1 Big Reason Solana Is (Still) a Bargain Buy

Key Points

• Solana has a lot of users and a big ecosystem.

• Those users are doing a very high volume of transactions within the ecosystem.

• And they're willing to pay for the privilege.

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Every investor eventually learns that price and value are not the same thing, but with crypto investments specifically, the learning process can be a bit harder because the important metrics to watch are different. One simple way to separate the two concepts is to ask a basic question, like how much economic value does a blockchain capture from the average person using it?

And if we ask that question about Solana, (CRYPTO: SOL) the result is that the coin is a bargain, especially relative to its biggest competitor, Ethereum (CRYPTO: ETH). Here's why.

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Fees per user is the tell

The metric that we're talking about here is called the average fees per user (AFPU).

In sum, AFPU measures the protocol fees paid per active user over a specific period. In other words, it is the total of gas (user) fees and other network-related fees divided by the number of users who actually did something that generated revenue for the chain or one of its ecosystem projects. You can also think of this as the sum of the platform-related costs that users have paid to do business on the network, stated as the cost burden for each user for the period. The higher the AFPU, the higher the price users are willing to pay to interact with the chain's smart contracts and decentralized applications (dApps).

Right now, Solana's AFPU is about $0.51 per day, and Ethereum's is near $2.50. So at first glance you might assume that Ethereum's ecosystem is generally in a state of higher demand for its services than Solana's.

But for context, Solana's transaction fee is typically fractions of a cent, whereas Ethereum's median transaction fee in recent weeks has hovered near $1 on quiet days and higher when demand spikes. So to generate its total user fees, users of Solana transact many times more than their peers on Ethereum.

Now look at size of these two assets. Ethereum's market cap is roughly $505 billion and Solana's is about $117 billion, or about a quarter as large. Put two and two together: Solana's AFPU sits within reach of Ethereum's, even though per-transaction costs on Solana are a tiny fraction of Ethereum's and Solana's market value is much smaller. That means Solana is monetizing activity far more efficiently relative to its size, which is exactly what you want if you are buying an asset for its long-term earning power.

And that's why Solana is a bargain buy; the market is mispricing the intensity of the activity in its ecosystem as well as the large scale at which its users are interacting with its offerings.

What could close the gap from here

If you accept that demonstrable economic productivity is what drives durable asset value, then there's a clear path for Solana to continue compounding in value by simply adding more users and more of their capital.

If Solana keeps recruiting users, even a stagnant AFPU can compound into a vastly larger fee pool over time. If AFPU inches higher as the app mix matures, the effect is stronger still. In practice, more real usage is the key, because fees scale with activity.

Therefore, the investment thesis for buying Solana is that it already monetizes the average user quite well relative to its tiny per-transaction costs, especially when compared to dramatically more expensive chains that it stands to steal user share from, like Ethereum. If usage growth continues, the chain has a credible route to a much larger and persistent fee base while still feeling cheap to use (and invest in) relative to its peers, as each individual transaction incurs a negligible fee from the perspective of users. For long-term investors, that mix of efficiency today and operating leverage tomorrow is what makes Solana look like a bargain.

Of course, there are risks to investing in this coin, and the metric we've been discussing is not infallible.

AFPU is cyclical and will slump during quiet periods, and because users need to buy Solana before paying fees denominated in it, the metric is a lagging indicator of the asset's pricing rather than a leading one. Furthermore, the apportionment of the chain's fees, which are split between being burned and being distributed to validators and stakers, can change via governance decisions, which can significantly alter value capture at the margin.

In closing, Solana looks mispriced relative to the productivity it delivers. Weigh what investors are paying for the coin today against how much value the network already extracts from its users, and you will have a good sense of its valuation even before future growth shows up in the numbers.

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Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.