Sei Network Deep Dive Analysis
Sei Network Deep Dive Analysis
1. Introduction
Over the last three years, the explosive growth of DeFi has outpaced the development of underlying blockchain infrastructure. Sei aims to tackle this issue by building the first layer 1 blockchain which is optimized for DeFi applications.
If you think about blockchains on a spectrum, on one end you have general purpose chains like Ethereum & Solana, on the other end you have app chains like dYdX and Osmosis. Sei comes in the middle, where it positions itself as a sector specific chain. Sei is a Layer 1 blockchain which address the issues associated with digital asset exchange by making fundamental changes at the base layer, allowing for the optimal functioning of DeFi applications.
Sei has one core thesis: the fundamental use case for blockchains is the ability to exchange digital assets. Thus, the problem of how to scale exchanges is instrumental to unlocking the next stage of growth for Web3 adoption. Sei is Layer 1 blockchain built for trading, optimized at every level of the stack to offer the best infrastructure for the exchange of digital assets.
This includes features like a built-in order matching engine, frontrunning protection, and the fastest finality of any chain at 500 milliseconds. These optimisations pave the way for the emergence of new financial products.
Why do we need a defi specific chain?
To understand why we need sector specific chain for defi, we need to look at Serum and Solana. Serum was an orderbook launched by FTX on Solana, and accounted for over one third of the total program executions at one point. Despite Solana’s high throughput, Serum was forced to compete with other dApps & games for resources, often leading to congestion on the network.
Sei addresses this problem by building the orderbook logic directly into the base layer.By optimising the infrastructure at the base layer, Sei is able to build a highly performant infrastructure for trading applications.But, that’s not all. Sei also boasts of a native order matching engine, price oracle, parallel order execution, and single-block order execution at the infrastructure level.
But, why launch an L1 considering the influx of L2s that are now leveraging RAAS( Rollups as a service) ?
The team did initially consider this, but being an Ethereum layer 2 comes with it’s fair set of challenges. Most L2s today rely on centralised sequencers, and is the sole entity when it comes to executing transactions. This is a major challenge when it comes to decentralisation and censorship resistance. Furthermore, the maximum throughput of a Layer 2 blockchain is limited by the blockspace of the underlying Layer 1, which can result in scaling challenges. By building an L1 from the ground up with a specific focus on end user experience, Sei addresses these challenges.
2. Infrastructure
When it comes to order books, market makers prioritize factors like block times, finality, and latency. For market makers, who need to update prices every block, shorter block times translate to smaller price updates between blocks, tighter spreads, and reduced risk.
Anything beyond a few hundred milliseconds becomes impractical, posing challenges for effective market making strategies. A standard Cosmos chain, with approximately 6-second block times, presents suboptimal conditions for order book management. But, the beauty of Cosmos, lies in it’s customisability.
2.1 Optimistic block production
Earlier, with ABCI, there was little to no control on which transactions to pick out of the mempool, and the application only interacted with the consensus whilst making the decision. ABCI++ changes this, as it brings programmability to every single step of the consensus, and lets you reorder, modify, add transactions, and even speed up block times by letting you optimistically produce blocks. Which means instead of waiting for sequential confirmation of each block by the network, nodes are allowed to propose and process blocks independently and concurrently.
Sei further optimizes block processing by introducing parallel execution during the pre-vote and pre-commit stages. This approach involves the 'optimistic' application of state changes to a temporary candidate state.
This means the application can begin processing the block optimistically before its official acceptance by consensus. In instances where it’s not accepted, the block is discarded. This optimisation significantly accelerates block times, reducing latency by approximately 30% for 1-second blocks.
2.2 Intelligent Block propogation
Aside from optimistic block production, Sei is actively enhancing block propagation as part of its efforts to optimie the block production process. In Tendermint, block proposers include all transaction details when proposing a block. However, this results in a substantial amount of data.
Sei introduces a smarter approach by recognising that validators already possess access to the majority of these transactions through the gossip process in their local mempool. Instead of redundantly sending all details, the proposer now sends only a hash of each transaction in the block. For example- if User A is trading, the proposer only sends a hash of their trade details, not the entire trade data.
Validators can then efficiently reconstruct the block using the transactions stored in their local mempool. Sei refers to the combination of optimistic block production and intelligent block propagation as "Twin-Turbo Consensus," boasting an approximately 83% improvement in throughput through the implementation of these modifications.
