Solana boat on the seas of resilience

Solana’s resilience post-FTX

Crypto

In the crypto industry’s pursuit for speed and scalability, only a handful of blockchains stand out, with Solana being one of them. Its core mission is simple yet vital – to create a fast, scalable and user-friendly ecosystem that tackles some of blockchain’s biggest bottlenecks.

While Solana has certainly had its fair share of setbacks, like the collapse of FTX and Alameda, it deserves credit for its resilience. Ongoing ecosystem efforts, a strong community and several upcoming technological advancements may suggest a strong commitment from Solana to improving its growth potential and capturing market share (more below).

Recent milestones include the Solana Mobile Stack, the Web3 smartphone Solana Saga, and Solana Pay, a permissionless payment ecosystem making its debut in various stores and brands. Meanwhile, Firedancer, a new validator client is set to enhance the network’s robustness and decentralisation efforts. This also places Solana, alongside Ethereum, as the only other blockchain with multiple validator clients.

Solana has gained a reputation as the “blockchain for retail” thanks to its fast transaction speed, low transaction costs and user-friendly applications. In contrast to Ethereum’s 10-15 transactions per second (TPS) and around 15 minutes for transaction finality, Solana is averaging between 2,000-4,000 TPS with a finality time of 20-40 seconds.

An integral part of Solana’s ecosystem revolves around its staking capabilities, allowing users to participate in securing the network and earn rewards. To date, over 71 percent of Solana’s circulating supply is currently staked, which may indicate a strong degree of trust by tokenholders.

In early 2022, Solana experienced several network outages due to a surge in bot spamming the network for NFTs at a rate of 4 million transactions per second. Since then, Solana’s development team has begun implementing network upgrades to manage traffic congestion, transaction prioritisation and fee markets aimed at disincentivising spam transactions. Fee markets enable users to get urgent transactions processed quickly, while Solana validators can earn more by processing transactions with tips. These proactive measures could signify Solana’s commitment to improving its network and ensuring these network outages are a thing of the past.

Ecosystem growth

Solana’s ecosystem recorded an impressive 86 percent growth in monthly active network addresses, outpacing other chains like BNB Chain (14 percent), Ethereum (-4 percent) and Optimism (22 percent) during the same period. Projects like The Orca and Raydium contributed significantly to this rise.

Despite the bearish market sentiment, Solana remains an attractive option thanks to its development capabilities, offering relief from issues like high gas fees, slow transaction times and scalability limitations on networks like Ethereum. That said, there are over 640 projects live on Solana, covering a wide spectrum of crypto sectors, with the most popular being NFTs (or Digital Collectibles), Decentralised Finance (DeFi) and Gaming. There are also more than 2050 active developers contributing to Solana-based projects.

Solana’s ecosystem by category

Solana ecosystem by category

Source: Sygnum Bank analysis

Projects like Mango and Jitra are working to improve network reliability, whereas solutions like Wormhole and Carrier cater to the industry’s need for blockchain interoperability. Wormhole, in particular, acts as a multi-chain protocol, linking Solana with 24 other chains, including Ethereum, BNB Chain and Polygon. Solana’s most popular wallet, Phantom, is also preparing to launch its multi-chain solutions to facilitate token transfers across various chains within the wallet itself.  Solana’s most popular wallet, Phantom, is also preparing to launch its mulit-chain solutions to facilitate token transfers across various chains within the wallet itself.

Solana is also popular NFT hub, home to popular marketplaces like Magic Eden, Solanart, SolSea and Tensor, but its ecosystem also extends into the payments and stablecoin sectors as well. In recent news, payment giant Visa announced its plans to use Solana for its USDC stablecoin settlements, alongside Worldpay and Nuvei. MakerDAO’s co-founder recently proposed Solana’s codebase for its new blockchain network, NewChain, which is a move that will mark a significant departure from its long-standing association with Ethereum. The proposal was based on Solana’s “technical prowess, resilience (post-FTX) and track record of being adapted by various projects” – but this has yet to be approved by the MakerDAO community.

As the crypto industry continues to attract new users, there is a growing appetite for blockchains that offer efficiency and scalability. This is why Solana remains a preferred choice for many applications, especially in the DeFi, NFT and infrastructure sectors. For instance, when dealing with NFTs, during periods of high network activity, retail users often find themselves unable to afford the exorbitant gas fees, some of which far exceed the price of NFT itself. These instances push users towards networks like Solana, where smaller transactions remain practical and affordable.

Solana is also keeping up with the growing relevance of blockchain interoperability, with solutions like Solana EVM (Ethereum Virtual Machine) and deBridge enabling decentralised applications and transactions from Ethereum (and other chains) to run on Solana.

SOL – Token supply model

Solana’s token supply model is designed to encourage network participation through staking. When users stake SOL tokens, a large portion of the SOL issued via inflation is distributed to them in proportion to the amount they stake.

This model employs a unique supply inflation schedule, which started at 8 percent in February 2021 (Solana’s official launch) and is gradually decreasing by -15 percent each year until it reaches a fixed value of 1.5 percent per year (i.e. the long-term inflation rate).

Solana also introduced a burning mechanism where 50 percent of the transaction fees are burned, with the other 50 percent going to validators that process the transactions. Over time, the increase in network activity is expected to boost transaction fee volumes, counterbalancing the declining staking rewards as the network becomes less inflationary. If widespread adoption continues, this could lead to long-term deflation, as more fees are burned than new SOL tokens created through inflation.

While SOL’s token price increased by 95 percent year-to-date, outperforming many other popular tokens, it remains 92.5 percent below its all-time high of USD 260.

FTX and Alameda’s staked SOL holdings

It is important to mention Alameda’s holdings of roughly 42 million locked SOL tokens, but due to its Chapter 11 bankruptcy status, these tokens are essentially frozen until the bankruptcy (liquidation) proceedings are finalised – a process which could take several years.

This effectively prevents these tokens from entering the open market, but there are still concerns about how this might impact Solana’s token value in the future.

Summary

Undoubtedly, Solana’s reputation took a hit following the collapse of FTX and Alameda, but so too did the entire crypto market. However, the absence of this influence could open a healthier development trajectory for the Solana ecosystem and its token.

“Some smart people tell me there is an earnest smart developer community in Solana, and now that the awful opportunistic money people have been washed out, the chain has a bright future”.

Vitalik Buterin, co-founder of Ethereum

If Solana keeps up this momentum, while experiencing increased user activity, coupled with its unique token supply model, there are compelling reasons to anticipate a positive outlook for Solana’s ecosystem, token usage, and potential price upside.

END

Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

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