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

Title: The Solana Thesis: Internet Capital Markets

Author: Kyle Samani

Translated by: Odaily

In this article, Multicoin Capital discusses how Solana can lead the future internet capital markets and analyzes its advantages over traditional financial markets. Through its efficient blockchain performance, Solana can reduce costs in the payments sector and provide users with a better experience. Compared to traditional payment systems, Solana's transaction fees are almost zero and it can handle higher transaction frequencies.

Additionally, Solana offers more efficient market pricing in DeFi, reducing spreads through Conditional Liquidity (CL) to improve trading efficiency and attract more users. Solana also plans to enhance price discovery speed and optimize global market liquidity through Multi-Concurrent Leaders (MCL).

The following is the original content translated by Odaily.

Multicoin Capital has been investing in Solana's native asset SOL and its ecosystem since Solana's seed round funding in May 2018. During this period, we have published four investment theses on Solana. The first two were published nine months before Solana's mainnet launch in March 2020. As the Solana network has evolved, our understanding of the Solana network and the SOL asset has also been constantly evolving.

Today, Solana has become a $100 billion asset with the fastest-growing developer ecosystem and has surpassed Ethereum on most major chain metrics such as transaction volume, daily active addresses, REV, TEV, and DePIN payments. In this context, we would like to share our investment rationale for why SOL can still deliver strong returns even after reaching a market capitalization of over $100 billion.

This article is the fifth in our series of investment theses on Solana. The previous four include:

• The Separation of Time and State

• The World Computer Should be Logically Centralized

• Technical Scalability Creates Social Scalability

• The Hidden Costs of Modular Systems

In this article, I will argue that Solana is the preferred public blockchain to lead the internet capital markets. Furthermore, I will posit that Solana, as a technology, can outperform the core performance metrics (such as latency) of the major participants in traditional finance (TradFi) - including the New York Stock Exchange (NYSE), NASDAQ, the Chicago Mercantile Exchange (CME), JPMorgan Chase, Goldman Sachs, and Morgan Stanley, as well as payment giants like Visa and Mastercard. At the same time, Solana can retain the core blockchain properties that traditional finance cannot provide: atomic composability and permissionless access for users, developers, and validators.

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

• Reduce end-user financial service fees by 90% -99%;

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

Traditional financial giants like the NYSE and NASDAQ only provide a small portion of the value stack in financial services, while Solana, through the mature DeFi protocols running on its blockchain, offers the superset functionality of these systems. Solana not only expands the total addressable market (TAM) of transactions by enhancing accessibility and performance, but also captures value from more layers of the financial services stack.

Overall, all financial services can be divided into two broad categories: payments and finance. In this article, I will start by explaining why payments are a loss-leading acquisition tool for blockchains; the main part will then focus on the infrastructure driving the core of Wall Street finance.

Providing the Best Global Payments Experience

There are many ways to transfer and make payments currently. Apple Pay has an excellent user experience (UX). Using physical credit cards is also convenient. Using Venmo, PayPal, or Square Cash is not bad. Other methods, such as ACH, bank wires, Zelle, bill pay, and remittances, are mediocre or even poor.

While some traditional payment methods have 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, the cost of simply updating the ledger record is so high that it defies common sense and directly contradicts the intuition that electronic transactions should be cheaper than traditional methods.

Solana makes payments extremely simple, with an excellent user experience, and at almost zero cost. Just look at the video made by Sling Money, built exclusively on Solana, which is the future of money movement.

The total market capitalization of global payment companies is around $1.4 trillion, and Solana's goal is to reduce this by 90%. The only cost Solana imposes on users is the Gas fee, which is about $0.001 per transaction, or 0.001 cents. Even if the Solana network processes 50,000 transactions per second on average throughout the year, the total cost to users would only be $150 million. In comparison, Visa currently processes only thousands of transactions per second.

Payments are a loss-leading acquisition tool for blockchains. While payments are crucial for driving adoption and provide real utility for users and businesses, they are not the primary revenue source for blockchains or their ecosystems.

However, payments are critical for the development of blockchains. The beauty of payments is their inherent virality. When Alice sends funds to Bob, and Bob then transfers the funds to Carol, it naturally drives wallet adoption and usage.

The primary revenue source for blockchains is not payments (which is almost negligible), but rather the profits from the natural price fluctuations between assets, manifested as Maximum Extractable Value (MEV). My co-founder Tushar elaborated on this in his 2022 Multicoin Summit talk.

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

Market Efficiency in CeFi and DeFi

Solana is a decentralized network composed 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 through the latency of transaction confirmations, but rather through the bid-ask spreads provided by market makers (MMs). Ultimately, what the buyer and seller experience is the price. For ordinary users (non-bots), the difference in transaction latency of 50 milliseconds, 100 milliseconds, and 200 milliseconds is not perceptible. For reference, the average blink of the human eye is 100-150 milliseconds.

In centralized finance (CeFi), market making is almost deterministic. Most market makers deploy servers near CeFi exchanges, with each market maker's fiber optic cable length being exactly the same, connecting their servers to the exchange. Exchanges complete transactions in microseconds, allowing market makers to know their risk exposure with extremely high real-time precision.

