Solana (SOL) has had a bumper July, culminating in a significant price increase compared to early 2024. However, some critics caution that the network's reliance on memecoins could be a potential red flag.

The appeal of Solana: a rising Ethereum killer?

Solana is a blockchain platform focused on enabling decentralised app (dApp) development and cryptocurrency transactions. It's distinguished by its unique Proof-of-History (PoH) system, which, combined with a Proof-of-Stake (PoS) mechanism, provides a secure and efficient way to record transaction timestamps, allowing Solana to process up to 65,000 transactions per second. This high throughput is supported by advanced technologies, such as GPU processing and concurrent processing, making Solana highly scalable.

SOL, the platform's native cryptocurrency, is used for transaction fees and staking, with an inflationary model that starts at an 8% annual rate, decreasing to a long-term rate of 1.5%. Solana's NFT ecosystem is robust, with low transaction costs and high speed, attracting artists and collectors alike.

This functionality places Solana as a rival to Ethereum (ETH), although the latter still holds on to its place as the second-largest cryptocurrency by market cap. However, as the blockchain technology ecosystem matures, enthusiasts point to Solana's optimisations and scalability as evidence that it will eclipse Ethereum in the long term.

Impressive SOL price movement in July triggers local top concerns

Between 25 and 29 July, the Solana network's native token, SOL, surged by an impressive 16%, peaking at $193.92, the highest level it had reached in four months. However, this bullish run faced resistance at the $190 mark, leading to a subsequent 8% decline, settling the price at around $182 at the time of writing on 31 July.

Despite this pullback, SOL managed to gain 23.5% over the course of July. Nonetheless, there are concerns that this correction could mark the local top for Solana, with critics pointing to the prevalence of meme coins on the Solana network.

Evaluating the factors behind SOL's surge: ETFs and more

To understand if the recent price rally is sustainable, it's essential to consider whether the gains were driven by fundamental factors or mere market hype. Forces influencing Solana's current trajectory include:

Spot Solana ETFs

Notably, the anticipation surrounding a potential Solana spot exchange-traded fund (ETF) following the approval of Ether ETFs in the US has buoyed optimism, as has the role of the Solana network in fuelling a new wave of meme coins, some of which have had breakout success.

According to the US Securities and Exchange Commission (SEC), the final decision on an SOL ETF is expected by March 2025. While some investors remain sceptical, others, like asset manager Franklin Templeton, express confidence in Solana's long-term prospects, citing strong adoption and overcoming technical challenges.

Rising Trading Volume

Solana's trading volume has been consistently high, staying within a specific range and even surpassing $2 billion on several occasions. As of the latest update, the trading volume is approximately $1.6 billion. This surge in activity is largely attributed to the growing popularity of meme coins on the Solana network, which has captured the interest of many traders.

Memecoin speculation

Memecoins have also played a significant role in boosting the Solana network's activity. Platforms like Pump.fun, which facilitate the launch of tradable tokens with features like automated market making and incentivised burns, have generated considerable volume. For instance, Pump.fun alone amassed $25.8 million in fees over the last 30 days, surpassing the fees earned by Bitcoin miners in the same period. The platform also saw a substantial number of unique active addresses, indicating robust user engagement.

In recent days, Solana has experienced a notable increase in network activity and trading volume, accompanied by a positive trend in Total Value Locked (TVL), reaching a peak of $5.6 billion.

Increased TVL

The increased trading volume has coincided with a rise in Solana's TVL. According to DeFiLlama, Solana's TVL hit a high of over $5.6 billion on 29 July, the highest level since October 2022. Although the TVL has slightly decreased to around $5.5 billion, these figures reflect strong engagement and liquidity within the Solana ecosystem.

Is Solana's growth too reliant on memecoins?

While memecoins have contributed to Solana's recent success, some investors are wary of the network's dependence on these high-risk assets. Critics argue that this focus detracts from more robust projects on the network, such as SPL tokens like Jupiter (JUP), Lido DAO (LDO), Helium (HNT), and Raydium (RAY), which demonstrate the network's technological capabilities.

The influx of trading volume, particularly driven by the memecoin frenzy, has sparked debate about the stability and long-term prospects of Solana's price. While the heightened activity suggests a vibrant trading environment, it also raises questions about the sustainability of such trends and their impact on SOL's price stability.

Additionally, the issue of Maximal Extractable Value (MEV) on Solana, where validators can exploit their power to reorder or exclude transactions, has been highlighted as a potential vulnerability exacerbated by the lack of a built-in mempool.

What's next for Solana?

While some research suggests that Solana's metrics may be inflated due to high volatility meme coins, the network continues to offer significant potential. However, the uncertainty surrounding its future growth and the challenges it faces may prompt traders to reassess their positions.

One factor that could significantly impact the price of SOL will be the ongoing efforts of the SEC to regulate the crypto industry and certain cryptocurrencies. On 30 July, the SEC retracted its request for a court ruling on whether certain tokens, including Solana, are securities as part of a case in progress. However, many legal and finance experts have warned that this change does not necessarily indicate a shift in the SEC's view.

The regulator informed the court that it would no longer seek a decision on the security status of these tokens within this specific lawsuit. This decision appears to be a strategic litigation move rather than a fundamental change in the SEC's position.

Nonetheless, the crypto community picked up on the news as a positive sign for Solana and its value. Traders interested in Solana in the short term should keep abreast of the SEC's actions, similar to how each new chapter in the regulator's case against Ripple (XRP) impacts that token's price.

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