10 min read
An Overview: The Solana Ecosystem
A Deep Dive into the High-Performance Blockchain
Published on21 Oct, 2022
Anybody venturing into the crypto space in 2022 is bound to have at least heard about it, if not invested in the Solana project. Since it broke ground in 2017, Solana has been developers’ first choice to build decentralized applications (dApps). In essence, Solana is an open-source project implementing a novel, high-performance, and permissionless blockchain. The Solana Foundation is based in Geneva, Switzerland, and maintains the open source project. Some people annotate it as the “Ethereum killer”, and say it is currently the fastest and cheapest way to actuate digital asset transactions. At its core, Solana envisions providing a platform for running high-frequency DApps and offering speeds and services that match those of centralized financial institutions.
While all this might sound very enticing, one might wonder how Solana accomplishes so many things. Does it have a fairy godmother to help it through the blockchain trilemma? How performant is it in 2022?
This systematic review of Solana aims to answer all these questions and more. We will learn about the Solana network, look at some statistics, and analyze its consensus mechanism. The report will also briefly discuss the network’s current trends, prospects, tokenomics, and some important on-chain metrics. A lot to talk about — so let’s dive right in!
Solana was founded in 2017 by seasoned software engineer Anatoly Yakovenko. This project was built by Solana Labs, a software company based in the United States, and its ongoing development is coordinated by the Solana Foundation, a non-profit based in Switzerland. The Solana team has a very strong background in mathematics, physics, and computer sciences, and is skilled in bandwidth optimization, app development, and system optimization, having previously worked at tech giants like Intel, Qualcomm, Dropbox, Microsoft, Google, Twitter, and Apple. Yakovenko coined the idea of Proof of History (PoH), a unique timestamping mechanism that helps Solana fulfill its ambitious goals. With the help of co-founder Greg Fitzgerald, the Proof of History codebase was written in the Rust programming language. Stephen Akridge and Raj Gokal joined the project as co-founders, and the Solana was introduced to the world in 2018.
No blockchain to date has been able to satisfactorily solve the blockchain trilemma, i.e., be scalable, secure, and decentralized, all at the same time. Solana claims to have the recipe for the perfect blockchain with high throughput and one that solves the blockchain trilemma. Solana is highly scalable and boasts 65,000 TPS, with a theoretical upper limit of 710,000 TPS on a standard gigabit network in the future. For perspective, this is ~1,000 times faster than Bitcoin (max throughput of ~5–7 TPS) and more than 3,000 times faster than Ethereum (max throughput ~15 TPS). When it comes to speed, Solana is competing in the league of centralized finances and also beating them at this game.
Solana uses an innovative solution called “Proof of History” for timekeeping. The Proof of Stake consensus leverages this technique to drastically reduce communication overhead and latency between nodes. The PoH helps cryptographically prove the passage of time and where events fall in that timeline. Proof of History improves the efficiency of PoS on the Solana network. The validators no longer need to validate the temporal consistency of the blocks. This improves the Solana network to allow fault tolerance through the mechanism of eventual consistency. Since the architecture of the network is responsible for the ordering of blocks, the energy that would otherwise be spent on this process can now be diverted to enforce efficient block processing. The Solana whitepaper takes a deeper dive into the implementation details of Proof of History.
Although it is still technically in beta, Solana’s main net went live in the spring of 2020. It is not known when Solana will enter full release. A network sporting billions of dollars worth of assets still running in the beta phase may raise some eyebrows, but that’s how web3 rolls. The Solana blockchain is currently secured by over 1900 validators (consensus nodes). Transactions are processed by smaller groups of up to 150 validators called Solana clusters. This does lead to a certain level of centralization and raises questions on the extent of decentralization of this network. Under the PoH topology, the votes cast on the blocks by the nodes are transferred to the “leaders”, who then sign off the block themselves, which is an aberration in the conventional PoS community. It will be interesting to see if Solana ever addresses this concern, albeit, with the rapid increase in the number of Solana clusters, decentralization will be preserved.
The innovation train of Solana didn’t stop with the invention of Proof of History. To develop a robust, permissionless, and decentralized blockchain, Solana also developed the following 7 technologies:
Solana, like any other modern PoS chain, allows users to make use of smart contracts for various purposes, like operating dApps or exploring Defi. Investors can delegate their stake to node infrastructure providers to earn rewards. Ethereum did change the blockchain picture with these ideas, but through its efficient management of transactions and high throughput, Solana takes it one step further.
