Solana stablecoin volume just hit a record $144bn. Or did it?

At the start of December, something unexpected started happening on the Solana blockchain. The transfer volume of stablecoins started rising rapidly.

In less than eight weeks, the metric ballooned from around $33 billion to over $144 billion — a 336% increase.

The sudden rise in stablecoin transfers on Solana, unprecedented in the history of DeFi, was lauded by Solana’s community. Blockchain analysts from Sphere used the metric in post comparing stablecoin trading volume to that of Visa transfers.

But according to Eugene Chen, co-founder of Ellipsis Labs, a core contributor to decentralised exchange Phoenix, the soaring stablecoin transfer metric doesn’t indicate what many people think it does.

“The metric may be correct, but it is not a good indicator of economic activity,” Chen told DL News.

Chen confirmed that the majority of last week’s $144 billion transfer volume came from the Solana-based Phoenix exchange.

Phoenix requires users to deposit assets before placing orders on its markets. These deposits leave a record on the blockchain, and are susceptible to getting lumped in with data showing actual stablecoin trades.

On the surface, it may appear that the increase in stablecoin transfer volume comes from the creation and cancellation of trade orders — similar to high-frequency trading in traditional finance.

In this case, however, it is actually market makers depositing funds into specific markets on Phoenix, which is necessary before they can place trade orders on them.

The result is that as activity on Phoenix grew in recent weeks, so did Solana’s stablecoin transfer volume.

Analysts who were unaware of how Phoenix worked assumed that Solana’s stablecoin transfer volume equated to its stablecoin trading volume — real trades between two counterparties — when it did not.

DefiLlama data shows that Phoenix settled $670 million worth of trades in the week ending January 28.

Onchain stablecoin trading volumes is a widely-watched metric. Analysts view it as a powerful heuristic for quality activity because it represents real dollar equivalents moved around on a blockchain, rather than volatile, unbacked tokens.

The metric is most useful on blockchains with a substantial transaction fee — like Ethereum — because it implies those trades are likely to represent real economic activity.

‘A common market-making pattern’

According to Chen, the reason Phoenix is responsible for an outsized amount of Solana transfer volume is because of the activity of market makers on the exchange.

He described “a common market-making pattern” where market makers repeatedly deposit and withdraw assets from different markets on Phoenix in order to place limit orders.

“None of this is trading volume, but because it happens very frequently it creates a lot of token transfer volume,” Chen said.

Such market-maker behaviour is not limited to onchain exchanges like Phoenix.

In markets including stocks, currencies, and commodities, market makers both buy and sell securities at competitive prices — acting as somewhat of a wholesaler. The market maker profits by exploiting price gaps with laser precision — hundreds of algorithmic trades that can happen in the blink of an eye. Investors benefit because such trading activity creates lots of counterparties, giving them a greater ability to quickly buy or sell a security, especially in large chunks.

And as Wintermute CEO Evgeny Gaevoy told DL News in an interview last year, crypto market making activity is similar.

“These are real USDC token transfers, creating real USDC transfer volume, but with little-to-no economic activity associated with them,” Chen said.

The confusion arises when analysts, such as those at Sphere, compare Solana’s stablecoin transfer volume — which includes thousands of onchain transfers from market makers — with that of other blockchains where such activity isn’t recorded onchain.

This can give the false impression that Solana users are trading many more stablecoins than they actually are.

For Solana, making sure people don’t overestimate the blockchain’s activity metrics is important. Solana co-founder Anatoly Yakovenko wrote in an X post conversation about the issue:

“Pls filter out the [market-maker] transfers.”

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.