Reasons Why Solana Faces Strong Resistance Around $190 Mark

SOL price surged by 5% today; however, on-chain data casts doubt on Solana's ability to breach the $190 barrier.

Source: coins.ph

On May 27, Solana's native token, SOL, surged by 5%, climbing from $161 on May 26 to $171. This uptick sparked optimism among investors, especially after SOL had reached $188.90 on May 21. A key catalyst for this upward momentum was a proposal aimed at boosting yields for validators instead of token burning, despite network activity remaining stable. 

Solana Has Decided to Discontinue Its Practice of Burning 50% of the Priority Transaction Fees

On May 27, Solana's validators greenlit the SIMD-0096 proposal, effectively eliminating the 50% burn rate on priority transactions and setting it to 0%. This means that starting from epoch 621, all transaction fees will be allocated to block producers. The rationale behind this shift is to incentivize validators to prioritize network security and efficiency rather than engaging in arbitrage strategies such as transaction reordering or exclusion. Maximal Extractable Value (MEV) refers to the profits block producers can earn by controlling the order of transaction processing on the blockchain. As each block has a limited number of transactions, validators have the discretion to choose which pending transactions to include, potentially disadvantageous to regular users who may face poorer execution prices in decentralized finance (DeFi) applications.

However, the adoption of the SIMD-0096 proposal could have adverse effects on the Solana Network by increasing SOL's inflation rate, as noted by Laine, a Solana staking validator. Despite the annual issuance increase of 4.6%, Laine highlights that priority fees were absent in May 2023, suggesting that the effective inflation rate could revert to approximately 9.9% annually. Some analysts speculate that SOL's recent price adjustment might be a response to a downturn triggered by the approval of an Ether exchange-traded fund (ETF) in the United States. The SEC's green light on May 23 propelled ETH to $3,975 on May 27, nearing its peak of $4,090 in 2024.

An analyst suggests that traders have adopted a bearish stance on SOL following the approval of the Ether spot ETF, which is described as a once in a lifetime bull catalyst. He argues that the market has overly fixated on the Ether ETF decision, despite SOL's year-to-date gains of 69%, closely mirroring Ether's 72% increase in the same timeframe.

Solana’s Network Activity Has Remained Stagnant Over the Past Week

Despite varying interpretations of the impact of eliminating the burn mechanism, Solana's network usage growth has been sluggish, especially when compared to Ethereum and its layer-2 solutions. Data indicates a mere 5% increase in Solana's decentralized application (DApps) volumes over the past week, starkly underperforming against Ethereum's 52% increase. In the same period, the BNB Chain saw a 22% increase, further highlighting Solana's relative underperformance. In terms of active users, Solana experienced a 6% weekly decline in unique active addresses, comparable to Ethereum's 4% decrease. However, competitors like BNB Chain and Polygon have seen increases in active users by 25% or more.

Solana's second-largest decentralized exchange, Raydium, witnessed a 16% drop in users this week, while its NFT marketplace saw a 22% decline. The recent decline in SOL's price to $161 may have been influenced by speculation surrounding Ether's ETF approval, though it's uncertain when these instruments will begin trading in the U.S. Given the stagnant on-chain activity and significant criticisms of the inflationary changes resulting from the elimination of the burn mechanism, it seems unlikely that SOL will soon reclaim its previous high of $188.90.

Disclaimer: FameEX makes no representations on the accuracy or suitability of any official statements made by the exchange regarding the data in this area or any related financial advice.