Solana Is Beating Ethereum in Tokenized Assets. That Might Not Make It the Better Buy.
Key Points
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Solana has been experiencing large capital inflows while Ethereum has been experiencing outflows.
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Those differing results may or may not predict the performance of the coins.
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Solana’s winning streak of big inflows is likely to continue either way.
- 10 stocks we like better than Solana ›
Over the 30-day period ending on Aug. 19, the sum of tokenized real-world assets (RWAs) on Solana (CRYPTO: SOL) saw $263 million in capital inflows, while the same category on Ethereum (CRYPTO: ETH) saw outflows of $337 million. Since tokenization is the process of representing an asset like a stock or bond as a crypto token, those flows indicate that real value is moving across blockchains.
There’s a $600 million swing between Solana’s inflows and Ethereum’s outflows. I’m not saying that investors moved their assets directly from one blockchain to another, but the opposite trends are real.
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Given Ethereum’s position as the incumbent champion in the tokenized asset space, Solana’s strong performance is a clear victory for it as a challenger. I predict that the chain will continue to one-up Ethereum in tokenized assets moving forward, especially in two key segments. Here’s why.
Image source: Getty Images.
To the victor go the spoils?
As of Aug. 19, Ethereum has $17.2 billion in tradeable tokenized assets on its chain, whereas Solana has $3.8 billion.
Solana’s base grew by 10.6% over the 30-day period ending Aug. 19, whereas Ethereum’s only rose 1.3%. Those totals can climb even when flows are negative, since a chain’s value also reflects yield and price changes in the assets it already hosts. So despite being a much smaller network in terms of its market cap and its base of tokenized assets, Solana grew much faster.
Tokenized stocks and bonds, particularly Treasury bonds, are where the chain’s fast transaction speeds and low transaction costs make Solana shine the most.
Its base of tokenized Treasuries grew by 16.1% over the last 30 days alone, reaching $1.2 billion. Growth at that clip is not realistic for the segment’s far bigger incumbents. Treasuries are a critical asset for chain economies, as they’re cash-equivalent assets that institutional investors hold and transact with in vast volumes.
Without an ample supply available on a given network, those institutions can’t work in the size they prefer, so it discourages them from managing their assets there. This also contributes to the capital-begets-more-capital effect, wherein blockchains with ample institution-demanded resources tend to see greater inflows of institutional capital. This, in turn, brings more of those in-demand resources to the party in a virtuous cycle.
In tokenized stocks, Ethereum actually lost a little ground, seeing outflows of 1.5%, just as Solana’s were growing rapidly. Last quarter, Solana took around 95% of tokenized stock trading volume on decentralized exchanges, which are venues that run directly on blockchains rather than through a company. Its budding ecosystem of tokenized assets means that dominance will likely continue, which is the heart of my prediction.
Winning in tokenized assets may not make for strong returns for holders
Don’t take that prediction to mean that I expect Solana to outperform Ethereum solely on the basis of its tokenized asset influx in the recent past.
A blockchain can be the site of an enormous amount of trading activity and capital inflows without passing much of the value to its coinholders. For holders to benefit, there needs to be some mechanism (like token burns or buybacks) that turns utilization into scarcity of the token, or direct income like a dividend.
In the cases of Solana and Ethereum, that mechanism is barely there.
The network destroys only around 650 SOL per day through its transaction fees while issuing roughly 60,000 new SOL over the same span, so the burn cancels out about 1% of what the chain mints, and its circulating supply of 583 million SOL has no ceiling. That makes it a bit hard to get excited about any incremental increase in network activity from tokenized asset inflows and the increased trading activity that’s sure to follow.
While two governance proposals are currently being evaluated that would address that issue, investors shouldn’t hold their breath until actual changes are made.
So, for the moment, bet on Solana to keep winning more tokenization inflows, but don’t let that be the decisive thing that guides you to buy it. Ethereum isn’t about to become fast enough or cheap enough to be highly competitive in the segments Solana excels in, but it could well fix the tokenomics issues first, so it might end up being a better investment.
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Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.
