VanEck’s proposed spot Solana (SOL) exchange-traded fund (ETF) is facing scrutiny as a result of concerns over wash trading and the character of on-chain activity. Matthew Sigel, Head of Digital Assets Research at VanEck, published an in-depth evaluation on Tuesday, comparing SOL’s metrics with those of Ethereum to offer context and clarity.

Solana has been recognized for its high throughput and low transaction costs, attracting a big variety of users and developers. With roughly 111 million monthly lively wallets, it vastly surpasses Ethereum’s 5.4 million. Nonetheless, skeptics argue that a big portion of those wallets could also be Sybil accounts—fake identities created to govern metrics.

Does Solana Have A Wash Trading Problem?

In his evaluation, Sigel acknowledges the challenge in distinguishing between organic user activity and that stemming from single users controlling multiple wallets. “We do agree that a really large portion of those wallets should not organic,” he states.

The evaluation reveals that memecoin and non-fungible token (NFT) activities constitute a good portion of Solana’s revenue. Roughly 34.3% of Solana’s revenues are derived from these sources, in comparison with 6.6% for Ethereum in the present yr and 20.3% for Ethereum during its peak memecoin activity between July and October 2021.

When assessing wash trading—a practice where traders buy and sell the identical asset to artificially inflate volumes—Solana’s figures are notably higher. An estimated 41.4% of memecoin and NFT volume on Solana is attributed to clean trading. In contrast, Ethereum’s wash trading for these assets stands at 28.9% in 2024 and was 44.4% during its 2021 peak.

“Putting it together, we assess that 14.2% of Solana revenues come directly from wash trading in comparison with 2% for Ethereum in 2024 and 9% in mid-2021,” Sigel notes. He adds a vital caveat: the evaluation assumes that memecoin wash trading generates miner extractable value (MEV) according to normal trading. Without MEV on these trades, the estimates would fall by 50%.

To conduct this evaluation, the study utilized Dune Analytics queries of each Solana and Ethereum blockchains to build up memecoin and NFT activity over specified periods. MEV and transaction fee data were sourced from Artemis, Jito, and Flashbots to judge each chain’s gas fee revenue and MEV. For wash trading identification, the evaluation employed a threshold ratio of day by day trading volume to a coin’s market capitalization.

Several reasons are cited by Sigel for the elevated levels of memecoin trading and wash trading on Solana. First, SOL’s transaction fees are roughly 1/10,000th of Ethereum’s, reducing the chance cost of wash trading. Second, the architecture offers a superior user experience for memecoin trading as a result of its high throughput and low latency.

Third, platforms like Pump.fun simplify memecoin trading, encouraging higher activity levels. Fourth, the approach to MEV may inadvertently inflate trading volumes. “Solana’s MEV trading is driven by statistics-driven assessments of landing a transaction through submitting many orders for a similar trade. A few of these likely land without capturing MEV, and this will juice trading figures higher than on Ethereum,” Sigel explained.

What Does That Mean For A Spot SOL ETF?

Sigel draws crucial comparisons between SOL and established firms like Alibaba, DraftKings, and CME Group to offer perspective on speculative trading activities. In Alibaba’s case, there was initial skepticism about package volumes which will have included ’empty packages’ to spice up metrics prior to its 2014 IPO. DraftKings and CME Group derive substantial revenue from speculative trading, often providing incentives like reduced fees or rebates to stimulate activity.

In contrast, Solana doesn’t incentivize users in the identical manner. Its high activity levels are attributed to its low-cost, high-throughput design. “Solana’s on-chain activity is concentrated mainly in memecoins, making it a hub for speculative assets within the crypto world,” Sigel notes. Nonetheless, he emphasizes that Solana has the potential to expand beyond speculation into impactful use cases akin to decentralized physical infrastructure networks (DePIN) and social media applications.

While memecoins significantly contribute to the present revenue, its valuation—roughly 250 times forward revenue—reflects investor expectations for future growth in non-speculative applications.

Notably, the evaluation has direct implications for VanEck’s proposed spot SOL ETF in america. The US Securities and Exchange Commission (SEC) has “identified possible sources of fraud and manipulation within the SOL market generally, including, amongst others, wash trading.”

On condition that a considerable portion of revenues could also be derived from suspicious trading activities, VanEck has included significant risk disclosures in its prospectus. “The evaluation of Solana’s revenue sources is significant since it brings to light concerns about our proposed SOL ETP,” Sigel states. “Since there may be reason to consider a good portion of SOL’s revenues are derived from suspicious trading, our ETF prospectus includes significant risk disclosures.”

Nonetheless, Sigel also expressed optimism about SOL’s future: “We consider this high amount of activity derives from Solana’s high-quality user experience and can develop into a less necessary a part of Solana’s revenue base as recent activity involves Solana. Ethereum’s transformation needs to be a guiding light for the way Solana’s DEX volumes can mature over time to trading fewer meme-related assets.”

At press time, SOL traded at $161.

Featured image from Shutterstock, chart from TradingView.com