SOL is Solana’s native token. It can be used for staking and making transactions on the network. The nodes of a Solana cluster earn SOL as rewards for running on-chain programs and validating blocks. The network also enables micropayments of fractional SOL, Lamport, named after Solana’s biggest technical influence, Leslie Lamport (1 Lamport = 0.000000001 SOL). SOL has a market cap of over $10B. The current token supply in circulation is 358M SOL. The total supply is capped at 508 million coins. The token has a disinflationary emission rate and is expected to reach 700 million by 2030. The distribution of Solana’s SOL was carried out in five rounds of funding, of which four were funding rounds. Solana’s distribution has also not impressed many investors since a large share of SOL’s supply is concentrated in the hands of venture capitalists and other private investors. Currently, SOL trades at $30. When Solana hit its peak in 2021, it had appreciated over 12000% from the time it was originally released in 2020 when it was trading below $1. Solana hit an all-time high of $259.96 on November 6th, 2021.
The initial token distribution was carried out in the following manner:
Solana attempts to strike a balance between the forces of inflation and deflation typical of financial assets. Since it is a PoS chain, the most significant contributor to the token’s inflation is staking rewards. Solana’s initial inflation rate is 8% annually. This metric reduces by a small amount (15% annually) every epoch (about 2 days and 19 hours). This inflation will hit its final rate of 1.5% about 10 years from now. There are also deflationary forces at work. 50% of every transaction fee is burnt. With enough transactions per second, this burn could equal 1.5% per year, which eventually makes Solana 0% inflation. Solana enthusiasts claim that this approach maintains the profitability of staking without any downward pressure on the price.
The Solana network’s native token is currently the ninth-largest cryptocurrency in the world. The project’s protocol has the potential to be a game-changing technology that enables the development of high-performance decentralized applications. Its speed makes it the perfect choice for Defi, Gamefi, and NFT marketplaces. Solana has onboarded many projects onto its platform, including Chainlink, USDC, USDT, Serum, Terra, and several others. Solana also hosts a burgeoning NFT market, with Magic Eden and Solanart as its native NFT marketplaces. Open sea, a prominent NFT marketplace, also integrated support for the project after high user demand. To further its goal of blockchain democratization, Solana launched its payment solution, Solana Pay.
The ability to perform transactions within seconds by just scanning a QR code in physical retail stores or e-commerce platforms helps Solana achieve parity with centralized payment solutions. Commenting on Solana’s state post-Merge, the founder, Yakovenko contended that Solana handled more user and app transactions each day than all Ethereum and other Ethereum-based blockchains combined. Unlike Ethereum, Solana would not need a layer 2 solution to scale.
All has not been a fairytale ride for Solana though. There have been some haunting twists in this tale. As of October 2022, the Solana price chart gleams red all over. The network has experienced a fair number of outages over a good part of the last year. Recently, the network also fell victim to a hack that led to thousands of users losing their funds worth around $8 million. The recent hack of Mango, a Defi project on Solana, potentially caused a loss of over $100 million, and perhaps caused the fall in the token value.
The post-pandemic strained macroeconomic environment also did not do any favors to the network’s performance. Like other cryptocurrencies, Solana also didn’t escape the brunt of hawkish monetary policies and uncertain investor sentiment and has slipped into a bear market. Consequently, the network saw a drop in financial and network usage metrics.
The daily total transaction fee of the network averaged ~$70,000 in Q2 2022, taking a dip from a high of ~$305,000 in the last quarter of 2021. As of October 2022, this metric averages ~$42,000. The shift in these prices was consistent with the volatility of the token’s price. The correlation also stretches out to the total value locked in the chain, which now is 70% lower than the $4.92B average of Q2 2022, and about 20% from the $2.4B average of Q2. Lower revenues were also registered, and the reliability of the network will continue to lose credence if the network outages and hacks continue.
These instances have however not been able to dethrone Solana as the NFT King. As of last month, Solana has managed to grow by more than 100% as far as NFT sales are concerned, while Ethereum plunged by 18%. Other popular chains like BNB and Polygon also displayed negative growth.
We are very excited to see where Solana is headed. It has a solid development plan firmly established. The concerns around the decentralization of the network, namely fewer validators and concentration of SOL in a few hands, should subside as the network grows and as VC holders distribute their tokens to retail investors. While validators do not have to stake a minimum value, the cost of setting up these validators is still very high and presents a barrier to those who wish to enter this sphere. Regardless, Solana’s strides in the NFT market, where notable companies like Instagram are partnering with it for their NFT ventures, and the network’s popularity among the masses show us the true potential of decentralized tech.
Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 30+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards.
3 min read
3 min read
Subscribe to get our latest updates!
New products & networks supported, staking research, blog updates, and exclusive offers directly in your inbox.