Multicoin Capital: Solana’s path to change in the global capital market

Original title: The Solana Thesis: Internet Capital Markets

Original author: Kyle Samani

Original translation: Odaily Planet Daily Husband How

In this article, Multicoin Capital explores how Solana can become a leader in the future Internet capital market and analyzes its advantages over traditional financial markets. Solana is able to reduce costs and provide users with a better experience in the payment field through its efficient blockchain performance. Compared with traditional payment systems, Solana has almost zero transaction fees and can handle higher frequency transactions.

In addition, Solana provides more efficient market pricing in DeFi, reduces spreads through conditional liquidity (CL), improves transaction efficiency, and attracts more users. Solana also plans to increase price discovery speed and optimize liquidity in global markets through multi-concurrency leaders (MCL).

The following is the original content, translated by Odaily Planet Daily.

Multicoin Capital has been investing in Solana’s native asset, SOL, and its ecosystem since Solana’s seed round in May 2018. During this time, we have published four articles on Solana’s investment perspectives. The first two articles were published nine months before the first block was born on the mainnet in March 2020. As the Solana network has grown, our understanding of the Solana network and SOL assets has also evolved.

Today, Solana has become a $100 billion asset with the fastest growing developer ecosystem and has surpassed Ethereum in most major on-chain metrics such as transaction volume, daily active addresses, REV, TEV, DePIN payments, etc. In this context, we want to share our investment rationale for Solana to deliver strong returns even after the market cap exceeds $100 billion.

This article is the fifth in our Solana investment thesis. The first four include:

• Separation of time and state

• The world computer should be logically centralized

• Technical Scalability Creates Social Scalability

• The hidden value of modular systems

In this post, I will argue that Solana is the public blockchain of choice to lead the Internet capital markets. Furthermore, I will argue that Solana as a technology is able to outperform major players in traditional finance (TradFi) on core performance metrics such as latency - including financial market giants such as the New York Stock Exchange (NYSE), NASDAQ (NASDAQ), Chicago Mercantile Exchange (CME), JPMorgan Chase (JPM), Goldman Sachs (GS), and Morgan Stanley (MS), as well as payment industry giants such as Visa and Mastercard. At the same time, Solana can retain the core properties of blockchain that traditional finance cannot provide: atomic composability and permissionless access to users, developers, and validators.

More importantly, I will demonstrate that the Solana ecosystem is able to simultaneously achieve two seemingly contradictory goals:

• Reduce end-user financial services costs by 90% -99%;

• Capture a higher total market capitalization than traditional financial giants.

While traditional financial giants like the NYSE and Nasdaq provide only a small portion of value in the financial services stack, Solana provides a superset of these systems by running a unique DeFi protocol that has matured over the years on its blockchain. Solana not only expands the total serviceable market (TAM) for trading by improving accessibility and performance, it also captures value from more layers of the financial services stack.

In general, all financial services can be divided into two categories: payments and finance. In this article, I will start by explaining why payments are a loss-making vehicle for blockchain; the main part will then focus on the infrastructure that drives the core of Wall Street finance.

Providing the best global payment experience

There are many ways to transfer money. Apple Pay has a great UX. Using a physical credit card is also very convenient. Using Venmo, PayPal, or Square Cash is OK. Other methods, such as ACH, Wires, Zelle, Bill Pay, Remittances, etc., are average or even terrible.

Although some traditional payment methods offer a good user experience, their fees are unreasonably high. Wire transfers can cost up to $25, and credit card fees can exceed 2%. For consumers and merchants, it is so expensive just to update the ledger records, which goes against common sense and goes directly against the intuition that electronic transactions should be cheaper than traditional methods.

Solana makes payments incredibly simple, with an amazing user experience, and near zero fees. Check out this video by Sling Money , built exclusively on Solana, for the future of money.

The total market value of global payment companies is approximately $1.4 trillion, and Solana aims to reduce this by 90%. The only cost Solana imposes on users is gas fees, which are approximately 0.001 cents, or $0.001, per transaction. Even if the Solana network averages 50,000 transactions per second for the entire year, the total cost to users is only $1.5 billion. For comparison, Visa currently only processes thousands of transactions per second.