2.3 Parallel Order execution.
The third critical modification revolves around the order execution process. In Cosmos chains which use ABCI, order processing follows a sequential order. This means orders are processed one by one, irrespective of the market they belong to, leading to a significant bottleneck in throughput and a proportional increase in latency under heavier loads.
With parallel order execution, enabling the simultaneous processing of unique markets that do not overlap. Rather than processing the first order of market B after market A's, both can be processed concurrently. However, within a specific market, orders still need to be processed sequentially to avoid non-determinism.
This parallel processing mechanism is beneficial for scalability and efficiency, allowing Sei to handle multiple markets concurrently without sacrificing determinism within each specific market.
Furthermore, Sei conducted extensive load tests focusing on parallelization and validator colocation to gauge improvements in block times, latency, and throughput. The results are striking—by parallelizing order execution, Sei achieved substantial reductions in block times (75-90% compared to sequential) and latency (40-120ms for parallel vs. 200-1370ms for sequential).
In a scenario involving 10,000 orders per block across 20 different contracts (markets), Sei managed to reduce block times from 1.33s to 0.81s, latency from 371ms to 48ms, and significantly increase throughput from 7,500 orders/s to 12,200 orders/s.
These findings underscore the effectiveness of Sei's approach, showcasing remarkable improvements across various load levels and emphasizing the benefits of parallelizing order execution in a blockchain optimized for DeFi applications.
2.4 Native order matching engine
Defi protocols often suffer from liquidity fragmentation. Each DEX maintains its own liquidity pool, leading to dispersed liquidity and potential slippage for users. Sei's native order matching engine consolidates liquidity, creating a deep pool that minimises losses due to slippage. Any defi application can build on top of Sei and leverage it’s order book.
Let’s take a simple example- If a user A submits an order to sell 1 ETH for $1000 on Sushi, and user B submits an order to buy 1 ETH for the same price on another DEX, then Sei’s native order matching engine will match both the orders.
Furthermore, Sei’s order matching engine doesn’t charge any transaction fees. As the network participation increases, we can expect participants to put up proposals to levy a small fees on this, thus unlocking a new value accrual mechanism for the token at the base layer.
2.5 Batch Auctioning
In order to protect users from malicious MEV, Sei aggregate all market orders and process them at once at the same price.
2.6 Native Oracles
In Sei, the oracle is built into the base layer, which means the validator will have to agree on the prices when committing to a block. This in turn, gives other modules access to reliable price feeds on-chain.
2.7 Order bundling
On Sei, you can consolidate multiple transaction and process them all at once. This functionality serves a dual purpose of reducing the overall gas consumption of the network and lowering transaction latency. Order bundling happens at two levels on Sei-
a) Client Order Bundling:
On the Sei network users can place orders across multiple markets in a single transaction. A user, can submit a single transaction that includes instructions to buy ETH/USDC in the spot market, sell UNI/USDC in the futures market, and sell ETH/USDC in the spot market—all in one go.
This is great for market makers as they thrive on providing liquidity to various markets, and the ability to execute multiple orders simultaneously in one transaction enhances efficiency and speed in managing their liquidity provision strategies.
b) Chain Level Order Bundling:
Instead of creating separate virtual machine instances for each transaction, Sei aggregates transactions within a specific market.
For instance, if there are 8 transactions in the UNI/ETH market, Sei bundles them together and processes them as a single virtual machine instance.
This approach significantly reduces the latency of trade orders, achieving an impressive response time of approximately 2 ms and contributing to an enhanced Transactions Per Second (TPS) on Sei.
3. Colocating Validators
In the initial version of the Sei documentation, the recommended specifications for validators mirrored those of a standard Cosmos chain. However, subsequent updates have elevated these requirements, particularly in targeted load tests where Sei has pushed the boundaries even further.
The intricacies of order book processing can strain hardware, and Sei emphasizes the need for validators to surpass typical blockchain norms, albeit not reaching the extensive requirements seen in Solana. Furthermore, Sei is advocating for smaller validator sets, a strategic move despite the overwhelming demand with 2,500 validator applications for the testnet. Currently, they are managing 250 validators in rotation, validating in groups of 50 at a time. Additionally, there's a strong push for colocating validators to further minimize latency.
Why colocation?
