Solana (SOL) had a great July, culminating in a significant price increase compared to early 2024. However, some critics warn that the network's reliance on memecoins could be a potential red flag.
The appeal of Solana: a rising Ethereum killer?
Solana is a blockchain platform focused on enabling decentralized application development (dApp) and cryptocurrency transactions. It is distinguished by its unique Proof-of-History (PoH) system, which, combined with a Proof-of-Stake (PoS) mechanism, provides a secure and efficient way to record transaction timestamps, allowing Solana to process up to 65,000 transactions. This high performance is supported by advanced technologies such as GPU processing and concurrent processing, making Solana highly scalable.
SOL, is used for transaction and wagering fees, with an inflation model that starts at an 8% annual rate, decreasing to a long-term rate of 1.5%. Solana's NFT ecosystem is robust, with low transaction costs and high speed, attracting artists and collectors.
This functionality places Solana as a rival to Ethereum (ETH), although the latter still holds its place as the second largest cryptocurrency by market capitalization. However, as the blockchain technology ecosystem matures, enthusiasts point to Solana's optimizations and scalability as proof that it will eclipse Ethereum in the long run.
SOL's impressive price movement in July raises some major concerns. Between July 25 and 29, the Solana SOL rose by an impressive 16%, reaching a peak of $193.92, the highest level reached in four months. However, this upward move met resistance at the $190 mark, which led to a subsequent decline of 8%, settling the price at around $182 at the time of writing on July 31.Despite this retreat, SOL managed to gain 23.5% in July. However, there are concerns that this correction could mark a local high for Solana, with critics pointing to the proliferation of meme coins on the Solana network.
Evaluating the factors behind the SOL surge: ETFs and others. To understand whether the recent run-up in prices is sustainable, it is important to consider whether the gains were driven by fundamental factors or simply market noise.Forces influencing Solana's current trajectory include:
Spotting ETF on Solana.In particularThe anticipation surrounding Solana's potential spot exchange-traded fund (ETF) following the approval of the Ether ETF in the U.S. has raised optimism, as has the role of the Solana network in fueling a new wave of meme coins, some of which have had breakout success.According to the U.S. Securities and Exchange Commission (SEC), a final decision on the SOL ETF is expected by March 2025. While some investors remain skeptical, others, like asset manager Franklin Templeton, express confidence in Solana's long-term prospects, citing strong adoption and overcoming technical challenges.
Growing trade volume. Solana's trading volume has been consistently high, staying within a certain range and even exceeding $2 billion on several occasions. As of the last update, the trading volume was approximately $1.6 billion. This spike in activity is largely due to the growing popularity of meme coins on the Solana network, which has attracted the interest of many traders.
Speculation with Memecoin. Memecoins also played a significant role in stimulating Solana network activity. Platforms such as Pump.fun, which facilitate the launch of tradable tokens with features such as automated market creation and incentivised burns, generate significant volume. For example, Pump.fun alone amassed $25.8 million in fees over the past 30 days, surpassing the fees earned by bitcoin miners over the same period. The platform also saw a significant number of unique active addresses, indicating robust user engagement.In recent days, Solana saw a significant increase in network activity and trading volume, accompanied by a positive trend in Total Value Locked (TVL), reaching a peak of $5.6 billion.
Increased TVL
The increased trading volume coincided with the rise in Solana's TVL. According to DeFiLlama, Solana's TVL peaked at over $5.6 billion on July 29, the highest level since October 2022. Although TVL has declined slightly to around $5.5 billion, these numbers reflect the strong engagement and liquidity in Solana's ecosystem.
Does Solana's growth depend too much on memecoins? Although memecoins have contributed to Solana's recent success, some investors are wary of the network's reliance on these high-risk assets. Critics argue that this focus detracts from more stable projects on the network, such as SPL tokens like Jupiter (JUP), Lido DAO (LDO), Helium (HNT), and Raydium (RAY), which demonstrate the network's technological capabilities.The rush of trading volume, particularly led by the memecoin craze, has sparked debate over the stability and long-term price prospects of Solana. While the increased activity suggests a lively trading environment, it also raises questions about the sustainability of such trends and their impact on SOL price stability.Additionally, the issue of Solana's maximum extraction value (MEV), where validators can use their power to reorder or exclude transactions, has been highlighted as a potential vulnerability exacerbated by the lack of an embedded mempool.
What's next for Solana?
Although some research suggests that Solana's performance may be inflated due to high volatility of the meme coins, the network continues to offer significant potential. However, the uncertainty surrounding its future growth and the challenges it faces may cause traders to reevaluate their positions.One factor that could significantly impact the price of SOL will be the SEC's ongoing efforts to regulate the crypto industry and certain cryptocurrencies. On July 30, the SEC withdrew its request for a court ruling on whether certain tokens, including Solana, are securities as part of an ongoing lawsuit. However, many legal and financial experts have cautioned that this change does not necessarily mean a change in the SEC's opinion.The regulator informed the court that it will no longer seek a ruling on the security status of these tokens as part of this particular case. This decision appears to be more of a strategic move for litigation than a fundamental change in the SEC's stance.However, the crypto community took the news as a positive sign for Solana and its value. Traders interested in Solana in the short term should keep abreast of the SEC's actions, similar to how each new chapter in the regulator's case against Ripple (XRP) affects the price of that token.