Payments are the gateway drug for blockchain. While payments are critical to driving adoption and provide real utility value to users and businesses, they 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 naturally viral. When Alice sends funds to Bob, and Bob sends funds to Carol, it naturally drives wallet adoption.

The main source of profitability for blockchains is not payments (which are actually almost negligible), but profits from the natural fluctuations between asset prices, which are expressed in the form of Maximum Extractable Value (MEV). My co-founder Tushar further elaborated on this in his speech at the 2022 Multicoin Summit .

The remainder of this article will focus on how and why Solana is able to outperform traditional finance (TradFi) on traditional performance metrics, and how this performance enables SOL and the Solana ecosystem to capture profits.

Market efficiency of CeFi and DeFi

Solana is a decentralized network of thousands of nodes that reach consensus on a series of financial transactions every 400 milliseconds (expected to decrease to 120 milliseconds in the coming years).

The correct way to measure market efficiency is not by the latency of transaction confirmation, but by the bid-ask spread offered by market makers (MMs). Ultimately, what buyers and sellers actually experience is price. For an average user (non-bot), the difference between 50ms, 100ms, and 200ms transaction latency is not actually perceptible. For reference, the average time it takes for a human eye to blink is 100-150ms.

In centralized finance (CeFi), market making is almost deterministic. Most market makers deploy servers near CeFi exchanges, and each market maker has exactly the same length of fiber optic cable connecting its servers to the exchange. Exchanges complete trades in microseconds, so market makers can understand their risk exposure with extremely high real-time accuracy.

In contrast, decentralized finance (DeFi) exchanges such as Drift, Phoenix, Clearpools, Raydium, and Orca have much lower finality than CeFi exchanges because:

• The leadership nodes of the Solana network are constantly rotating;

• In order to reach consensus among validators worldwide, transaction confirmation time will increase.

As a result, market makers are unable to understand their own risk exposure with the same real-time precision. In many cases, market makers may leave outdated prices on the blockchain order book that may be pick up by others.

Therefore, DeFi’s spreads are generally wider than CeFi’s.

Next, we’ll explore how these systems can change to provide a better experience for market makers and traders.

Market Makers - Narrowing Spreads through Conditional Liquidity

Things are changing. DFlow recently quietly launched Conditional Liquidity (CL) on Solana. As the name implies, conditional liquidity means that liquidity is only available when the order meets certain predefined conditions. In this article, the most critical condition is to distinguish between toxic and non-toxic order flow.

How does CL work?

CL stipulates that only orders that are approved by certain known front-end applications can obtain the specified liquidity. These applications include wallets (such as Phantom, Backpack, Solflare, and Fuse) and DApps (such as Drift, Kamino, Jupiter, and DFlows own front-end). This mechanism ensures that robots cannot obtain CL because their orders cannot be endorsed by the approving party. This is a huge improvement for market makers because even if their quotes are delayed by a few seconds, it is almost guaranteed that they will not be picked up.

While CL is a new concept in terms of mechanics, it is directly inspired by widely adopted practices in traditional finance (TradFi). Robinhood is a pioneer in this regard. The prices that Robinhood provides to its customers are generally better than the National Best Bid and Offer (NBBO) on the New York Stock Exchange (NYSE) and NASDAQ. They have demonstrated this price improvement in trillions of dollars of transactions over the past decade. This is because market makers have statistically good reasons to believe that Robinhood users are, on average, more harmless than institutional users who trade directly on the NYSE or NASDAQ. Simply put, who would you rather trade with? Joe, a white user watching YouTube videos, or a top institution like Citadel?

CL allows market makers to avoid having to deal with institutional counterparties like Citadel.

For more background on how Order Flow Segmentation can lead to better prices for retail traders, read this .

DFlow’s CL combines the strengths of TradFi and the crypto industry:

• It offers tighter spreads to retail traders like Robinhood users;

• It also has the real-time nature of blockchain, permissionless access, and public auditability.

