What is Solana? Decoding the Ethereum killer

On 18 February 2022, Crypto Finance (Brokerage) AG, announced the addition of Solana (SOL) to our 24/7 CAT and agency trading offering, which is available from 7:00am-6:00pm Monday to Friday.

We now want to share some background on the often-touted Ethereum killer.

Solana’s History

Solana is a Layer 1 Blockchain aimed to produce a platform enhanced for scalability, enabling developers to create decentralised applications. The whitepaper was published by Anatoly Yakovenko in 2017. Solana uses Proof-of-Stake (PoS) to validate transactions and to add new blocks. However, in the whitepaper, Yakovenko defined the additional mechanism Proof-of-History (PoH), which is a timekeeping technique, further described later on. Shortly after publication, Solana Labs was created, and it began raising funds to build its network in Q2 of 2018. The Mainnet Beta launched in March 2020, featuring transaction abilities and smart contract support.

The SOL Coin

SOL has two main uses. Network users can use SOL to pay for fees from sending transactions or running smart contracts. Secondly, holders of SOL can delegate their holdings to a validator to help secure the network. In return, they receive passive rewards in the form of SOL: 50% of the transaction fee is burned and 50% is distributed to the validators. At network launch, 500,000,000 SOL were released in the genesis block. There is no established maximum supply, however, due to its inflationary schedule. SOL aims for 1.5% inflation, a controversial topic in crypto given the fixed supply of bitcoin and the debates around the so-called deflation in ETH. As per the Solana explorer, the current total supply is 515,621,261, while 319,246,363 SOL are in circulation.

The native coin SOL entered the market after multiple private rounds. SOL’s reputation as a VC-backed project has fuelled the perpetual centralisation debate in crypto markets.  According to Messari, 38% of SOL coins are dedicated to the community reserve fund. This allocation is managed by the Solana Foundation for community initiatives, rewards, and airdrops. An additional 37% went to private investors. Among these are Alameda Research (the largest FTX backer), Delphi Digital (a leading crypto asset research firm), and Multicoin Capital (an acclaimed investment firm). 1.6% was sold through public auctions. The remaining 25% went to founders. In comparison to other public blockchains, Solana ranks the highest in community allocations, but also ranks 2nd highest in coins distributed to insiders (team, company, and VC-purchased coins).

Developments

Solana developments accelerated rapidly in 2021 and at the start of 2022. Here are some notable headlines:

  1. FTX launched a NFT marketplace on Solana
  2. Deutsche Boerse launches Solana ETN by Van Eck
  3. Solana launches Wormhole Bridge between multiple Blockchains
  4. Solana NFT sales volume crosses $1bn
  5. Grayscale launches Solana Trust
  6. Solana wallet Phantom raises $109m and releases iOS app

Unfortunately, the pace of development has attracted hackers to take advantage of the immature ecosystem. In the recent Wormhole token bridge exploit, Jump Crypto Group, who has a stake in Wormhole’s development, ended up replenishing  the stolen assets to allow the bridge to operate without any user losses. This poses the question of the role of large traditional players in the crypto ecosystem.

Solana’s Consensus Mechanism and Scaling Efforts

The Solana Blockchain is often compared to other Layer 1 blockchains such as Ethereum, Polkadot, Binance Smart Chain, and Avalanche. The impossible Blockchain triangle, or the Blockchain Trilemma, is often used to compare the Layer 1s through the characteristics of Scalability, Decentralisation, and Security. Binance Smart Chain is known for offering scalability and security, while lacking in decentralisation due to the low number of nodes. Ethereum enjoys more decentralisation and security in comparison, but has not yet been able to scale. While Solana claims to have solved all three problems, its strongest selling point is its scalability: the ability for a blockchain to cope with a large number of transactions. However, there are still some hiccups in the network, which is often the case in nascent projects in new technologies. Solana’s scaling efforts has sacrificed the network’s stability. According to Solana’s status page, the Mainnet experienced nine partial outages in January of this year due to high levels of network congestion.

Scalability is the leading limitation experienced among Layer 1 blockchains, on account of the length of time it takes to reach consensus on the transaction order. In a pure PoS system, each node needs to agree on the time and sequence in which events occur in order to create a block. Time taken to validate transactions therefore becomes very time consuming. To counter this, Yakovenko included PoH in the Solana Blockchain. Described as “A Clock for Blockchain”, PoH provides a historical record and a verifiable order of transactions. Each event is assigned a timestamp as it arrives. Therefore, nodes do not need to coordinate with each other, but can trust the timestamp and the order of transactions they receive to create the next block in the PoS process. In addition to PoH, Solana’s network uses seven other key core features. You can read about them in Yakovenko’s article published on Medium. Altogether, Solana’s network can process more than 50,000 transactions per second, compared to 15 transactions per second on Ethereum and 100 transactions per second on Binance Smart Chain.

Solana in DeFi

The heavy use of protocols on Ethereum has caused the network to become overly congested and has resulted in increased gas fees. Through Solana’s scaling capabilities, Decentralised Finance users and protocols have flocked to the network to enjoy cheap and quick transactions. The total value locked (TVL) increased from $216.07m on April 1, 2021 to an all-time high of $15.25bn on November 9, 2021. The TVL is dominated by decentralised exchanges, lending & borrowing protocols, and yield aggregators. Most notably, Serum dominates Solana’s TVL with an 11% share. Serum is a decentralised exchange that is built on Solana; it was created by FTX, Alameda Research, and a few other partners. The non-custodial DEX operates an on-chain central limit book and matching engine. Any Solana protocol can use Serum’s order book to source liquidity and develop trading features. In November, Serum launched a $100m liquidity mining program to attract users to the ecosystem. The SRM token offers the Serum traders up to 60% off fees, and can be staked to receive platform trading fees. You can trade the ERC-20 version of SRM with us at Crypto Finance (Brokerage) AG.

Here you will find the quick facts on Solana.

 

Disclaimer

Please note that our descriptions of crypto assets are often based (at least in part) on the project’s marketing materials and other publicly available resources. The content in this article is for educational and discussion purposes only and should not be considered as financial advice.

 

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