Polkadot Is Falling Behind, Short DOT And Buy Solana Instead

Summary We think it’s time to go Long Solana and short Polkadot due to Solana’s superior ecosystem fundamentals and underlying infrastructure. Solana’s high transaction volume, low fees, and robust protocol development give it strong long-term prospects, while Polkadot’s fragmented user base and muted adoption present significant issues. Despite risks, we believe this trade could capture significant alpha in crypto markets. We rate SOL-USD a ‘Buy’ and DOT-USD a ‘Sell’. Over the last two years, we’ve written hundreds of pieces of analysis , about stocks, funds, and options trading on regulated financial markets, with the goal of making you, the reader, money. Since starting, we’re happy to say that we’ve been largely successful in doing just that . In that time, however, we’ve never written much about crypto; partially because folks here on SA enjoy primarily equities research, but also because getting involved in decentralized finance is a lot harder than simply opening a brokerage account. The world of crypto can be confusing to understand, and even harder to navigate. That said, in this article, we’re breaking with tradition to write about an opportunity we think is too good to pass up. Here’s the gist: Solana ( SOL-USD ), a leading blockchain, appears to be accelerating ahead of competitors. At the same time, legacy chain Polkadot ( DOT-USD ) appears to be falling behind the pack. This gives rise to a unique, partially hedged trade idea – Long SOL and Short DOT. Today , we’ll explain our underlying valuation methodology for crypto (for those new to the space), dive into our reasoning behind the pair trade, and explain why we think now is a great time to put on this highly attractive exposure. Plus, we’ll explain how to get started with a trade like this. Sound good? Let’s dive in. Valuing Crypto In case you’ve never done anything in the crypto markets before, this section will serve as a quick orientation to the market so you can follow our trade logic in later sections. Essentially , the world of crypto exists as a parallel financial system to what we have currently. In the traditional system, we have currencies, assets denoted in currencies, transfer networks, banks, and functions like lending, borrowing, and trading. In Crypto, the currencies/assets are ‘Tokens’, the transfer networks are ‘Chains’, and a wide variety of ‘on-chain protocols’ allow users to swap, lend, and put their digital assets to work. Bitcoin ( BTC-USD ), the largest chain by market cap, doesn’t have much of this ‘extra’ functionality, but many other, smaller chains have evolved to enable more complex financial use cases, with Ethereum ( ETH-USD ) being the largest, most recognizable alternative. Valuing crypto can be difficult, but as we see it, there are three main ‘types’ of tokens: Stablecoins Natives Asset Tokens Stablecoins are self-explanatory and are valued on their reserves of underlying USD or other ‘real world’ currencies. This includes tokens like USDC and USDT. Natives, like BTC, ETH, and SOL, are the ‘gas’ currency of the main blockchain that they live off of. That is, in order to interact with the chain, one needs to use the native currency in order to send transactions through. Finally, Asset Tokens can simply be thought of as ‘on chain’ investments – ways that one acquires something of utility in a tokenized form. This category includes things like Pepe ( PEPE-USD ) (whose value is speculative), but also things like Curve ( CRV-USD ), which entitles owners to a fraction of the profits from the underlying protocol’s decentralized exchange operations. In the trade we’re about to lay out, both tokens are Natives. Valuing Natives can be more complex than wrapping your arms around the growth of cash flows of a protocol (think: an on-chain ‘company’), but it can also be more rewarding over the long run given chains’ inherent economies of scale. When it comes to valuing a chain, it’s best to think of it in the same way you’d think about an ecosystem or an economy. With that, we can head into our assessment of each. Long Solana Within Crypto, Solana is one of the most important chains around. The chain has a substantial amount of financial capital invested into on-chain protocols and utilities, and the userbase is significant: DefiLlama Solana currently ranks first in active addresses, second in TVL, and fifth in stablecoin TVL. It also ranks 9th in terms of total protocols, but TVL per protocol is among the best. Not only that, but trading and transaction volumes on the chain are also significant: DefiLlama As you can see, Solana ranks first in transaction volume and second in DEX TVL, which shows that the chain’s protocols are effectively attracting and monetizing users at scale. Underlying these stats are best-in-class network performance, with low transaction fees for users and lightning-fast settlement in a minute or less. While there have been some network outages in the past, the Solana Foundation has been laser focused on improving network performance for decentralized use, which has paid off throughout the recent run we’ve seen. On a valuation basis, we’d argue that