DeFi Velocity on Solana: Measuring an Ecosystem's Health

Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.

The Bonk Effect explored in the first January Data Report is hard to ignore. There's a second data report, because it's also hard to ignore how much trade volume Solana's decentralized exchanges (DEXs) handled in January.  

The following sections will look at a metric called "DeFi Velocity," which measures the trading volume versus total value locked (TVL) on a blockchain. Overall, the Solana DEX ecosystem led all other blockchains assessed in January for DeFi Velocity—by a long margin.

What is DeFi Velocity and How It's Measured

From January 3-8 Solana supported the third most DEX trading volume for any DeFi blockchain. The 24h DEX trading volume on Solana peaked on the 5th with $152.08 million, or around two-thirds (2/3!) of the blockchain’s total value locked (TVL).

Solana's DEX volume didn't go unnoticed. On Twitter, a metric concerning the ratio of trade volume weighed against chain TVL surfaced, coining DEX Volume/TVL as a blockchain's "DeFi Velocity." When @bennybitcoins compared Solana's DeFi Velocity with other blockchains, the network was clearly ahead:

What does velocity mean in economic terms, and why is it a significant metric?

Ben didn't invent a statistic out of nowhere trying to make Solana look good, he just applied the Velocity of Money to DeFi. Here's an explainer on the Velocity of Money taken from Investopedia:  

Essentially, measuring trade volume against the size of a market measures the health and activity of an economy, and a high velocity of money "indicates a bustling economy with strong economic activity." If a population is handing over money for goods and services again and again, then something is going right.

The following chart from the St. Louis Fed shows the Velocity of Money in the United States over 60 years. Each grey vertical line represents a recession, and the peak of the USA's velocity was reached in the booming 1990s.

In this chart, it's possible to see the beginning of quantitative easement post-Global Financial Crisis as the United States became flooded with cash, and then there's the plummeting line that describes the economy during Covid.

In general, the Velocity of Money can say a lot about the health of an economy. When the same principle is applied to blockchains and DeFi, it shouldn't be ignored.

How Did Solana's DeFi Velocity Compare with Other Chains in January?

As was mentioned in the EOY Kamino Data Report, looking solely at a chain's DeFi TVL is a relatively poor indicator of an ecosystem's health.

In Part 1 of the Kamino Data Report, it was noted that Solana regularly hosted more daily active wallets and transactions than all other chains. This section of the report will demonstrate how Solana also blew other chains out of the water for DeFi Velocity by a mile.

The data in the table below was sourced from DeFi Llama, and the raw numbers can be found here in a Google spreadsheet. As the chart shows, second and third place for average DeFi Velocity in January go to Polygon and Arbitrum, two Ethereum scalability solutions.

When Solana's January DeFi Velocity is compared with other chains, the network’s 0.25 is at least twice as high as other networks. Subtracting January 3-8 (Solana’s highest DEX volume for the month, a Bonk outlier) from the average velocity, the network is still in first place with a velocity of 0.21.  

The numbers also show that—despite much higher TVLs than Solana—BNB Chain, Avalanche, and Ethereum demonstrated weaker trading ecosystems when compared with Solana's DeFi Velocity. Nearly 5x less capital changes hands on the DEXs of each of these chains.

Finally, with one DEX, SUNSwap, handling around 100% of trade volume on Tron, it's no big surprise that Tron hosts a DeFi Velocity of 0.003—83.3x lower than Solana. This may imply that a lot of capital is parked on the network without participating in trade and that TVL isn't everything.

Charting Daily DeFi Velocity from 12/25 - 01/31

When visualized, the contrast between Solana's DeFi Velocity and other blockchains becomes much clearer. In the graphs below, the daily values for TVL, trade volume, and DeFi Velocity are displayed from Christmas, when Bonk was launched, until the end of January.

The blue bars indicate daily chain TVL, the orange bars indicate the 24h trade volume recorded for each chain's DEX ecosystem on the same day, and the grey line marks daily DeFi Velocity. Each chain's TVL is variable and measured on the left side of the chart in millions or billions, and on the right side, the DeFi Velocity is scaled from 0.00-1.00 for all chains.

As can be seen, Bonk may have spearheaded more bullish trading activity on Solana before any other chain's traders began waking up in January. By comparing the graphs (focus on the orange bars), it can be inferred that Solana had a higher DeFi Velocity than all other chains on nearly every day of January.

Solana

Polygon

Arbitrum

BNB Chain

Avalanche

Ethereum

Tron

Why Does a Chain’s DeFi Velocity Matter?

The rate of capital trading hands in an economy is a significant indicator of its strength. The increase in trading activity and the semblance of a bullish market in January demonstrated that the Solana DeFi trading community is going strong, and Solana is a chain where traders definitely trade.

A high DeFi Velocity could be the product of several variables including network latency, cost per transaction, and user experience, but it's probably too early in the game to pinpoint why Solana is so far ahead of other networks in this regard.

What can be said at this time is DeFi Velocity demonstrates the capital efficiency of trading on a network. For instance, there were several days in January when Orca's concentrated liquidity Whirpools facilitated more trade volume than there was liquidity held in its pools, and that's the definition of capital efficiency.

After FTX declared bankruptcy and capital fled the network in November, Solana's TVL more than quartered. Statistics showed strong numbers for daily active wallets, new wallets, transactions per day, transactions per second—you name it, but people still asked if Solana was going to make it.

According to several metrics, including DeFi Velocity, Solana hosts an active and capital-efficient trading environment. If traders continue to value speed and capital efficiency, then it looks like Solana has few worries about making it.