Project History
Recognising that the scalability limitations of blockchains were a serious obstacle in the way of real-world use cases building on decentralised platforms, Anatoly Yakovenko proposed a solution in a 2017 whitepaper for a highly scalable blockchain with fast transaction speeds and settlement times.
Teaming up with Greg Fitzgerald, they initiated the open-source implementation of the whitepaper in February 2018.
The mainnet beta was launched in March 2020.
Technology/Approach
Solana uses Bitcoin’s SHA256 algorithm but combines it with linking actions to moments in time, allowing for parallelisation – one of the key components of Solana’s high scalability. This approach to achieving consensus on the state of the network was a genuine innovation, unlike most blockchains which tend to be iterations of existing protocols.
In addition, Solana’s innovations include parallel processing of thousands of smart contracts simultaneously and fast data propagation – the latter by brea king down the data into smaller packets and the network into layers, and transmitting the blocks of data using a random path.
The team initially prioritised scalability objectives over security and decentralisation, and Solana’s high hardware requirements for validators and the high cost to maintain a validator on Solana can lead to centralisation. Solana has also experienced multiple network outages and performance issues.
The upcoming launch of the Firedancer validator client will exponentially increase Solana’s already very high scalability, increase decentralisation – being the first third party client software, and provide increased stability by using different programming languages which reduces the likelihood that it would experience an outage simultaneously with the other validator clients.
Solana’s all-in-one integrated scaling approach differs from Ethereum’s strategy of scaling through Layer 2 protocols. Solana’s approach has been recently favoured by the market due to the more seamless user and developer experience, although it is likely that modular and integrated approaches will both thrive in the long run, addressing different types of user needs.
Key People/Team
The concept for Solana was first expressed in a whitepaper by software engineer Anatoly Yakovenko, who went on to found the project with former colleagues Greg Fitzgerald and Stephan Akridge, and entrepreneur Raj Gokal.
A for profit company, Solana Labs developed the Solana protocol and continues to expand and support the network and develop products and tools that can be used on the Solana blockchain.
The nonprofit Solana Foundation supports the growth of the ecosystem and improvements to the network through advocacy and providing funding for ecosystem projects.
Solana had significant financial ties with FTX, including the Solana Foundation having substantial holdings in FTX Trading Ltd shares as well as FTX Tokens, and FTX and Alameda holding significant amounts of Solana tokens as well as tokens of Serum, the largest DeFi project on Solana. About 20% of Solana based projects received funding from FTX or Alameda. FTX’s collapse had a serious negative impact on the Solana ecosystem, both due to operational ties (for example, FTX held the upgrade authority on Serum, rendering the DEX defunct), financial losses, and a tarnished reputation.
Nonetheless, Solana continued operating, the developer team remained highly committed and focused, and the project strongly recovered within a year following the collapse of FTX to the point that it was seen again as the prime contender to rival Ethereum.
Solana also has strong links with Jump Trading, the developers of the Wormhole bridge – initially a bridge between the Ethereum and Solana blockchains. In 2022, Jump Trading replaced over $300m worth of stolen ether that backed Wrapped Ether on Solana.
Later in 2022, it was announced that Jump Trading was developing a new validator client for Solana called Firedancer intended to make Solana less prone to outages as well as more decentralised while also vastly increasing the network’s transactions per second capacity. As Jump Trading scaled back its crypto operations after being investigated by the SEC for their role in Terra’s 2022 collapse, there were concerns that this may affect the rollout of Firedancer. However, there has been no indication that their commitment to Firedancer has changed and the rollout is progressing.
Ecosystem
Unlike most blockchains, including several that presented genuine technological innovation, Solana has been highly successful in attracting users and developing an ecosystem of a meaningful size, with a number of projects with strong user traction building on, or moving to, Solana.
Solana’s fast and cheap transactions make new types of activities economically feasible, with “Only Possible On Solana” (OPOS) transaction types contributing to the network’s growth while also serving as great PR.
Solana has been successful in growing its market share in the decentralised exchange subsector, with its share of DEX volumes rivalling and sometimes exceeding Ethereum’s.