CL is still in its early stages, but we expect it to become the mainstream mode of on-chain liquidity quotation in the next few years, because market makers do not like to be picked up due to delayed quotation. The essence of market making is to quote based on as much information as possible. Whether it is passive or active market makers, there is no reason to refuse to use more information (i.e. conditional liquidity) to optimize pricing.

Currently, DFlow’s CL implementation on Solana is fully open source and free of any fees or taxes. GitHub repository .

CL is one of the most important functional improvements in the DeFi field since Uniswap launched the x*y=k automated market maker (AMM) at the end of 2018. As CL becomes more popular, it will redefine many aspects of the DeFi field, such as user experience (UX), spreads, and maximum extractable value (MEV).

It’s worth reiterating that CL will help market makers provide tighter spreads to regular users. We expect this to be beneficial to market makers, users, SOL, and the Solana ecosystem.

Undertaker - Obtaining excess returns (Alpha) by reducing delays

The nature of financial markets is to incorporate all publicly available information into asset prices. While they are generally able to do this, for most assets, price discovery typically occurs on one specific server, while the information that influences prices is spread across the globe.

In traditional finance (TradFi), market microstructure is designed around low-latency traders whose servers are co-located with the exchange’s matching engine.

For example, if you are a retail trader and observe an event in Singapore that could affect the price of TSLA, you still need to send the message to New Jersey, USA, which happens to be near the market makers. This is obviously unfair to the takers and too generous to the market makers.

From a basic principle, the optimal solution is that market participants who observe the information should be able to place orders based on the new information with the nearest validator, rather than with a validator far away in New Jersey. These participants should receive excess returns (Alpha) for being the first to observe the information and submitting orders to the global order book the fastest.

Currently, Solana, like other major blockchains, has only one network leader at any given time. But this is about to change, as Solana is moving towards Multiple Concurrent Leaders (MCL).

In the MCL model, there will not be just one leader at any given moment, but dozens. Through MCL, participants who observe information in the real world can 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 nanoseconds, but to empower information holders around the world to update prices by pushing price discovery to the “edge”.

Decentralized price discovery is by definition superior to centralized price discovery. After all, the world is a big and diverse place.

Horizontally expand the total available market (TAM)…

Most major exchanges around the world, such as the London Stock Exchange, Chicago Mercantile Exchange, and Tokyo Stock Exchange, typically trade only one type of asset (such as stocks or commodities). But blockchain reveals the reality that all units of value - whether it is currency, commodities, stocks, derivative positions, debt obligations, meme coins, governance tokens, utility tokens, NFTs, etc. - can be represented in the form of standardized tokens on a permissionless blockchain.

Most of the assets currently traded on the blockchain are on-chain native assets, that is, those assets created and issued directly on the chain, including DeFi tokens, DePIN tokens, NFTs, etc. But now more and more assets are being issued on the chain, and these assets represent traditional financial (TradFi) assets, including US stocks, bonds, real estate, US Treasuries, mezzanine debt, etc.

Almost all assets will eventually be traded on global and permissionless systems like Solana. This doesn’t mean people will completely stop trading on the NYSE, NASDAQ, and CME, but more and more trading volume will move from traditional financial platforms to on-chain trading. This is a natural trend because blockchains are inherently global, permissionless, run 24/7, and are easier for retail traders to access and easier for developers to integrate.

It is very simple to integrate a private key and a token in any application, whether it is a Telegram bot, a lightweight Android app or a WeChat applet. In contrast, it is much more complicated to connect to the multiple heterogeneous systems representing the traditional financial system around the world. Their APIs are more complex, settlement times are slow and inconsistent, and in many cases, traditional financial institutions do not even directly face retail traders.

Due to the public and permissionless nature of blockchain, it significantly increases participation in all forms of financial markets. Ultimately, asset issuers don’t care on which rails their assets are traded, they just want to ensure that anyone who wants to buy their assets can do so. Today, most CEOs don’t believe that issuing shares natively on-chain can increase their potential shareholder base, but this perception will change in the coming years as global cryptocurrency holdings grow from an estimated 500 million to billions.

