Solana’s Fee Growth: Is the Surge Sustainable or a Mirage?

Solana has made remarkable advances in the realm of cryptocurrency and has placed itself as an alternative to Ethereum that is fast and scalable.

Solana’s low transaction costs and high throughput have produced something that many developers and users find appealing and are talking about more and more—Solana’s fee structure. Time and again, we’ve seen claims that Solana’s fees are outpacing those of Ethereum. But the actual fee distribution tells a more complicated story.

The Real Story Behind Solana’s Fees

The low fees of Solana are often praised, but the belief that its transaction fees consistently outdo those on Ethereum is not well-founded. In fact, if we consider Ethereum’s transaction fees just to be what it costs to send a transaction (and not to use the many stateful DeFi applications on Ethereum), then Ethereum’s fees have been below Solana’s for the last six months.

However, using average fees across all used wallet addresses seems too broad a brush to paint with, when the users across these two networks can only be somewhat comparable in their number and nature. And if we dig into who exactly runs up Solana’s much-praised transaction fees, we find that it’s mostly just a handful of users.

The number one source of Solana’s fee generation during this period has been Wintermute, a prominent trading firm in the cryptocurrency world. Wintermute’s high-frequency trading strategies and algorithmic bots are a significant part of what drives Solana’s total fee volume up. Outside of Wintermute, the rest of Solana’s fee generation comes from an ensemble of bots and high-frequency traders, again not exactly spreading the activity around among a large, diverse group of users.

Concerns Over Centralization and Speculation

A tiny fraction of wallet addresses holds most tokens.

A tiny fraction of wallet addresses holds most of the tokens. This raises some serious questions about whether the Solana network, and by extension its fee model, can last over time. What’s happening, it seems, is that most of the “on-chain activity” happening on Solana is not, in fact, most of what’s being done by normal users in the ecosystem at large. Instead, it seems, on-chain activity seems to be mostly coming from power traders and short-term speculators who are using the Solana network either to front-run trades or otherwise make and save money somehow, which is not really a sustainable user base,

A primary worry centers on the growing dependence on what are known as “sandwich attacks,” which are strategies conventionally employed by bots and high-frequency traders. When these attacks are launched, it is not unusual for an attacker to place an order to buy, say, 100,000 tokens just as a retail trader is about to place an order to turn 100,000 tokens into a stop loss. In this instance, the attacker’s bot places a buy order at $0.06 and instantly routes a market sell order for more than $0.06. Consequently, the attacker profits to the tune of about $6,000. As far as I can tell, this and related behavior are pushing Solana’s already-above-average fees into the stratosphere.

Consequently, even as Solana’s fees are increasing with great speed, they are depending on the volatile entity of speculative trading, especially with memecoins. This is an unstable situation that leaves retail traders as the main risk-takers; that is, they are the ones who might see their trading losses matched by profits accrued by the trading bots and the speculators. Because replication should help in assessing fees and profits for the replicators, it is worth looking at the fees and profits for both the retail traders and the trading bots.

Is Solana’s Fee Growth Sustainable?

Solana’s future hinges on a single critical inquiry: Is the current fee structure sustainable? If the network relies on a small set of traders (mostly bots and high-frequency traders), then the fee generation could curtail the relevance of the network in a hurry. Reliably generating fees while attracting a broad swath of traders is the ideal scenario. However, current fee growth is mainly linked to market speculation and the sorts of near-term trading strategies that don’t exactly inspire confidence.

Furthermore, the concentration of fee generation brings up centralization problems, of which the blockchain community is all too aware. They are issues that participants in the Solana ecosystem need to be contend with.

1. Solana is not decentralized enough to be considered a reliable blockchain.

2. This relays a couple of significant problems.

3. Even if it is “cheap and fast,” the network cannot be trusted if it is not decentralized.

The Bottom Line

Despite showing impressive growth and a favorable fee structure, Solana has a not-so-great story to tell if looked at more closely. Its current fee generation is highly concentrated among speculative traders and bots. Little of the impressive number of transactions is being driven by the sort of long-term, valuable applications that one would hope to find on a blockchain, and most of what is driving Solana’s transaction growth is the sort of short-term speculation on memecoins that we know to be a poor basis for a blockchain’s health. If a few more Solana users than now start using the network for the sort of applications that one would hope to find on a blockchain, and if a few fewer than now use the network to line up speculative trades, then the Solana on-chain story is much healthier.

In the end, the long-run success of Solana will depend on its capacity to enlist a larger and more varied group of users who contribute to the network’s value in less ephemeral ways. Until that happens, the current growth in network fees may well turn out to be more a mirage than a sign of Solana’s ascendancy in the blockchain world.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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