Solana — Another Ethereum killer emerges

By June 17, 2021Binance
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Solana (SOL) is a blockchain platform that focuses on delivering fast, cheap, and scalable smart contract solutions. The network has been described as idiosyncratic because of the unique method it uses to order transactions and process higher blockchain throughput. The network is powered by the SOL token which is used to interact with and transact with the Solana blockchain.

Solana was founded by Anatoly Yakovenko in 2017. Yakovenko worked for Qualcomm and Dropbox before building Solana. Along with co-founders Greg Fitzgerald and Eric Williams, Yakovenko sought to build a blockchain that solved the throughput and scalability issues inherent with Bitcoin (BTC) and Ethereum (ETH), but without too many trade-offs.

Solana is a third-generation blockchain like Cardano, Tezos, and Polkadot, that is trying to challenge the incumbent centralized, traditional networks by improving and modifying the operational methods used by 1st and 2nd generation blockchains like Bitcoin and Ethereum.

Solana has attracted headlines recently after news that Solana Labs, the development team that manages the Solana chain technology, had raised US$314 million of new funding. The money will be used to develop technology in the Decentralized Finance (DeFi) space. The funding round was led by prominent Silicon Valley VC firm Andreessen Horowitz, and crypto-specific hedge fund Polychain Capital.

Discussing the project after the raise, Alameda Research CEO Sam Bankman-Fried said Solana has “the most ambitious tech road map of any blockchain, and they’ve been making impressive progress on it. It’s a blockchain that has the potential to support a DeFi ecosystem with world-scale activity.”

Solana has shown significant alpha as an altcoin in recent months outperforming benchmark assets Bitcoin and Ethereum. The SOL price is up ~2541% year-to-date, and ~184% in the last three months. For comparison, the Bitcoin price is up ~38% year-to-date but down ~32% in the last three months.

Watch Josh Olszewicz’s technical analysis of Solana on YouTube

Solana’s technology solution - why it’s fast

Solana is a Proof-of-Stake blockchain that uses the same hashing function as Bitcoin, SHA-256. It uses a unique, trustless way to determine the time of a transaction called Proof of History (PoH).

The SHA-256 algorithm takes inputs from users and encrypts them to produce a unique output that is difficult to predict. Solana takes the output of a transaction and uses it as the input for the next hash. The order of the transactions is now inbuilt into the incoming hashed output. This is different from the way the Bitcoin blockchain operates.

The PoH hashing process creates a long, unbroken chain of hashed transactions. This is designed to create a clear and verifiable order of transactions so that when a validator adds to a block, they don’t need to use a conventional timestamp.

Blocks on the Bitcoin blockchain are large and unorganized. Each BTC miner adds the time and date to the block they mine based on their local time. Other nodes in the network then have to verify that the timestamp provided by the miner is valid because it may be false or differ from the time reported by other miners. This is time consuming.

By ordering transactions into a chain of hashes, however, Solana validators are able to process and transmit less information per block. Having that hashed version of the latest state of transactions constantly recorded greatly reduces the time to confirm each block on the Solana chain.

Proof-of-History combines with other features of Solana to optimize and speed up throughput. For example, TowerBFT is Solana’s version of a Byzantine fault-tolerant Proof-of-Stake consensus model that uses the cryptographic clock enabled by PoH to speed up blockchain consensus by reducing messaging overhead and transaction latency. Selecting the next Proof-of-Stake node to validate a block of transactions becomes faster because nodes need less time to verify the order of transactions.

In a blog post from July 2019, Anatoly Yakovenko describes eight key innovations that make Solana “the First Web-Scale Blockchain”. Apart from Proof of History and Tower BFT (more on those later), the six other key innovations are:

  • Turbine — a block propagation protocol
  • Gulf Stream — a mempool-less transaction forwarding protocol
  • Sealevel — parallel smart contracts run-time
  • Pipelining — a transaction processing unit for validation optimization
  • Cloudbreak — a horizontally-scaled accounts database
  • Archivers — distributed ledger storage

All of these features mean that Solana can offer transactions and fees at a speed and cost much lower than other smart contract platforms.

Solana is currently running at 686 Transactions per second (TPS), which compares favourably to Ethereum which runs at 13 TPS. Ethereum users would likely enjoy having some of Solana’s throughput capabilities, as at the time of writing there are 147,718 pending transactions waiting to be confirmed by the Ethereum blockchain. Solana’s transaction fees for powering Dapps and smart contracts are also very low, estimated to be at $10 for a $1 million transaction.