Not only do we believe that crypto will underpin all traditional financial assets, we also anticipate that it will underpin many new types of assets that couldn’t exist before. One of the most interesting examples is Parcl, which offers a perpetual contract for the average price per square foot of real estate transactions that have closed in a market over a rolling 30-day period. With Parcl, you can go “long” the Austin real estate market and “short” the San Francisco market, and use the equity value of each position as collateral for the other!

There are even teams developing products that put individual bottles of whiskey, wine, and watches on the chain in the form of NFTs!

Solana’s total available market is expanding in all directions. Wall Street is slowly migrating on-chain, and developers are building all kinds of new financial markets on-chain.

…and capturing value through innovation across the technology stack

So far, this article has discussed Solana’s role as a matching engine. But through DeFi protocols (such as Drift, Jupiter, Kamino, marginfi, etc.), the Solana ecosystem can provide:

• All imaginable financial services

• For everyone around the world

• Significantly reduce the potential for chain risk with greater transparency and auditability

• And it has higher capital efficiency than traditional finance.

Today, the largest DeFi primitives on Solana include: 1) spot trading, 2) lending, and 3) perpetual contract trading. These roughly correspond to: 1) NYSE/NASDAQ, 2) large banks and futures commission merchants (FCMs) that provide consumer and institutional lending services, and 3) Chicago Mercantile Exchange (CME). And these are just services for the US market. Solana aims to provide financial services to the world.

Although many Solana supporters, including Solana Labs co-founder and CEO Anatoly and myself, compare Solana to a decentralized Nasdaq, the total available market (TAM) of Solana and its ecosystem is much larger than Nasdaq. Solana aims to power all financial services around the world, which goes beyond the scope of a matching engine.

What’s amazing about Solana is that all of these different financial instruments can be combined with each other natively and atomically, without explicit authorization or support from application developers. This concept of leveraging existing smart contracts as Lego blocks to build more useful services is known in the industry as composability. This feature enables developers to quickly experiment and grow based on a set of existing contracts, integrations, and liquidity, all of which creates value for stakeholders in the Solana ecosystem in a virtuous cycle. This means that products built on Solana can innovate faster and provide a better user experience.

Solana itself does not directly provide financial services. However, Solana has built a technology stack that supports hundreds and will soon reach thousands of financial services that facilitate trillions of dollars of risk transfer each year. And even though Solanas gas fees are almost zero and still falling, Solana can still directly benefit from the growth of these financial services through Maximum Extractable Value (MEV).

As my partner Tushar discussed at the 2022 and 2024 Multicoin Summits, 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. Already, a single application has generated over $100 million in MEV for Solana, in addition to the specific revenues of their respective applications. And we’re just getting started.

In the fourth quarter of 2024, Solana network revenue (excluding SOL inflation) exceeded $800 million, or about $3.2 billion on an annualized basis. A year ago, this figure was almost zero. This was achieved when there were almost no traditional financial assets issued on Solana and the major DeFi protocols were still in their early stages, with most protocols less than two years old.

Solana’s Total Available Market (TAM) is growing in three dimensions:

• DeFi protocols continue to mature, and new features create more MEV opportunities.

• Entrepreneurs are building entirely new financial markets (such as computing, communications, energy markets, and BECMs) natively on-chain.

• More and more assets are being issued on-chain, ranging from meme coins to US stocks.

Not only do these expand Solana’s total available market, they also reinforce each other. For example, more asset issuance means more assets that can be used as collateral, thus supporting more lending activity.

Solana is compounding growth at an increasingly rapid pace.

Internet Capital Market

The Solana ecosystem is advancing in all aspects and is committed to realizing the vision of the Internet capital market. Solana not only improves execution efficiency for market makers through conditional liquidity optimization, but also improves the execution experience of traders through multiple concurrent leaders. In addition, the Solana ecosystem is expanding horizontally - supporting a wider range of traditional financial and crypto-native assets; it is also expanding vertically - capturing some MEV from many financial services built on Solana.

This presents a huge opportunity to build a global, permissionless financial system:

• Allowing those with information advantages to capture excess returns across asset classes;

• Trade with the smallest bid-ask spread;

• Operate at the lowest cost;

• Leverage globalization and achieve real-time transparency and auditability;

• Maximize capital efficiency through atomic composability across positions and protocols.

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