In contrast, decentralized finance (DeFi) exchanges (such as Drift, Phoenix, Clearpools, Raydium, and Orca) have far less determinism than CeFi exchanges, due to:

• The rotating leadership nodes on the Solana network;

• The increased transaction confirmation time required to reach consensus among validators globally.

Here is the English translation of the text, with the terms in <> retained and not translated: Therefore, market makers are unable to understand their risk exposure with the same real-time precision. In many cases, market makers may leave outdated prices on the blockchain order book, which may be "picked off" by others. As a result, the spreads in DeFi are generally wider than in CeFi. Next, we will explore how these systems are evolving to provide a better experience for market makers and traders. Market Makers - Narrowing Spreads Through Conditional Liquidity Things are changing. DFlow has recently quietly launched Conditional Liquidity (CL) on Solana. By definition, Conditional Liquidity means that liquidity is only available if the incoming order meets certain pre-defined conditions. The key condition in this case is to distinguish between harmful (toxic) and harmless (non-toxic) order flow. How does CL work? CL stipulates that only orders that have been endorsed by certain known front-end applications can access the designated liquidity. These applications include wallets (such as Phantom, Backpack, Solflare, and Fuse) and DApps (such as Drift, Kamino, Jupiter, and DFlow's own front-end). This mechanism ensures that bots cannot access CL, as their orders cannot obtain the "endorsement" of the "approvers". This is a huge improvement for market makers, as even if their quotes are delayed by a few seconds, they can almost be certain that they will not be "picked off". While CL is a new concept in mechanism, it is directly inspired by widely adopted practices in traditional finance (TradFi). Robinhood is a pioneer in this area. The prices Robinhood provides to its customers are typically better than the National Best Bid and Offer (NBBO) on the New York Stock Exchange (NYSE) and NASDAQ. Over the past decade, they have proven this price improvement in trillions of dollars of transactions. This is because market makers have good statistical reason to believe that the average Robinhood user is more "harmless" than the institutional traders who trade directly on the NYSE or NASDAQ. Simply put, who would you rather trade with? Joe, the casual YouTube viewer, or a top-tier institution like Citadel? CL allows market makers to avoid counterparties like Citadel. For more background on how order flow segmentation can bring better prices to retail traders, please read this. DFlow's CL combines the best of TradFi and the crypto industry: - It provides tighter spreads for retail traders like Robinhood users; - While retaining the real-time, permissionless access and public auditability of blockchain. CL is still in its early stages, but we expect it to become the mainstream model for on-chain liquidity provisioning in the coming years, as market makers dislike being "picked off" due to delayed quotes. The essence of market making is to price based on as much information as possible. Whether passive or active, market makers have no reason to reject optimizing pricing with more information (i.e., conditional liquidity). Currently, DFlow's CL implementation on Solana is fully open-source and charges no fees or commissions. GitHub repository. CL is one of the most significant functional improvements in the DeFi space since the introduction of the x*y=k Automated Market Maker (AMM) by Uniswap in late 2018. As CL becomes more widespread, it will redefine many aspects of the DeFi user experience (UX), spreads, Maximum Extractable Value (MEV), and more. It's worth reiterating that CL will help market makers provide tighter spreads for the average user. We expect this to be beneficial for market makers, users, , and the Solana ecosystem as a whole. Takers - Capturing Alpha by Reducing Latency The essence of financial markets is to incorporate all publicly available information into asset prices. While they generally succeed in doing so, for most assets, price discovery typically occurs at a specific server, while the information affecting the price is dispersed globally. In traditional finance (TradFi), the market microstructure is designed around low-latency traders, whose servers are co-located with the exchange's matching engines. For example, if you are a retail trader observing an event in Singapore that may affect the price of , you still need to send the message to New Jersey, USA, where the market makers are located. This is clearly unfair to the takers and overly generous to the market makers. From first principles, the optimal solution is for the market participants who observe the information to be able to place orders with the nearest validators based on the new information, rather than the validators far away in New Jersey. These participants should be rewarded with alpha for being the first to observe the information and submit the order to the global order book the fastest. Currently, Solana and other mainstream blockchains have a single 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 be dozens of leaders at any given time, not just one. With MCL, those participants who observe information in the real world can incorporate that information into asset pricing much faster. The key to optimizing price discovery is not to reduce the latency of a single matching engine to nanoseconds, but to empower information holders around the world to update prices by pushing price discovery to the "edge". Decentralized price discovery is inherently superior to centralized price discovery. After all, the world is a large and diverse place. Horizontally Expanding the Total Addressable Market (TAM)... Most major exchanges globally, such as the London Stock Exchange, Chicago Mercantile Exchange, and Tokyo Stock Exchange, typically only trade one asset class (e.g., stocks or commodities). But blockchains have revealed a reality where all units of value - whether currencies, commodities, equities, derivative positions, debt obligations, meme coins, governance tokens, utility tokens, , etc. - can be represented as standardized tokens on a permissionless blockchain. Currently, most of the assets traded on blockchains are on-chain native assets, i.e., those directly created and issued on the chain, including tokens, tokens, , etc. But increasingly, assets representing traditional finance (TradFi) assets, including US stocks, bonds, real estate, US Treasuries, mezzanine debt, etc., are being issued on-chain. Ultimately, almost all assets will be traded on globalized, permissionless systems like . This does not mean that trading on the New York Stock Exchange (NYSE), NASDAQ, and Chicago Mercantile Exchange (CME) will cease entirely, but an increasing volume of trading will shift from traditional finance platforms to on-chain trading. This is a natural trend, as blockchains are inherently globalized, permissionless, 24/7, more accessible to retail traders, and easier to integrate for developers. Integrating a private key and a token into any application is very simple, whether it's a Telegram bot, a lightweight Android app, or a WeChat mini-program. In contrast, interfacing with the heterogeneous systems representing the traditional financial system around the world is much more complex. 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 openness and permissionless nature of blockchains, it significantly increases participation in all forms of financial markets. Ultimately, asset issuers do not care on which rails their assets trade, they just want to ensure that anyone who wants to purchase their assets can do so. Today, most CEOs do not think that on-chain native stock issuance can increase their potential shareholder base, but as global crypto asset ownership grows from an estimated 500 million to billions in the coming years, this mindset will change.