With validators dispersed globally, the increased distance leads to longer message travel times, resulting in higher latency during consensus and block production. In High-Frequency Trading (HFT), where speed is of utmost importance, Sei aims to reduce latency as much as possible. Recent tests conducted by Sei on colocation have yielded key insights: Colocation reduces latency by approximately 46% compared to internationally dispersed validator set.
The limit for optimal latency with validators is around 50; beyond this, adding more validators results in increased latency. While there are tradeoffs with having all validators in the same geographic region, the undeniable performance gains make a compelling case. Furthermore, concentrating validators in one location can lead to geographical centralisation, making the network susceptible to regional disruptions or attacks.
Furthermore, stricter hardware requirements could inadvertently exclude smaller players or community contributors, affecting the diversity of the validator set.
4. Token economics & Value Accrual
Sei is a proof of stake based Layer 1 blockchain. Which means, the network token is fundamental to building a thriving ecosystem. Let us take a look at the utility, existing & new value accrual mechanisms, token distributions and their role in building a thriving on-chain economy on the Sei network.
The SEI token serves several functions-
Network Fees: Pay for transaction fees on the Sei blockchain.
DPoS Validator Staking: SEI holders have the option to delegate their holdings with validators or stake SEI to run their own validator to secure the network.
Governance: SEI holders can engage in future governance of the protocol.
Native Collateral: SEI can be used as native asset liquidity or collateral to applications built on the Sei blockchain.
Fee markets: Users can pay a tip to validators to get their transactions prioritised, which can be shared with users that are delegating to that validator.
Trading Fees: SEI can be used as fees for exchanges built on Sei blockchain.
However, with a strategic focus on minimising fees, the expected value accrual is is projected to be moderate, akin to the dynamics observed in the Solana ecosystem. The primary avenue for substantial value accrual for the SEI token lies in MEV redistribution.
4.1 Using MEV for token value accrual
Sei introduces an novel strategy by implementing a private off-chain auction mechanism inspired by flashbots. In this setup, bots are given the opportunity to bid for typical MEV transactions within popular DeFi apps, such as liquidations and arbitrages on platforms like Aave.
For instance, consider a scenario where a liquidation within the Aave ecosystem has an economic value of approximately $1,000. Competing bots will vie for the chance to maximize their share of this value. Instead of congesting the base layer, these MEV transactions occur off-chain. In a well-functioning market, the winning bid might be, for example, around $980, with $20 allocated to the successful bot and the remaining $980 distributed among validators and delegators.
Importantly, the value derived from MEV is anticipated to surpass that generated from gas fees by a considerable margin. This approach establishes Sei in a distinctive position, deviating from the fee-centric dynamics of many blockchain networks, including counterparts like Solana.
4.2 Order matching engine
Sei’s order matching engine doesn’t charge any transaction fees. As the network participation increases, we can expect participants to put up proposals to levy a small fees on this, thus unlocking a new value accrual mechanism for the token at the base layer.
4.3 Token distribution
The total supply of SEI is capped at 10 billion tokens, with a circulating supply of 1.8 billion SEI tokens.
Sei's tokenomics reflect a strategic allocation aimed at fostering community participation and network growth. Of the total supply, 51% of the tokens are reserved for community initiatives, which includes staking rewards & incentivising contributors to actively build on top of the Sei network.
This is more or less in line with other L1s like Near, which allocated a combined 54% for community initiatives & developer onboarding.
Furthermore, of the 51% of the funds reserved for community, Sei has reserved a significant portion of it for airdrops & user engagement. This is crucial as it’ll help onboard users from other chains to the ecosystem, considering the fact that Sei is not EVM compatible, and doesn’t use Metamask. Which means, users will have to go through the friction of setting up a new wallet, and bridging funds. Sei launched the Atlantis campaign, before their mainnet release, incentivising users to test the network, resulting in over 100 million transactions on the mainnet.
The Foundation Treasury's 9% allocation ensures sustained support for ongoing operations, underlining a balance between community-driven initiatives and foundational stability. Overall, Sei's tokenomics prioritize community involvement, and long-term sustainability in building a thriving on-chain economy.
5. Ecosystem Fund and Adoption
Sei along with other venture firms has an ecosystem fund of over $120 million for projects building on top of it, signalling a commitment to fostering development. Currently, there are over 200 projects building on top of Sei across various sectors, from gaming to defi. But, that’s not all. Sushiswap is launching a decentralised perpetual futures exchange on Sei, which is a key indicator of trust by a major protocol.
