Solana vs ETH: A comparative analysis of DeFi on Solana vs Ethereum

Introduction

Decentralized finance (DeFi) protocols are blockchain-native applications that enable anyone with a self-custodial wallet to access various financial services through digital assets, including trading, staking, borrowing, and lending in a permissionless environment. Though each blockchain hosts its own native ecosystem, the diversity of applications in crypto had been stagnant for some time as teams would either deploy the same product across different blockchains or simply fork existing projects on new environments, an unsustainable pattern for developing robust crypto ecosystems with continuously growing organic adoption over time.

Choosing the suitable blockchain to deploy to can be difficult for DeFi protocols given the number of options available today, but it is critical to ensure network performance capabilities align with application incentives and utility. Solana’s low fees, fast execution speeds, and high throughput enable a new generation of decentralized applications to be built around unlocking new and innovative user-centric experiences.

Ethereum

Few blockchains have been more influential for the broader crypto industry than Ethereum, extending the functionality of blockchain networks beyond peer-to-peer payments infrastructure and instead towards a new kind of application domain empowered by smart contracts interacting with one another. 

The majority of liquidity in DeFi, expressed as TVL, has lived, and continues to live, on Ethereum. The first major DeFi protocols, i.e. Maker, Uniswap, Compound, all started out on Ethereum, and today the two largest protocols by TVL in DeFi are native to Ethereum as well (Lido and Eigenlayer).

It’s important to note that a lot of Ethereum DeFi activity has migrated to Layer 2 scaling solutions, e.g., rollups, due to the prohibitive transaction costs and network congestion, which emerged as network activity significantly picked up.

DeFi on Solana

Solana’s beta mainnet went live in April 2020, 5 years after Ethereum was launched. Rather than aspiring to develop the next store of value assets or become the largest smart contact platform, Anatoly Yakovenko was largely inspired by his previous work at Qualcomm in designing an application environment that can synchronize information across the globe as fast as physics would allow. As a result, Solana was built around enabling fast execution speed, high throughput, and low transaction fees as its core principles. 

After an initial, short-lived Cambrian explosion of applications and liquidity, Solana DeFi had mostly been stagnant and dismissible relative to that of the EVM ecosystem, before further bottoming upon the FTX collapse. 

However, most readers will likely recall that the tide shifted dramatically over the course of the next year, as network activity slowly but steadily picked up before taking off at an unprecedented rate in Q4 2023. Protocol and ecosystem metrics had all experienced significant growth following the FTX collapse and daily trading volumes on Solana had even exceeded that of Ethereum on multiple occasions. 

The tide started to shift when many of the teams who continued to build on Solana in the bear market launched applications and services that utilized Solana’s greatest strengths rather than trying to replicate what had already been built on other blockchains. New technical developments, such as state compression, further bolstered Solana’s strength. What was once simply a meme has become a movement as more teams pivoted to building applications that were, indeed, Only Possible on Solana. 

Only Possible on Solana

Jupiter

• Swap aggregator - With Solana’s low fees, Jupiter is able to route trades across multiple liquidity routes to deliver the best trade settlement on users’ behalf. Jupiter has seen much higher adoption within the Solana ecosystem relative to that of swap aggregators on Ethereum, accounting for over 70% of trades on Solana in 2023, a testament to the difference Solana’s low fees and high throughput enables.  
• DCA - Jupiter’s Dollar-Cost-Average feature allows users to purchase an asset in increments over time, leveraging Solana’s low fees and high throughput to be able to do so without incurring significant costs to the user. Jupiter DCA has facilitated over $3.7B in volume since launching in September 2023. 

Hivemapper

Solana’s ability to handle high volumes of data on a frequently recurring basis in an efficient manner has made the network an attractive domain to build on top of for decentralized physical infrastructure networks (DePINs). Hivemapper, a project building the world’s freshest map, utilizes Solana to facilitate operations for its DePIN, providing a venue for data providers to receive $HONEY token rewards for their contributions to the global network. Hivemapper has thus far mapped over 180 million kilometers from 4,417 regions and over 120 thousand contributors.  

JitoSOL and Solana Liquid Staking 

Liquid staking protocols distribute a fungible token to stakers known as a liquid staking token or LST, which can be further utilized on other DeFi protocols for further profit-maximizing efforts. 

This new unlock in UX, as well as the inherent alignment with blockchains’ native tokens, has caused liquid staking to grow to become the largest sector within DeFi today, accruing up to $54b in TVL at the time of writing, with Ethereum accounting for $46b or 85% of that total.

On Ethereum, Lido Finance offers liquid staking services across multiple blockchains, including Ethereum, Polygon, formerly Solana, and a select few EVM L2s. As the first liquid staking provider in crypto, Lido has amassed up to $27.7B in TVL, most of which comes from its staked ETH product, stETH. Validators earn block rewards, which are then distributed to the Lido Stake Pool to be distributed to stakers based on their deposit amount. Today, Lido accounts for over 70% of liquid staking TVL and 30% of total network TVL, which has raised a number of concerns around managing and mitigating the associated centralization risk this distribution entails.

JitoSOL is a Solana-native liquid staking token issued out to stakers who deposit their SOL into the Jito Stake Pool. Jito stakes exclusively with validators who run software to improve the network performance, i.e. the Jito-Solana client, which are able to collect fees from MEV transactions on Solana on top of block rewards they are already earning. To date, just under 10 million SOL has been staked with the Jito Stake Pool, which accounts for 48% of all LST deposits and 20% of total network TVL. 

DeFi Comparative Analysis

Since Q4 2023, Solana DEX volumes have outperformed the top L2s and have matched up with Ethereum’s despite having a fraction of its TVL. At the same time, Solana has 2,323 DAAs per protocol, over 7x that of Ethereum. To put this into the context of the quality of DeFi protocols between the two ecosystems; Ethereum has 8x more protocols in total than Solana, Solana has just 7% of Ethereum’s TVL, yet Solana has 7x more DAAs per protocol, indicating a more engaged and organic user base within the Solana ecosystem relative to that of Ethereum.

Conclusion

Ethereum and Solana have irrefutably been the most influential smart contract platforms to date, each utilizing their own respective capabilities and design features. Ethereum, inspired by Bitcoin’s functionality, or lack thereof, was the first blockchain to come equipped with a Turing-complete programming language enabling smart contracts to communicate with one another, while Solana, inspired by the lack of a synchronized global state, was the first blockchain to be built around parallelization, optimized for performance and scalability. 

Ethereum has and continues to dominate TVL across DeFi, though a significant chunk of this is to be attributed to the success of early DeFi protocols such as Aave and Uniswap, which introduced new primitives to the crypto-economy such as borrowing and lending and the use of liquidity pools to facilitate price discovery. Due to the success of these protocols, though, there have been many different forks and projects replicating others in hopes of siphoning their liquidity away, which has led to over 1,000 protocols on Ethereum today though with just a fraction of the daily active addresses per protocol relative to Solana.

Solana has been on a strong recovery ever since bottoming near the collapse of FTX, with strong growth present at the network and application layer. Though Solana still holds a fraction of the total TVL of Ethereum today, it has matched up to and even outperformed the activity on Ethereum and L2s at times. Furthermore, with more daily active addresses per protocol on average, it can be argued that Solana has a more engaged and organic user base, demonstrating that, more often than not, quality outweighs quantity.