VanEck's Solana ETF Filing: A Deep Dive with Matthew Sigel

In a recent episode of Lightspeed, Matthew Sigel, Head of Digital Assets Research at VanEck, joined hosts Mert and Jack to discuss VanEck's recent filing for a Solana ETF and share insights on the broader cryptocurrency landscape. The conversation covered a wide range of topics, from the potential approval of a Solana ETF to the future of blockchain technology in finance.

The Genesis of VanEck's Solana ETF Filing

VanEck's decision to file for a Solana ETF comes on the heels of the approval of Ethereum ETFs by the SEC in May. This move raised questions about which cryptocurrency would be next in line for an ETF. Solana emerged as a strong contender due to growing interest in its ecosystem and significant price appreciation since the lows of 2022.

Matthew Sigel explained VanEck's rationale for choosing Solana: "For Solana, we've been on paper for three years now as being bullish on the project, seeing a lot of upside. And when the regulator approved the ETH ETFs, that really blessed ETH the asset as a commodity. And we've been observing considerable momentum in the decentralization of Sol over the last couple of years."

The Case for Solana

VanEck's bullish stance on Solana is rooted in the blockchain's performance. Sigel emphasized, "It's the fastest, cheapest, decentralized database project that we can find." He pointed out that the market is acknowledging Solana's capabilities by choosing it to launch hundreds of thousands of new assets.

The vision for Solana extends beyond its current capabilities. Sigel noted, "If you look across which project has the capacity to run a decentralized NASDAQ on chain someday, years in the future maybe, but for us, that's Sol." This long-term potential is a key factor in VanEck's investment thesis for Solana.

Gauging Customer Demand for Spot Crypto ETFs

While Bitcoin ETFs saw significant inflows upon launch, Ethereum ETFs have experienced more modest demand. This raises questions about the potential appetite for a Solana ETF. Sigel addressed this concern by highlighting VanEck's existing Solana ETF in Europe, which currently holds about $70 million in assets.

However, Sigel cautioned against overly optimistic projections, stating, "I don't want to be just too optimistic here and say it's going to get done right away and there's going to be a billion dollars in it. There's a number of steps that have to get through."

The Regulatory Landscape

The path to approval for a Solana ETF in the United States faces significant regulatory hurdles. Sigel noted the potential challenges ahead, particularly in light of the current administration's stance on digital assets. He remarked, "Given the current state of the organization, it could take a while to get them out."

Despite these challenges, VanEck sees value in laying the groundwork for these products. Sigel explained, "You have to be in the game to win the game. So putting down our arguments in paper and then either winning them in a lawsuit or because the regulator chair turns over or because the president turns over, all of these are possible."

The ETF's Impact on the Solana Network

The introduction of a Solana ETF could have significant implications for the network. Sigel described it as "a tradfi L2" that expands the available market by reaching investors who are interested in the asset but require the security of a third-party custodian to hold the keys.

Drawing parallels with the Bitcoin ETF experience, Sigel noted, "After the first quarter, hedge funds owned twice as much Bitcoin ETFs as investment advisors, despite managing like 5% of the assets." This suggests that hedge funds may be front-running investment advisors in anticipation of broader adoption.

Valuing Layer 1 Blockchains

Assessing the value of Layer 1 blockchains like Solana presents unique challenges. VanEck's approach focuses on fees and potential market share. Sigel explained, "We think that the asset class is going to grow dramatically over time, but that one of these L1s is likely to take 80% market share over the long run."

Their valuation model considers factors such as the penetration rate of open-source blockchains in the financial world, potential market share, fee structures, and current earnings. Sigel added, "We basically just try to do a discounted cash flow of what that fee income could be worth in five to seven years."

Solana's Strengths and Areas for Improvement

While bullish on Solana, Sigel acknowledged several areas where the blockchain could improve. These include:

1. High reliance on MEV (Maximal Extractable Value)
2. Issues with spam and chain congestion
3. Suboptimal block explorers
4. Complex consensus design
5. Challenging developer experience

Despite these challenges, Sigel remains optimistic about Solana's potential. He highlighted the blockchain's commitment to innovation, stating, "We love the idea that with Solana, the devs are incentivized to build something that leverages how the chips are gonna be in three years, in five years. It assumes this continual improvement."

The Future of Finance on Blockchain

The conversation touched on the ambitious goal of running a NASDAQ-like exchange on blockchain technology. While Sigel believes it's technically possible, he acknowledged significant regulatory hurdles. "Obviously, actually the answer to that is no right now because you can't even use USDC on Solana in New York state," he noted.

However, Sigel remains optimistic about the long-term potential. He drew parallels with past technological innovations, such as Qualcomm's early work on location-based services, suggesting that Solana's approach could represent "round two for the original Qualcomm vision to get executed."

Decentralized Finance vs. Real-World Applications

When asked about the potential of decentralized finance (DeFi) applications versus real-world use cases on Solana, Sigel expressed more immediate interest in projects like Helium and Hivemapper. He noted, "Over the next year, I think the Deepend story will probably resonate more strongly because of the regulatory hurdles to getting NASDAQ on chain."

Sigel highlighted the growth of these projects, with Helium surpassing 100,000 subscribers and Hivemapper mapping 15% of the world's mappable kilometers. He believes the low transaction costs on Solana will continue to benefit these networks.

