Will Solana be next? -GSR Markets

Source: Santiment, GSR.

The Growing and Underestimated Chances of New Crypto ETFs

As Solana cements itself alongside Bitcoin and Ethereum as crypto’s “Big Three” and Bitcoin and Ethereum both have (or are about to) have US spot ETFs, this naturally raises the question: Will Solana be next? And it’s a particularly pertinent question to answer, with cash ETFs being the primary price driver in the current cycle.

The simple answer is that, according to the current concept, the path to creating a spot digital asset ETF The US is clear, there needs to be a federally regulated futures market (there are none beyond Bitcoin and Ethereum), the futures market needs to exist for several years to demonstrate sufficient correlation, and a futures-based ETF needs to be approved before we can even begin to consider a spot product. In other words, there won’t be any additional ETFs on spot digital assets anytime soon. However, we believe this vastly understates the potential for change.

Actually, change is already underway with Donald Trump’s newfound support for the crypto industry leading Democrats to soften their stance against digital assets in a tight election year. Indeed, while unthinkable just a month ago, we’ve already seen bipartisan passage of a measure rolling back a controversial SEC accounting policy on crypto (SAB 121) on both sides of Congress, as well as the passage of a comprehensive digital asset regulatory framework (FIT21) in the House. And while the current legislative and regulatory makeup is unlikely to pass rules that would allow for the launch of a myriad of cash digital asset ETFs, a Trump administration and a liberal SEC commissioner could do just that, with the possibilities truly opening up with a digital asset defining securities and commodities market structure bill. Not only is such a scenario possible, it might even be likely.

Key Driving Factors for the Next Spot ETF

With more permissive laws and regulations, we believe the two key elements that will determine the next spot digital asset ETF are the level of decentralization and potential demand. On the first point, whether due to FIT21’s circumvention of the Howey test by creating new digital asset classes with a key decentralization test, or the SEC’s own suggestion that being “sufficiently decentralized” could impact the classification of securities, the level of decentralization could be determining whether a digital asset can obtain an ETF. On the second point, the potential demand for any new ETF will be equally important, as it will be the most important factor impacting profitability. Here, issuers will likely evaluate the potential request with additional considerations such as reputational risk, ability to pass through various internal committees, and the best interests of the client. Overall, while crypto-native issuers may deposit a fair number of spot digital asset ETFs, we believe larger issuers are more likely to focus on just one or two, sufficient decentralization and with high potential demand determining which digital assets will be next.

In what follows, we provide brief analyses that attempt to quantitatively determine both a decentralization score and a demand score before adding them together to form an ETF opportunity score. Note that we convert the various category measures to Z-scores to allow for the combination of categories, before taking a simple average of each category’s Z-score to calculate the final decentralization and demand scores. Finally, note that many of the measures used have flaws and a certain level of subjectivity, although we believe they remain informative for the task at hand. So without further ado…

Analysis of decentralization

Analyzing the level of decentralization of a blockchain is difficult because there is no generally accepted definition, many metrics are sketchy, and the topic in general is highly nuanced, technical, and even philosophical. Additionally, decentralization encompasses a variety of ideas such as permissionless participation, development control, key figure influence, token allocation/distribution, stake characteristics, and software and hardware diversity, to name a few. Finally, note that most public blockchains are becoming progressively more decentralized over time, such as the group below, exemplified by Cardano’s upcoming Voltaire era that will materially decentralize governance, or Solana’s upcoming introduction of the Firedancer client that will make Solana the only network other than Bitcoin and Ethereum with a second independent client live on the mainnet. That said, we believe some of the most robust and informative decentralization metrics are:

• Nakamoto coefficient, which measures the smallest number of independent entities likely to collude to attack a network, with a higher number indicating greater decentralization.
• Staking requirements, which measure how easy it is for anyone to participate in the network as a node operator or validator, encompassing both minimum staking and hardware requirements, and with lower stakes and lighter hardware promoting greater decentralization
• CCData Governance Assessment, which integrates various governance measures around participation, transparency and decentralization

As shown below, the four blockchains with above-average decentralization scores are Ethereum, Solana, Avalanche, and Aptos.

Decentralization scores

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