Why developers are choosing to build on Sei-
User Experience Focus: According to Sei's co-founder Jay, the emphasis on user experience is a driving force for developers. The platform's speed and efficiency resonate positively, making it an attractive choice for those prioritizing user-friendly applications.
Strategic Ecosystem: Developers find strategic value in joining an ecosystem with existing users and trading activity. Sei's is strategically building a thriving defi ecosystem, amplifying its appeal for developers looking to tap into an active and engaged user base.
5.1 Top projects building on Sei
Outside of Sushi, some of the top projects building on Sei network are-
Axelar
Axelar is a cross-chain communication protocol built using the Cosmos SDK. Axelar is the gateway for BTC and EVM assets like ETH and USDC into the Cosmos Network. Furthermore, it is the canonical pathway for external assets for Osmosis.
Synthr
Synthr is an omni-chain synthetic asset protocol that enables the mint and trade of various financial assets using trustless contracts. It will also host an internal DEX — SYNTHSWAP, where users can swap on-chain assets with zero slippage.
Nitro SVM is a rollup network based on the Sei bringing SVM, the virtual machine used by Solana, to the Cosmos ecosystem.
5.2 Analysing Community sentiment
As explained in the tokenomics section, Sei launched an incentivised testnet campaign named Atlantis prior to the mainnet launch, which drove over 100M transactions on the network.
After the airdrop, #seiscam started trending on Twitter, as users felt the effort/reward ratio of the airdrop was low. With media outlets like Coindesk & Blockworks picking it up. Despite the negative sentiment on Twitter, the community is active on discord, continuously answering questions, and is actively participating in new community initiatives launched by Sei team on Twitter.
5.3 Github Developer Activity
One of the ways, we can gauge the developer interest and activity of an open source project is by analysing their Github.
Some of the key metrics-
757 forks
2.5K stars and 112 people watching
29 active contributors.
33 pull requests and 18 active issues in the last one month.
Forks
Sei's core repository has garnered attention with 2.5k stars and 112 watchers, indicating a notable level of interest. Furthermore, over 757 people have forked the project, which can be an indicator developers are exploring the codebase, potentially for building on top of it or integrating it into their own projects.
However, it's essential to note that forking alone doesn't guarantee active development or contributions, as some forks might be used for personal exploration or experimentation without necessarily contributing changes back to the original repository.
With only 33 pull requests and 18 active issues in its first month post-mainnet launch, it can be an indicator of two things- either low developer interest or it reflects a deliberate and quality-driven approach in the early stages of development, setting the foundation for future growth.Considering the above factors like 757 forks, and the fact that over 200+ teams are building on top of Sei, it most likely is the latter.
Contributors
There are 29 contributors to the Sei project currently. A significant portion of the contributions are coming from the Sei team itself. This could suggest that, at the current stage, the core development and maintenance of the project are primarily handled by the internal team.
While having active community contributors is a positive sign for the long-term health of a project, the early stages of a Layer 1 blockchain’s development often see a higher level of involvement from the core team. As the project gains traction and attracts more external developers, the contributor base is likely to diversify and grow.
6. Competitive Analysis
Sei stands out from other app-chains within the Cosmos ecosystem due to its distinctive technical features. Even though Sei started off as a sector specific chain with a focus on defi, their vision is to evolve into a general purpose chain over time. Which is why we’ll be comparing Sei with other Layer 1 blockchains rather than app chains like dydx and injective.
6.1 Developer onboarding
One of the central tenets of an on-chain economy is having a thriving developer ecosystem. Whilst both Solana and Ethereum have a thriving developer ecosystem, it’s different for the new and upcoming chains like Sei, Sui & Aptos, as they need to significantly reduce the onboarding friction and capture mindshare for people to build on top of them.
Aptos and Sui use Move for writing smart contracts. Sei on the other hand uses Rust, and is able to tap into a thriving developer ecosystem of Rust developers, and the existing pool of developers on both Cosmos( devs in the Cosmos ecosystem use Rust for deploying smart contract on top on Cosmwasm) and Solana ecosystem. This gives Sei a significant advantage when it comes to onboarding developers.
