GSR Research: Will the Solana ETF Pass? What impact will it have on price?

Compiled by: Wu Shuo Blockchain

Original link:

https://www.gsr.io/reports/is-solana-eft-next/

Solana has solidified its position as one of the top three cryptocurrencies status. With the other two giants either already launching or about to launch spot ETFs, Solana is likely to launch a spot ETF in the near future as well, and its impact on SOL may be the biggest yet.

Note: GSR holds SOL.

Solana – Synchronizing the world at the speed of light

Founded in 2018 by Anatoly Yakovenko and Raj Gokal and launched in 2020, Solana is a delegated proof-of-stake blockchain designed for high performance and mass adoption. With extremely low transaction costs, a wide range of decentralized applications, and an active user and developer community, Solana has amassed nearly 300 billion transactions and more than $4 billion in total locked value. In addition, Solana continues to stand out among projects, with recent highlights including a large number of high-profile token launches, various projects migrating to Solana, key innovations such as the release of token extensions, and use cases unique to Solana such as order books, batches, etc. NFTs, DePINs, memecoins, and more.

The foundation of Solana’s success is its technological excellence, which we believe provides a sustainable competitive advantage in three particularly salient ways. The first is Solana’s proof-of-history, which provides validators with a concept of time. Similar to how mobile towers alternate transmissions to avoid interference, proof-of-history allows validators to generate blocks when it is their turn without the network having to reach consensus on the current block first, resulting in huge speed and scalability benefits. Second, unlike the single-threaded virtual machines that currently underlie the cryptocurrency space, Solana supports parallel transaction processing, not only dramatically improving throughput but also taking advantage of a major source of increases in computing speed. Most of today's performance gains come from adding more cores. Rather than improving the performance of each core. Finally, while Solana's historically high hardware and bandwidth requirements have sacrificed decentralization to some extent to optimize speed and security, as costs decline (Moore's Law), Solana will naturally benefit from this and perhaps become the third A project that truly solves the blockchain trilemma and finally realizes its vision of synchronizing global states at the speed of light.

Undervalued cryptocurrency ETFs have the potential to grow further

With Solana establishing its position behind Bitcoin and Ethereum, both of which have (or will soon) launch US spot ETFs, Naturally it begs the question – could Solana be next? This question is especially relevant in the current cycle, where spot ETFs are the primary driver of price.

Simply put, under the current framework, the path to launching a spot digital asset ETF in the United States is clear and requires a federally regulated futures market (currently there are no other futures markets except Bitcoin and Ethereum). The market needs to exist for many years to demonstrate sufficient correlation, and futures ETFs need to be approved before spot products can be considered. In other words, there will be no additional spot digital asset ETFs in the near future. However, we believe this severely underestimates the potential for change.

In fact, change is already underway, with Donald Trump’s recent support for the crypto industry allowing Democrats to relax their stance on digital assets in a tense election year. While unimaginable just a month ago, we’ve already seen both chambers of Congress pass a bipartisan measure to overturn the controversial SEC cryptocurrency accounting policy (SAB 121), as well as the House pass a comprehensive digital asset regulatory framework (FIT21). While the current legislative and regulatory structure is unlikely to adopt rules that would allow the launch of various spot digital asset ETFs, the Trump administration and liberal SEC commissioners may make it happen, particularly by defining digital asset markets for securities and commodities Structural Bill. Not only is this possible, but it may even become a reality.

Key Determinants of the Next Spot ETF

With looser laws and regulations, we believe the two key factors that will determine the next spot ETF are the degree of decentralization and underlying demand. In terms of the former, whether FIT21 circumvents the Howey test by creating a new digital asset class with a key decentralization test, or the SEC’s proposed “sufficiently decentralized” approach could impact security classification, the degree of decentralization may be a factor in digital assets. The key to getting ETFs. In terms of the latter, the underlying demand for any new ETF is equally important, as it will be the biggest factor affecting profitability. Here, the issuer may consider potential demand while weighing reputational risk, the ability to pass various internal committees, and the best interests of its customers. Overall, while crypto-native issuers are likely to apply for a large number of spot ETFs, we believe larger issuers are more likely to focus on one or two digital assets with sufficient decentralization and high potential demand.

Next, we provide a brief analysis that attempts to quantitatively determine the decentralization score and demand score and add them together to form an ETF likelihood score. Note that we convert the various category metrics into Z-scores to facilitate merging categories, and then take a simple average of the Z-scores for each category to calculate the final decentralization and demand scores. Finally, note that many of the metrics used have flaws and a degree of subjectivity, but we believe these metrics are still valuable for the current task.

Decentralization Analysis

Analyzing the degree of decentralization in blockchain is difficult because there is no universally agreed upon definition, many metrics are unsatisfactory, and the topic is generally highly complex, technical, and even confusing. Philosophical color. Furthermore, decentralization encompasses many concepts such as permissionless participation, development control, key person influence, token allocation/distribution, stake characteristics, and software and hardware diversity, among others. Finally, note that most public chains have gradually become more decentralized over time, which is evident in groups such as Cardano’s upcoming Voltaire era that will substantially decentralize governance, or Solana’s upcoming The Firedancer client will make Solana the only network besides Bitcoin and Ethereum to have a second independent client on mainnet. To sum up, we believe that some of the more sound and valuable decentralization indicators are:

· Nakamoto coefficient, which measures the minimum number of independent entities that may collude to attack the network. The higher the value, the higher the degree of decentralization. .