Solana's Unique Positioning

Sigel outlined several factors that set Solana apart in the blockchain space:

1. Consumer-focused development: "We're going to build for the consumer."
2. Clear vision led by a brilliant founder: "Anatoly is open-minded and has a clear vision for this project."
3. A community driven by practitioners: "Lots of them have practical experience creating things that utilizes the chain's high performance."
4. Commitment to innovation: "We love the vision that you're supposed to write code for how the chips are going to be in five years, not for how they're going to be now."

The Path to Mainstream Adoption

Looking ahead, Sigel believes the key to Solana's success lies in its ability to onboard a significant user base. He stated, "It's going to come down to that, to which app can onboard 50 million people." While acknowledging that Bitcoin remains the only "killer app" in crypto for now, Sigel sees potential in stablecoins and merchant adoption of blockchain technology.

The introduction of a Solana ETF could play a crucial role in bringing the blockchain to a broader audience. By providing a familiar investment vehicle for traditional finance participants, it could bridge the gap between the crypto ecosystem and mainstream investors.

As the regulatory landscape evolves and blockchain technology continues to mature, the potential for Solana to capture a significant share of the financial market remains a compelling proposition. VanEck's ETF filing represents a step towards realizing this potential, offering investors a new way to gain exposure to one of the most promising blockchain networks in the space.

In conclusion, while challenges remain, the future looks bright for Solana. With its focus on performance, scalability, and real-world applications, Solana is well-positioned to play a significant role in the future of finance and blockchain technology. As Matthew Sigel and the team at VanEck continue to champion the project, the crypto community will be watching closely to see how Solana's story unfolds in the coming years.

Facts + Figures

• VanEck filed for a Solana ETF following the approval of Ethereum ETFs by the SEC in May 2024.
• VanEck already has a Solana ETF trading in Europe with approximately $70 million in assets.
• Hedge funds owned twice as much Bitcoin ETFs as investment advisors after the first quarter, despite managing only about 5% of the assets.
• Solana's MEV averages about 0.2% per transaction.
• In March and April, Solana experienced 70% transaction failure rates due to network congestion.
• Helium, a project built on Solana, has over 100,000 subscribers.
• Hivemapper, another Solana-based project, has mapped 15% of the world's mappable kilometers.
• More than 80% of transactions on Solana are paying tips and priority fees.
• VanEck's base case for Solana initially estimated a 30% market share, which has since been adjusted to 70%.
• VanEck has 22 different digital asset strategies, including both passive ETFs and active management approaches.
• Solana's MEV portion accounts for more than half of its fee income, compared to about 30% for Ethereum.
• Solana's MEV is estimated at about $200 million year-to-date, annualizing to approximately $400 million.
• The staking rate for Solana is roughly 5.5%, with MEV changing the staking yield by about 10 basis points.
• On August 10th, 17,000 tokens were launched on Solana, with only 175 making it onto Raydium pools and 19 achieving a market cap of $69,000 or more.

Questions Answered

Why did VanEck file for a Solana ETF?

VanEck filed for a Solana ETF due to their long-standing bullish stance on the project and the observed momentum in Solana's decentralization over the past couple of years. The approval of Ethereum ETFs by the SEC also paved the way for considering other cryptocurrencies as commodities, making Solana a strong candidate for the next ETF filing.

What makes Solana attractive as an investment?

Solana is attractive as an investment due to its high-performance capabilities, being the fastest and cheapest decentralized database project according to VanEck's research. The blockchain's ability to handle a large number of transactions and its potential to run complex financial systems like a decentralized NASDAQ in the future make it a compelling investment opportunity.

How does VanEck value Layer 1 blockchains like Solana?

VanEck values Layer 1 blockchains by considering their potential market share, fee structures, and current earnings. They use a discounted cash flow model to estimate the future value of fee income, typically looking 5-7 years ahead. They also consider factors like inflation rates and staking rewards, with a focus on assets that produce a positive real yield where staking rewards exceed the inflation rate.

What are the main challenges Solana faces?

Solana faces several challenges, including high reliance on MEV (Maximal Extractable Value), issues with spam and chain congestion, suboptimal block explorers, a complex consensus design that few fully understand, and a challenging developer experience. Addressing these issues will be crucial for Solana's continued growth and adoption.

What is the potential impact of a Solana ETF on the network?

A Solana ETF could significantly expand the available market for the cryptocurrency by providing access to traditional investors who are interested in the asset but require the security of a third-party custodian. It could lead to increased adoption and potentially drive up demand for Solana, similar to how Bitcoin ETFs have attracted significant investment from hedge funds and institutional investors.

How does Solana compare to Ethereum in terms of MEV and fees?

Solana's MEV (Maximal Extractable Value) accounts for a larger portion of its fee income compared to Ethereum. While this provides more incentives for validators and can lead to tighter markets, it also attracts criticism. Solana's MEV averages about 0.2% per transaction, and it represents more than half of Solana's fee income, compared to about 30% for Ethereum.

What is VanEck's outlook on Solana's future market share?

VanEck has adjusted its base case for Solana's market share from an initial estimate of 30% to a more optimistic 70%. This adjustment reflects the strong fundamental momentum observed in the Solana ecosystem and its growing adoption for various applications.

What will determine Solana's success in the long term?

According to Matthew Sigel, Solana's long-term success will largely depend on its ability to onboard a significant user base, potentially 50 million or more users. The development of killer applications, particularly in areas like stablecoins and merchant adoption of blockchain technology, will be crucial for achieving this level of mainstream adoption.