Solana DEX comparisons

Raydium, the Solana blockchain’s most popular decentralized exchange (DEX) and automated market maker (AMM) currently has ~US$405 million worth of assets locked into it. Its 24-hour volume is US$16,627,966. In comparison, Uniswap V3, Ethereum’s most popular DEX and AMM currently has US$1.82 billion worth of locked assets and its trading volume in the last 24 hours was ~US$823 million. Pancakeswap, Binance Smart Chain’s most popular DEX and AMM, currently has US$4.24 billion worth of locked assets and its trading volume in the last 24 hours was ~US$592 million.

One thing that Solana has going against is that it uses an alternative coding language to Ethereum and it is not EVM compatible. Unlike on the Binance Smart Chain, where projects can just copy-paste what has already been built on Ethereum and use the same Solidity tooling because of BSC’s EVM compatibility, Solana developers building Dapps like Raydium need to start from scratch. Solana is written in Rust, which has far fewer Dapp building developers on it than Ethereum and BSC have access to.

One of the biggest issues with using Solana is the lack of multifunctional block explorers or analytics platforms in the same vein as Etherscan. Analytics or data for fundamental analysis for the Solana blockchain is very limited but appears that the Solana development team is working towards fixing this.

Solana’s lack of EVM compatibility and the fact that projects simply can’t be ported over instantly from Ethereum, also means there are far fewer cash grabs and scams on it than there are on Ethereum clone platforms like the Binance Smart Chain.

Staking SOL for passive income

As mentioned, Solana is a proof-of-stake blockchain with a focus on delegations. This means that anyone who holds SOL tokens can choose to delegate some of their SOL to one or more validators, who process transactions and run the network. SOL users need to stake or lock up their tokens with a validator.

Staking lists Solana as the fourth-largest blockchain by value of assets staked - with US$13,475,960,413 staked into it. The Cardano, Polkadot, and Ethereum blockchains are ahead of it.
The current estimated interest rate for SOL holders who delegate their tokens to a validator is 10.2%. Adjusted for the inflation rate of network supply, however, this interest rate drops to 2.5%. According to Staking Rewards, validators running a Solana Node will earn an interest rate of 11.31% but once adjusted for network supply inflation this drops to 3.61%.

The percentage of available SOL being staked is 68.17%. This means that 30% of tokens that could be stake are static meaning a large chunk of SOL users may be speculators or can’t get past the informational barrier of learning how to stake.

Solana Staking
68% of available SOL is currently staked. Source: Staking Rewards

Solana social media drama & marketing misfires

Although Solana is something of a crypto-media darling today, that doesn’t mean every swing of the bat by the project has led to home runs.

In mid-June, Solana misstepped badly with a marketing campaign featuring social media influencer, Maren Altman, in which she suggested the Solana’s cheap fees allowed her to live in the expensive Manhattan area of New York. The grandiose nature of the campaign was met with confusion and disappointment on Twitter, as it was a deviation from the technologically focused and formal public messaging that Solana had used in the past. The video ad has since been deleted.

Twitter user @TheSoftwareJedi’s comment neatly summed up the feeling of many in the Solana community. “I have to say that it upsets me to see money being spent on ridiculous social media influencers while I sit here adding VALUE by spending hundreds of hours learning to develop on the Solana platform and answering dev questions in your Discord - for free.”

The negative blowback highlights the difficulty projects like Solana face in expanding their user base into new demographics. The Maren Altman video was part of a wider marketing campaign launched on the TikTok platform. In the US, 60% of TikTok users are between the ages of 16-24. On Twitter, the largest demographic of users (26.3%) is aged from 25-34. Twitter’s demographic not only skews older than TikTok’s but it also has a higher proportion of male users. Recent estimates are that only 44% of Twitter users are female compared to 60% on TikTok.

Maren Altman
Influencer Maren Altman is leaving Twitter after backlash to her part in a Solano campaign.

So it made sense for Solana to try different messaging to target a younger, more female TikTok audience - but the blowback will likely scare future projects off trying to broaden their appeal in future. The angry reaction on Twitter was so severe, in fact, that Altman has decided to leave Twitter after receiving death threats because of the ad.

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