EVM Compatibility- Sei is not EVM compatible as it doesn’t support parallelization, and was focused on delivering the best performant infrastructure. When it comes to developer onboarding on a blockchain, the question of EVM compatibility has always arisen. Both Solana, and Terra back in the day, managed to build a thriving ecosystem despite not being EVM compatible.
EVM compatibility is something that helps with alignment with the Ethereum ecosystem. Furthermore, it also helps when it comes to onboarding developers who only know how to write Solidity smart contracts, and reduces the friction for them to get started. According to Sei’s co-founder Jay, over a period of five years, execution environments won’t matter and will get built into whatever chain you’re using. Which means, in the long run Sei will be supporting every type of smart contracts.
Killer apps- Whilst it’s important to reduce friction when it comes to developer onboarding, another metric that helps to build a thriving on-chain economy is the ability of a chain to attract killer apps. As it helps build trust with the broader developer ecosystem, and will also attract new players onto the blockchain. Sushi, one of the OG protocols of the ethereum ecosystem recently acquired Vortex protocol, and will be launching on Sei in the coming months. Sushi's move to Sei has the potential to pave the way for fresh capital inflows so that it can rival other chains.
6.2 Performance- Time To Finality
Transactions per second (TPS) is a metric measuring the number of transactions a blockchain can process in one second. But it can be misleading at times. Consider a scenario where you increase the number of transactions per block significantly and extend the block time to one hour; you might still achieve a high TPS on paper, but users would endure a lengthy one-hour wait for their transactions to be confirmed.
This is why when it comes to scalability discussion, time to finality is what ultimately matters. Unlike TPS, TTF provides insights into how long it takes for a transaction to be confirmed. For a layer 1 chain like Sei, specialising with a focus on digital asset exchange, achieving immediate transaction processing and confirmation is paramount. Hence, optimizing TTF becomes a critical aspect of scalability.
The time to finality on Sei is just 500 ms, this is lower than both Aptos & Sui which have have 10x the TPS but have lower block confirmation times. For Aptos, it is 160K TPS and a TTF of 0.9 seconds, whilst for Sui it sits at 120K TPS and 2.5 seconds for TTF. For Sei, the goal has always been to provide a user experience akin to centralised exchange with an on-chain orderbook.
6.3 MEV Redistribution
MEV is a major problem on Ethereum, as miners can reorder transactions to maximise their profits. This siginificantly compromises on the core user experience. In order to protect users from malicious MEV, Sei aggregate all market orders and process them at once at the same price. Sei's approach involves a private off-chain auction, akin to Flashbots, where bots can bid for MEV transactions like liquidations and arbitrage. The MEV redistribution mechanism ensures that the accrued value from these transactions is directed back to the Sei token, contributing to its overall value accrual.
6. 4 Liquidity
Dapps can leverage Sei's unified liquidity pool, addressing the challenges of fragmented liquidity and slippage. Which has been a major problem with AMMs in the Ethereum ecosystem. Whilst RFQ based projects like Hashflow deliver a much better experience compared to AMMs, there’s a limit on the number of tokens available for trades.
Liquidity Alliance
The Liquidity Alliance, is a group of organisations plays a pivotal role in providing liquidity through market-making to Sei's native order matching engine. This collaborative effort not only meets the high demand for market-making in protocols building on Sei but also significantly enhances user experience by minimizing slippage during transactions. Some of the members include- Skynet Trading, GSR, Kairon Labs, and Flow Traders amo
The key differentiator between orderbook applications on Solana( Serum), Sui( Deepbook- an orderbook dapp built by the Sui team) and Aptos( Econia- which recently raised $6.5 million seed round) v/s Sui, is they are constantly competing for resources with other dapps in the ecosystem & the orderbook logic hasn’t been built into the base layer. Since Sei started off as a chain aimed at solving the fundamental problem of asset exchange, the orderbook logic has been built into the base layer, thus offering a better user experience for the end users.
6.5 Culture- The Missing Layer
Sei has some of the best defi teams building on top of it. But, it missing one key piece when it comes to building thriving on-chain economies— culture. Ethereum, Solana and Flow ( Doodles) have a thriving NFT IP ecosystem built on top of them.
Ethereum scaling solutions like zkSync ( Pudgy Penguins) and Optimism have also onboarded consumer teams through incentives to build on top of them. Integrating and supporting cultural initiatives within Sei will not only attract diverse and passionate communities but also establish a distinct identity that goes beyond technical excellence, unlocking value across new user segments in the long run.
