Comparison of Economic Value Between Ethereum and Solana

Network Costs

Currently, transaction costs on Arbitrum are approximately 50% cheaper than those on Solana. In fact, early Layer 2 (L2) networks generally have lower transaction costs.

Total Network Fees

The total fees for Ethereum and its leading L2 networks are close to $20 billion, with 97.5% of the fees coming from Layer 1 (L1) and the top L2 networks accounting for $479 million. In comparison, Solana's historical total fees amount to $495 million, with 87% generated this year.

The trend favors Solana, as over the past 90 days, Solana's network fees accounted for 41% of Ethereum's total fees (excluding Miner Extractable Value, or MEV). The mention of L2 is significant, as they create demand for ETH and settle transactions on L1. If the economic connections between the two are disrupted, we will need to reassess their interrelationship.

Protocol Revenue

Next, let's discuss protocol revenue (the value generated for non-stakers from destroyed tokens):

Approximately 64% of Ethereum's historical transaction fees, or about $12.4 billion, have been burned, thus accumulating value for ETH token holders.

In contrast, 50% of Solana’s historical transaction fees, approximately $247 million, have been burned, which is only 2% of Ethereum's figure.

Currently, L2 networks do not provide a mechanism for value accumulation for token holders.

Supply Side Fees (Payments to Validators)

Ethereum has paid $7 billion to supply-side validators, which constitutes 36% of historical fees, with $400 million paid so far this year.

Solana, on the other hand, has paid $247 million, with $212 million of that occurring this year.

How does Solana bridge this gap? Through token incentives and inflation. So far this year, Solana has distributed $3.2 billion in incentive payments, while Ethereum has paid out $2.3 billion.

Comparing Total Economic Value (Network Fees + MEV + Token Incentives)

In the past 90 days, Ethereum's total economic value was $1.03 billion, with 58% derived from token incentives.

During the same period, Solana's total economic value reached $1.19 billion, with 79% coming from token incentives.

When focusing on actual economic value (i.e., fees + MEV), Ethereum ($431 million) surpassed Solana ($254 million) during the same timeframe.

In Solana's actual economic value, over 51% comes from MEV (measured via Jito fees), while this proportion for Ethereum is 29% (measured via Flashbots fees).

Cost to Generate $1 in Revenue

Here, we measure the expenditure required for token holders (token incentives) to generate $1 in fees.

*Token Incentives = The cost to non-staked token holders, income for stakers/validators.

Token Incentives and Network Fees to Date

As of now, Ethereum has paid $2.65 billion in token incentives, generating $2.06 billion in network fees. This means that for every $1 in fees generated, $1.28 was expended.

During the same period, Solana has paid $3.26 billion, resulting in $428 million in fees, translating to an expenditure of $7.62 for every $1 in fees generated.

From an on-chain perspective, a Layer 1 (L1) network achieves profitability when its fee revenue can independently cover the costs for network suppliers without relying on token incentives or inflation.

For most of 2023 and into the first quarter of 2024, Ethereum met this goal. However, following the EIP-4844 network upgrade, fees have decreased, leading to a slight inflationary effect (with an annualized inflation rate of 0.4% calculated for the third quarter).

In contrast, Solana has not yet achieved on-chain profitability, with its current inflation rate approaching 5% (a necessary condition in the early stages, similar to Ethereum's experience during its initial high-inflation phase).