· Staking requirements, a measure of how easy it is for anyone to participate in the network as a node operator or validator, including minimum staking requirements and hardware requirements, less staking and lighter hardware contribute to higher decentralization.

· CCData governance rating, including various governance measures such as participation, transparency and decentralization.

As shown below, the four blockchains with above-average decentralization scores are Ethereum, Solana, Avalanche, and Aptos.

Demand Analysis

Potential demand is another key determinant and issuers may look at various metrics when assessing future inflows. The most important of these is token market cap, but overall, we believe the following three categories are particularly valuable:

· Market indicators, where higher market cap, higher trading volume, and strong token performance may be indicative of the future Demand is strong.

· Total assets under management (AUM) of existing products, high AUM of tokens in existing investment products globally indicates that demand for spot ETF products may also be high.

· Activity metrics, a strong, active community and widespread usage can also be strong signals of future demand.

As shown in the chart below, the three largest blockchains with above-average demand scores are Ethereum, Solana, and NEAR.

Our decentralization score and demand score are added together to arrive at the final ETF Likelihood Score. It is important to note that we set the decentralization weight to 33% and the demand weight to 67%, as we believe that decentralization may be a threshold factor, while underlying demand may be the main criterion used by issuers. Overall, Ethereum received approval for the key spot ETH ETF 19b-4 filing in May and is expected to launch multiple spot ETFs this summer, taking first place by a wide margin. Next up is Solana, which also outperforms other digital assets by a wide margin and is the only one besides Ethereum to score positively on both decentralization and demand. In third place is NEAR, due to good performance in two categories. Overall, the results clearly indicate that if the U.S. allows additional spot digital asset ETFs, Solana will be next.

Potential spot Solana ETF impact on price

To evaluate the potential spot Solana ETF impact on SOL price, we can simply refer to the impact of the spot Bitcoin ETF on Bitcoin. After all, the approval of a spot Bitcoin ETF and the massive inflows that followed were the main factors that pushed Bitcoin from $27,000 in October, when market participants began to think U.S. spot ETF approval was a real possibility, to around $63,000 now. Achieved 2.3 times growth. This 2.3x will be our baseline.

Next, we need to adjust our analysis to take into account that the spot Solana ETF has seen significantly smaller inflows relative to Bitcoin. Ultimately, we adjust by estimating inflows into the spot Solana ETF relative to Bitcoin. Here we consider three simple scenarios.

· Pessimistic scenario: Solana Global Investment Products has 2% of Bitcoin’s AUM. We believe this underestimates potential Solana ETF inflows, as this metric gives Bitcoin a big lead, with the Grayscale Bitcoin Trust launching back in 2013 and Solana not launching until 2020. Therefore, we use 2% as the inflow for the pessimistic scenario.

· Baseline Scenario: We evaluate Solana’s performance with reference to actual recent inflows. Here we use inflow data from 2021 to 2023, as Solana is not well known before 2021, and data as of 2024 to exclude the impact of the spot Bitcoin ETF (which launched in January). Over the three years, Solana investment products saw 5% cumulative inflows relative to Bitcoin. We consider this 5% as the baseline scenario.

· Optimistic scenario: Over the past two years, Solana has seen higher relative inflows, accounting for 31% and 9% of Bitcoin inflows in 2022 and 2023, respectively. While we don't expect Solana to fully keep up with the unusually high periods of Bitcoin inflows in 2021 and 2024, we view relative inflows averaging 14% per year over three years as a potentially optimistic scenario.

While inflows to the spot Solana ETF could be 2%, 5%, or 14% of Bitcoin under the pessimistic, baseline, and optimistic scenarios respectively, we now have to adjust the spot ETF for its smaller size For the impact on SOL, this adjustment will be made through market capital. Specifically, Solana’s market cap has averaged just 4% of Bitcoin’s over the past year.

Taking all factors together, we can adjust our relative inflow estimates based on Solana’s 2.3x growth relative to Bitcoin under different scenarios. Thus, Solana could grow 1.4x under the pessimistic scenario, 3.4x under the baseline scenario, and 8.9x under the optimistic scenario. Additionally, there is reason to believe that the impact may be higher than these estimates because, unlike Bitcoin, SOL is actively used in staking and decentralized applications, and the relationship between relative inflows and relative size may not be linear. Finally, it is important to note that the underlying Solana spot ETF may be significantly less reflected in the SOL price than Bitcoin at the beginning of our analysis, which can be inferred from Grayscale Trust's deviation relative to its net asset value . If this extrapolation is correct, SOL's huge potential upside from owning a spot ETF could be considered a "free option." All in all, if more spot digital asset ETFs are allowed in the U.S., Solana will be primed for spot ETFs and the price impact will likely be the largest yet.

Due to the lack of a real-time creation and redemption mechanism, the price of the Grayscale Trust may deviate from its underlying net asset value (NAV), but this deviation will disappear when the Trust is converted to a spot ETF, because the spot ETF has Such a mechanism. On January 1, 2023, Grayscale Bitcoin Trust (GBTC) was trading at a 45% discount to net asset value (before BlackRock filed for a spot Bitcoin ETF on June 15, 2023, and on August 31, Grayscale was fighting the SEC’s Prior to winning the lawsuit), this discount was reduced to 21% by early October, suggesting that the price of Bitcoin may have already factored in increased opportunities for spot Bitcoin ETFs by the time we began to measure the price impact.

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