Solana has significant advantages as an ecosystem, which should drive the price of SOL (the native token) higher over the medium and long term. The key inputs to an economy are land, labor, capital, and entrepreneurship, as we discussed before. If we’re judging a chain’s prospects on this basis, then Solana has significant financial and human capital invested into the chain, building next gen apps on the underlying high throughput infrastructure (Land). On the entrepreneurship side, we’ve seen a significant pickup in protocol development, and the chain has one of the most vibrant and diverse protocol ecosystems, with multiple DEX, Lending, and Yield solutions competing for market share. Overall, we’d argue that Solana appears to be a healthy ecosystem with robust inputs for substantial long-term growth. The SOL token’s tokenomics also appear conservatively dilutive, which shouldn’t pose a long-term risk to investors. Short Polkadot Conversely, Polkadot appears to be in a much less attractive position. Structured a bit differently than Solana’s simple ‘spoke and node’ model, DOT operates as a ‘layer zero’ network, offering shared security and interoperability to multiple individual chains operating on top of the core chain: Polkadot Wiki In theory, this technological layout should enable considerable value for DOT holders, ‘parachains’, and everyday users, but in reality, adoption of DOT has been muted. As we see it, DOT’s long-term value comes from the competitiveness of the chains that use it as a ‘base’, but many of these parachains haven’t been competitive when it comes to collecting financial capital, users, or developers: DefiLlama As you can see, SOL’s total TVL and protocol count significantly dwarfs the collected strength of these many separate DOT parachains, and transaction amounts and user bases are also incredibly small by comparison. Not only that, but in the world of Crypto, users tend to cluster their activities on a few chains that they are comfortable with, which means that DOT’s multichain layout actually splits up the user base and potential monetizability considerably. The shared security and interoperability benefits dim in comparison to the collected strength that SOL developers harness when they choose to develop there. Long story short, we think SOL is positioned incredibly well for the future, and DOT isn’t. Each chain will continue to develop, but we don’t see a world where further updates change the structural strengths and weaknesses with these chains. The Trade Thus, our trade idea – Long SOL, short DOT. Historically, this has been a pretty attractive way to allocate capital, up more than 1,240% since mid-2021: TradingView However, while the long-term trends and fundamentals appear sound, the recent election has given DOT an outsized boost, which has driven the pair’s price down nearly 30% in the last two weeks: TradingView We see this price action as traders trying to scoop up the ‘under loved’ legacy plays that should benefit in an outsized way from a positive regulatory environment. This isn’t to say that Solana won’t also benefit from a more pro-crypto stance from the US government, but it isn’t a core piece of the existing thesis. For chains like DOT with less positive catalysts on the horizon, it’s a bigger deal. Thus, we see this dip being a short-lived drop that appears to be an attractive entry point into this long-term story. Tactically, if you’re looking to enter into a long SOL short DOT position, the easiest way to do so is probably on Coinbase ( COIN ), going long SOL in a spot format and shorting the DOT futures on the derivatives platform there. Carrying costs of this trade are low, so it’s an efficient venue to consider. If you’d prefer to conduct the trade ‘on chain’, then heading to Thena’s Alpha perpetual futures exchange (or a similar provider) could be a good option. Risks There are some risks with a trade idea like this. First off, there is no generally accepted method for valuing digital assets, which makes fundamental analysis less precise than it otherwise would be in traditional finance. We’ve analyzed the chain’s respective ecosystems and potential strengths, but DOT’s recent outperformance may continue for the foreseeable future, despite our conviction in the token’s underlying quality. Secondly, in the event that we enter a ‘crypto winter’, DOT’s ‘lower beta’ profile means that it would likely lose less in overall value than SOL, which could cause losses to investors in this trade. Finally, volatility in the crypto sphere is quite high relative to traditional equities. We’d advise caution and sizing down until you’re more comfortable with the types of swings and volatility you might experience on a day-to-day basis. Summary However, while there are risks, we think going Long SOL and short DOT could be a simple way to capture alpha in the crypto markets in a somewhat-hedged way. While we can’t be sure that the time is perfect for an entry into this trade, we have long-term conviction in our thesis and expect that investors into a position like this should be rewarded over the medium and long term. Thus, our respective ratings. Stay safe out there!

Source: Seeking Alpha