Serum (SRM)’s Inflated Price Is Not Justified (Yet)

  • Serum (SRM) is a high-speed, low-fee, decentralised order book built on Solana.
  • Investors can transfer assets back and forth between Serum and Ethereum-based decentralised applications. This will attract users that want to avoid paying the high fees associated with Ethereum-based exchanges like Uniswap.
  • SRM’s future is dependent on Solana's adoption. SRM is already priced high relative to other decentralised exchanges.
  • The market has already priced in a future 10x growth in Serum’s daily transaction volume. Investors that buy-in at peak prices of SRM will need to have a medium to long-term investment horizon.

Investment Idea

Serum (SRM) is a unique decentralised exchange (DEX) that operates more like an order book found on a centralised exchange. Instead of using automated market maker (AMM) models, Serum uses a central limit order book (CLOB) to match orders automatically while keeping everything entirely decentralised.

Serum has some heavy institutional backing, including Alameda Research along with the likes of FTX’s Sam Bankman-Fried. These factors are promising for Serum's continued development, integration and adoption. Serum is built on the Solana (SOL) blockchain, which uses a novel consensus algorithm to keep transaction speeds at some of the highest in the industry while maintaining security and decentralisation. Solana can process 65,000 transactions per second and costs $0.00001 per transaction.

Potential

Measured by daily trade volume, Serum is already one of the world’s top 20 DEXes. However, Serum is expected to gain increased adoption over the coming weeks. In August 2021, Solana introduced Wormhole, which bridges the Ethereum (ETH) blockchain with Solana. The bridge allows cryptocurrency users to transfer assets to and from Ethereum-based decentralised finance (DeFi) applications such as Uniswap and nonfungible token marketplaces such as OpenSea.io. Wormhole also enabled seamless interoperability with DeFi on the Terra blockchain and Binance Smart Chain. Connecting to multiple blockchains and processing transactions at affordable prices gives Serum a competitive advantage over other DEXes. This bodes well for future adoption and price appreciation.

The nearest ranked competitor by market capitalisation is SushiSwap (SUSHI), which would not take much more growth for Serum to overcome. PancakeSwap (CAKE), which runs on the Binance Smart Chain, is likely to be around Serum's market potential in the medium to longer term.

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Risk

Serum may be currently overvalued. Serum is processing just $38m per day in transactions and has a market capitalisation of just over $1bn. In comparison, SushiSwap is processing almost 10 times the amount of Serum ($306m per day), but has a market capitalization similar to Serum’s at $1.3bn.

Outside of the current Solana hype pushing up Serum’s price, Serum has two main risks: Solana adoption and looming regulation from governments.

Solana quickly became one of the top ten cryptocurrencies, measured by market capitalisation. However, Solana recently had a hiccup. Validators temporarily shut down the network in order to fix a bug. If Solana cannot provide 100% uptime for cryptocurrency transactions, users will seek out other blockchains and investors will follow.

Regulators from the United States and other world powers have recently discussed a vague looming crackdown on cryptocurrencies and blockchains, which may be regarded as securities if not adequately decentralised. Until regulatory clarity is provided, there is no way of knowing if Serum is among regulators' lists. A VPN may be necessary to access Serum's features and the SRM token.

Conclusion
If Solana can become a crypto blue-chip, Serum will receive tailwinds of increased network adoption, which is likely to increase the value of the SRM token. Serum's unique central limit order book (CLOB), combined with low fees and fast settlement across multiple blockchains, makes it a powerful force in the DEX space. However, the market has already priced in a future 10x growth in daily transaction volume. Therefore, investors that buy in at the current high of SRM will need to have a medium to long-term investment horizon.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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