Solana DeFi Ecosystem Overview

Solana has emerged as one of the handful of smart contracts platforms competing to become a base layer for DeFi applications, with some of its projects gaining traction as its SOL token climbs to the top 15 by market capitalization.

Solana, created in 2017, incorporates a so-called Proof-of-History timing mechanism that facilitates its Proof-of-Stake protocol structure, which allows it to process more than 50,000 transactions per second, but also requires highly specialized hardware. There are currently about 770 Solana network validators, compared with about 8,000 Ethereum nodes.

The network is heavily backed by Sam Bankman Fried’s Alameda Research and FTX, with investments in ecosystem projects including Oxygen and Step Finance, while FTX directly founded Serum, one of Solana’s main DEXs.

Binance Smart Chain (BSC) has exploded onto the scene and kicked off the multi-chain wars thanks to the relative ease of porting Ethereum applications onto it, backed by the unstoppable marketing machine of Binance.

Solana growth, on the other hand, isn’t as explosive. Since it isn’t EVM-compatible, applications need to be tailor-made for it. With that said, Solana aims to host decentralized apps that aren’t possible on other blockchains.

Before we go further, it’s worth mentioning that getting our hands on data relating to Solana adoption isn’t particularly easy. Most of the analytics sites are a bit bare-bones right now. Hopefully, as DeFi on Solana develops further, we’ll see more comprehensive analytics and integrations so we can keep a closer eye on this ecosystem’s growth.

Even so, we can take a look at some of the currently most popular dApps on Solana and how they compare to Ethereum and BSC.

Serum DEX

The prime application running on top of Solana is the Serum DEX. Anyone can spin up their custom GUI with its own features meanwhile tapping into the global liquidity of Serum.

According to CoinGecko, the Serum DEX has printed an average volume of ~$17.1M in the period between 15 April and 15 May. Not too shabby – but how does that compare to some other DEXs?

Uniswap has an average volume of ~$1.4B, while PancakeSwap around ~$1.2B for the same period. Serum is currently printing, on average, around 1.2% of Uniswap’s and about 1.4% of PancakeSwap’s volume. While the comparison isn’t perfect since Serum is a central limit order book (CLOB) exchange while the other two are automated market makers (AMM), it can still give us a rough idea of the relative performance.

Both USDC and USDT are natively issued on Solana, so unsurprisingly, they are among the top traded tokens on Serum. Similarly to how we tend to see on Uniswap and PancakeSwap, the pairs with the highest volume tend to be the ones that are generally popular on centralized exchanges, such as BTC/USDC or ETH/USDT. Besides those, Serum also provides a home for some of the most liquid tokens native to Solana, such as RAY and COPE.

But the rise of DEXs isn’t generally attributed to the availability of otherwise popular trading pairs. It’s for the efficient price discovery that they allow for when it comes to newly launched assets that aren’t available elsewhere. We may have seen a sneak peek of this already with the launch of COPE, which quickly became one of the most liquid tokens on Solana.

The ease of setting up a CLOB market on Serum does provide a new way to launch tokens, though it’s worth noting that AMMs may simply be a better way to kickstart a new market than a CLOB due to the challenges of initial illiquidity. In any case, Solana surely needs more native assets to attract more traders and volume.

SerumSwap

Serum also has an AMM built on it called SerumSwap. As of writing, it has printed ~$2M of average daily volume for the same period. This would be a more accurate comparison to other DEXs since it’s also an AMM design. The comparison comes down to 0.14% of Uniswap’s and 0.16% of PancakeSwap’s volume.

What could be the reason for the relative underperformance? This is always quite hard to tell, but it could be that the inherent limitations of AMMs don’t look so attractive on a blockchain where on-chain order books are possible. It could also be the underdeveloped user experience.

Interestingly, while the sample size and volume are relatively small, some of the most popular pairs on SerumSwap are denominated in SRM instead of the usually common stablecoins.

Raydium

Raydium is an AMM that plugs into the Serum ecosystem. It reports around $30M 24-hour volume and a TVL of ~$370M. While TVL isn’t the ultimate metric by any means, this is roughly equivalent to rank 20-25 on DeFi Pulse these days.

Unfortunately, historical data isn’t easy to come by, so for now, the growth trajectory is unknown. Although, as mentioned earlier, it’s worth noting how Raydium’s AMM is a clear leader compared to SerumSwap.

Why could that be? A simple answer is the generally smoother user experience, and a friendly UI. A more likely answer, however, is incentives.

Raydium recently launched incentivized Fusion Pools which are joint projects between Raydium and Serum ecosystem partners that pay out dual yield in both the platform’s native token and the other asset in a given Fusion Pool. This proved to be an effective way to attract more capital to the platform by providing honest farmers a way to increase their exposure to two Solana tokens at the same time.

Bonfida

Bonfida is also an on-chain DEX powered by Serum. Again, historical data isn’t easy to come by, but the reported average daily volume on Bonfida is said to be around the $25M mark, and the aggregate volume since the initial launch late last year is reported to be more than $2B.

In addition to the spot DEX, Bonfida plans to implement on-chain perpetuals and allows traders to create custom automated trading strategies using BonfidaBots.

Mango Markets

Mango is an on-chain margin trading platform on Solana offering up to 5x leverage. As of April 16, it has more than $20M TVL across BTC, ETH, and USDT.

Orca

Orca is an AMM and DEX aggregator with a slick interface. Currently, it aims to offer traders the best prices from SerumSwap and the Orca AMM. As of 16 April, it has $25M TVL.

Orca also has a planned integration with Ethereum Solana cross-chain bridge Wormhole, which could open up the floodgates for more liquidity.

Oxygen

Oxygen is a prime brokerage protocol still in alpha that’s powered by Serum’s on-chain ecosystem. As of April 16, it has a 7-figure TVL, though the functionality is quite rudimentary so far.

Once this type of product can integrate with more parts of the ecosystem, it could be a key part of the application stack on Solana.

Summary

Kickstarting a decentralized ecosystem isn’t an easy feat. While Solana offers lightning-fast transaction speeds that enable new types of products like a fully on-chain order book, it has some ways to go until the infrastructure gets to the point where it’s comparable with its competition.

Since anyone can host a GUI and earn a portion of the fees while having access to the global pool of liquidity on Serum, some interesting competition may emerge in the future. Once the ecosystem develops further, liquidity on Serum will likely be less isolated than it currently is on other blockchains.

Just like all the early Ethereum DeFi apps needed each other to advance the entire application stack, Solana apps also require time to start collectively benefiting from the effects of composability.