For example, the more assets are issued, the more collateral available for lending.

Solana's compounding speed is increasing.

Internet Capital Markets

The Solana ecosystem is fully committed to realizing the vision of Internet Capital Markets. Solana simultaneously improves execution for market makers through conditional liquidity and enhances throughput by having 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 is a prime opportunity to create a global, permissionless financial system:

1. Allowing informationally advantaged individuals to capture alpha across every asset class

2. Simultaneously bridging the smallest spreads

3. And enjoying the lowest fees

4. Having leverage sourced globally, transparent, and auditable in real-time

5. Achieving maximum capital efficiency through cross-position and cross-protocol atomic composability.

This is the vision of Internet Capital Markets. This is the vision of Solana.

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