We not only believe that cryptocurrencies will support all traditional financial assets, but we also expect them to support many new types of assets that were previously impossible to exist. One of the most interesting examples is Parcl, which provides perpetual contracts for the average price per square foot of real estate transactions completed in a rolling 30-day period for a given market. Through Parcl, you can "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 will put single-bottle whiskeys, wines, and watches on-chain through Non-Fungible Tokens!

Solana's Total Addressable Market is expanding in all directions. Wall Street is slowly migrating on-chain, and developers are building various new financial markets on-chain.

...and capture value through innovation in the technology stack

So far, the discussion has been about Solana's role as a matching engine. But through DeFi protocols like Drift, Jupiter, Kamino, marginfi, etc., the Solana ecosystem can provide:

• All imaginable financial services

• Accessible to everyone globally

• Significantly reduce the likelihood of chain risk with higher transparency and auditability

• And 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) the New York Stock Exchange/Nasdaq, 2) large banks providing consumer and institutional lending services as well as Futures Commission Merchants (FCMs), and 3) the Chicago Mercantile Exchange (CME). And these are just the services for the US market. Solana's goal is to provide financial services globally.

While many Solana supporters, including Solana Labs co-founder and CEO Anatoly and myself, have compared Solana to a decentralized Nasdaq, Solana and its ecosystem's Total Addressable Market (TAM) is far larger than Nasdaq's. Solana's goal is to support all global financial services, going beyond just a matching engine.

The amazing thing about Solana is that all these different financial instruments can natively and atomically compose with each other without needing explicit permission or support from the application developers. This concept of using existing smart contracts as Lego bricks to build more useful services is known in the industry as composability. This feature allows developers to experiment and grow quickly based on a set of existing contracts, integrations, and liquidity, all of which will create value for Solana ecosystem stakeholders in a virtuous cycle. This means Solana-based products can innovate faster and provide better user experiences.

Solana itself does not directly provide financial services. But Solana has built a technology stack that supports hundreds, and eventually thousands, of financial services that facilitate trillions of dollars in risk transfer annually. And while Solana's Gas fees are near-zero and still declining, Solana can 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, assets like Solana can be valued based on the MEV they capture. Each new financial service generates incremental MEV, and Solana can capture a portion of that. Today, individual applications have already generated over $100 million in MEV for Solana, in addition to their own application-specific revenues. And this is just the beginning.

In Q4 2024, Solana network revenue (excluding SOL inflation) will exceed $800 million, annualizing to around $3.2 billion. A year ago, this number was almost zero. This is achieved with virtually no traditional financial assets issued on Solana, and most DeFi protocols still in their early stages, with most being less than two years old.

Solana's Total Addressable Market (TAM) is growing along three dimensions:

• DeFi protocols maturing and adding new features to create more MEV opportunities.

• Entrepreneurs natively building entirely new financial markets on-chain (e.g., computation, communication, energy markets, and BECMs).

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

Not only do these expand Solana's total addressable market, but they also reinforce each other. For example, more asset issuance means more collateral to support more lending activity.

Solana is achieving compounding growth at an accelerating pace.

The Internet Capital Market

The Solana ecosystem is pushing forward, aiming to realize the vision of the Internet Capital Market. Solana not only enhances execution efficiency for market makers through conditional liquidity optimization, but also improves the trading experience for traders through Multiple Concurrent Leaders. Moreover, the Solana ecosystem is expanding horizontally - supporting a broader range of traditional finance and crypto-native assets; and vertically - capturing a portion of the MEV from the many financial services built on Solana.

This presents a tremendous opportunity to build a globalized, permissionless financial system:

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

• Trading with the tightest bid-ask spreads;

• Operating at the lowest fees;

• Leveraging global scale, with real-time transparency and auditability;

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

This is the vision of the Internet Capital Market, and it is Solana's vision.