7. On-chain Analytics
Now, that we’ve looked at Sei the ecosystem, let’s take a look at the user adoption by leveraging on-chain data.
Over 478.4 million transactions have taken place on the Sei network with over 504K users participating.
7.1 Measuring on-chain activity on dApps
On Sei, the total number of transactions w.r.t dApps is 623K, with over 49.7K users participating, generating a total of 208,000 fees in $SEI. Interestingly, of the 500K+ users who bridged to Sei, only 10% interacted with dApps.
This can be for two reasons- It’s been only a month since the mainnet launch of Sei, which means there are only a handful of protocols that users get to interact with safely, considering the increasing number of hacks that happen daily.
Furthermore, since Sei had an incentivised testnet campaign, much of the transaction volume can be attributed to potential airdrop farming on the new chain.
As you can see in the above chart, the number of users interacting with dApps peaked on August 17 with 9.6K users when they launched their mainnet with a gradual decline over time.
Like most upcoming L2s & L1s, bridging is the most used Dapp. Wormhole- a cross chain communication protocol has the highest number daily active users with a 9.6k users.
Gaming is seeing traction
Yolee- an open world game on Sei has the largest transaction count with 380k txs, accounting for 54% of dApp transactions on Sei. Even though it has only 2.3k DAU, it is the one with the most network activity outside of bridges and is driving the demand for blockspace.
Whilst the number of active users bridging via Wormhole dropped, Yolee with their game was able to maintain sustainable traction on the network consistently over time. This is a positive indicator of retention, considering it’s an on-chain game.
7.2 Assessing the Network health of Sei
Sei has the highest successful transactions per second compared to Ethereum, Polygon and Avalanche at 43, indicating a high transaction throughput capability.
The low time between blocks being only 0.38 seconds implies that Sei has the fastest block generation time compared to other blockchains. Short block times are desirable as they contribute to quicker transaction confirmations and a more responsive network.
Sei exhibited remarkably low network fees, totaling a mere $18,000 or a negligible $0.0002 per transaction. In stark contrast, Ethereum recorded a substantial $127 million in fees during the same period, averaging at $4.4 per transaction.
After analysing, both the network health & user activity on-chain on the Sei network, we can infer that Sei is living up to it’s promise of being a highly efficient and performant chain with cheap network transactions. This will pave the way for mass market user adoption in the long run.
8. Investment Proposal
Sei is a sector specific chain focused on defi. And considering the fact, Sushi is going to launch a perpetual futures exchange on the chain, and is trying to fill the market void left by FTX, we can use the derivatives volume as a proxy to asses the potential future growth and network demand on Sei over time period of 2-3 years.
As you can see in the above chart, the current monthly derivatives volume is hovering around $2 trillion. The potential for perp DEXs to make strides seems quite plausible, especially if the overall market sentiment continues its upward trend.
Should DEXs make notable progress encroaching into CEX territory, we can anticipate substantial spikes in trading volume. A mere 3% uptick in DEX volume share would translate to a staggering $450+ billion surge in volume based on current rates.
Whilst the derivatives volume can definitely act as a proxy to asses future network growth, we can’t do the same for revenue at this point in time for two reasons. The economics of a dex and L1 are vastly different, considering one is operating at the base layer. Furthermore, in the case of Sei- the value accrual mechanism for the token is still subject to change via the governance. A more apt comparison would be Solana.
Why Solana?
Going back to our introduction, one of the core selling points of Solana with respect to defi was that order book exchanges will eventually take over AMMs, which eventually proved true as Serum, an order book dapp built on top of Solana accounted for over 1/3 of the total program executions at one point. Since it was launched by FTX, and the dapps leveraging the orderbook pulled out, there’s a major gap in the market that needs to be filled.
Bull Case Scenario for Sei
Sei is perfectly positioned to fill that gap. Furthermore, Sushi is launching a perpetuals exchange on Sei trying to capitalise on this.
In the optimistic bull case, Sei not only sustains but surpasses 2022 DEX volumes, indicating a scenario where DEXs outpace CEXs in the next three years.
Sushi's move aims to strategically fill the void left by FTX's absence, leveraging Sei's on-chain order book for a competitive edge in the DEX landscape.
Scenario Analysis
If Sei follows a growth trajectory similar to Solana, what would an estimated ROI be for the token over a three year period. We’re taking a three year period, as it usually take anywhere between 3-4 years for an on-chain economy to hit escape velocity.
With that being said, there are few things to keep in mind before conducting the scenario analysis. As you can see in the chart below there are multiple token unlocks in the next three years. Furthermore, we are only using network activity & the current market cap to conduct a scenario analysis. Since Sei only launched their mainnet last month, and much of the network activity is airdrop farming as we saw during the on-chain analysis, we won’t be looking at revenue & P/S ratio for valuation.
Let us conduct a scenario analysis based on the limited information we have, and analyse how Sei can neutralise these unlocks as well as position itself in the highly competitive market.
Solana
Solana current market value- $23.34
Market capitalisation- $9.65 billion dollars fully diluted.
ATH- $258.70
Total supply- 559,333,551 SOL
Circulating supply- 414,237,913 SOL
Sei network
Sei current market value- $0.116
Market capitalisation- $211 million fully diluted.
Circulating supply- 1.8 billion SEI
Total supply- 10 billion SEI
Solana at the peak of network activity & mindshare, hit an all time high of $258.70.If Sei reaches a similar peak, what would a potential ROI for the token be? Let’s do a scenario analysis.
Peak Price Ratio = Current Solana Market Cap / Current Sei Market Cap
Peak Price Ratio= 211 million/ 9.65 billion ≈ 0.02187
The Peak Price Ratio is a measure of how Sei's current market capitalization compares to Solana's current market capitalization. It provides a relative indication of the size of Sei compared to Solana in the current market. This ratio is useful for estimating how Sei's market cap might scale relative to Solana's at its peak.
Sei Future Price
Sei’s Future Price = Peak Price Ratio × Solana Peak Price
Sei Future Price = 0.02187 × 258.70 ≈ $5.65
If Sei reaches a similar peak as Solana, the estimated Sei token price could be around $5.65 at a market cap of approximately $10.17 billion. Now, that we’ve estimated Sei’s future price, let’s calculate the ROI if Sei hits Solana’s peak.
Calculating the ROI for SEI token
ROI = (Final value - Initial Value) / Initial value x 100
ROI = ($10.7 billion - $0.211 billion)/$0.211 billion x 100 ≈ 4663.98%
That is over a 47X return on investment from the current price.
Bear Case Scenario for Sei
With that being said, in a bear case scenario— Sei might face challenges due to stagnation in derivatives growth at 10% perpetually. This scenario could arise from adverse regulatory developments which might lead force users to retreat and rely on centralised exchanges over DEXs in the long run.
While this might have a negative impact on the broader crypto market, Sei's resilience could come from its fee revenue, providing a buffer against market headwinds.
In estimating the potential ROI for Sei, the analysis indicates a remarkable growth scenario. If Sei were to reach a similar peak as Solana, with an estimated future token price of $5.65 and a market cap of approximately $10.17 billion, the calculated ROI stands at an impressive 47X. Such a substantial ROI underscores the significant growth potential for Sei, reflecting a compelling investment opportunity if the token were to achieve similar market dynamics as observed in Solana's peak performance.
This extraordinary ROI for Sei aligns with historical data from prominent network tokens like Solana and Polygon( an ethereum scaling solution), demonstrating the potential for at least 50X growth within a 2-3 year timeframe. The comparison with Solana and Polygon serves as a reference point, considering the market's capacity for exponential growth.
Conclusion
Given the comprehensive analysis of Sei, I would recommend considering an investment in the protocol. Sei demonstrates notable technical differentiations, such as the highest time to finality (TTF), advanced MEV mitigation & value distribution through a private auctions, and building the orderbook logic right into the base layer. The strategic onboarding of Sushiswap and the focus on a unified liquidity pool provide a strong foundation for building a thriving ecosystem.
Moreover, for any Layer 1 blockchain to succeed they need a thriving developer ecosystem. Sei smart contracts are written using Rust, coupled with access to the Cosmos and Solana ecosystems— positions it well for continuous growth and innovation in the long run.
With that being said, for Sei to evolve from being a sector specific chain to general purpose blockchain on the Layer 1 spectrum, they will need to build a thriving cultural ecosystem, which can capture mindshare & unlock new novel use cases beyond defi in the long run.