Solana has also been effective at branding itself as the go to chain for the hot subsector of decentralised physical infrastructure networks (DEPIN), with several leading DEPIN projects such as Helium or Render moving from Ethereum to Solana.
Solana has emerged as a leading platform in blockchain payments, it has captured significant market share in NFTs, and it is making headway in blockchain based gaming – another application Solana is well suited for due to its low cost and speed. Solana recently announced the launch of the Play Solana blockchain based portable gaming console.
Solana’s recent growth has been to a great extent fuelled by memecoins issued and traded on the network, accounting for a substantial portion of the volumes on Solana based DEXs, sometimes exceeding 90%. Memecoin issuance has taken off since the launch of the pump.fun memecoin launch platform which has been one of the fastest growing crypto applications, capturing a leading market share.
Largely due to memecoin activity, Solana has bucked the recent industry wide trend of declining revenues, posting strong growth in transactions, platform revenues, as well as aggregate revenues by Solana based applications.
Solana has been criticised for having a large share of activity coming from bots and exaggerating trading volumes by including unfinalised orders. While certain metrics may be inflated on Solana as a result, revenue growth remains an objective benchmark of activity.
Solana has also been successful in securing a number of valuable real-world collaborations, integrating with Shopify, Visa, Stripe, as well as with Google Cloud, including an integration of Solana’s game development kit. PayPal implemented its PayPal USD stablecoin on Solana while criticising Ethereum’s limitations in transaction processing.
In 2023, Solana released a mobile phone called Saga integrated with the Solana blockchain, supporting widespread crypto adoption and benefiting the Solana ecosystem. The phone offers a platform that natively supports the self-custody and trading of crypto assets and provides access to decentralised applications. Solana recently announced the upcoming launch of the next generation of the mobile phone.
Supply Model/Tokenomics
At launch, Solana had an annual inflation rate of 8 percent, set to decline by 15 percent every year until it reaches 1.5 percent. The inflation rate is at around 5 percent currently. The 1.5 percent inflation rate is designed to stay in place indefinitely as a mechanism to reward those who stake their tokens to secure the network at the expense of those who don’t.
At the same time, half of the base fees earned by the network are burnt, benefiting all Solana holders. The remainder of the base fees and all of the priority fees are paid to validators.
Approximately 20 percent of Solana supply is non-circulating. This includes locked tokens of investors and grants as well as stakes held by the Solana Foundation and Solana labs.
Most of FTX’s substantial stake in Solana has been sold, with tokens amounting to slightly over 1 percent of Solana’s supply remaining in the FTX wallet.
Key Value Drivers
With Solana trading 15x above its post FTX lows and Solana increasingly described as the main rival to Ethereum, continued transaction and revenue growth and a continued increase in Solana’s market share are critical drivers of the token price.
Although Solana rivals, and sometimes flips, Ethereum along certain metrics (stablecoin transaction volume, DEX traded volumes), the veracity of these metrics is sometimes questioned. The large volumes of bot trading and the majority of failed bot transactions recorded as traded volume skew the statistics, while in terms of DeFi TVL and stablecoin AUM Ethereum still dwarfs Solana. Progress on TVL metrics therefore is a particularly important driver going forward.
It is also important to note that in terms of transaction volumes, Solana competes with the Ethereum ecosystem including Layer 2s as this is Ethereum’s approach to scaling. Aggregate transaction volumes on Ethereum Layer 2s have been growing (even) faster year-to-date than on Solana.
Daily and monthly fluctuations in revenues notwithstanding, Solana’s market capitalisation is currently in line with Ethereum’s based on their relative annualised revenues, which suggests that the market expects their relative future market shares to remain constant.
The successful launch of Firedancer is a further important driver. The expected benefits to decentralisation and network stability are arguably already discounted by the market. Any potential problems with the launch pose downside risk, while Firedancer catalysing another wave of growth in transactions, revenues and applications would be a positive driver.
While Solana’s prior history of frequent outages has been to some extent addressed, problems arose again earlier this year with the network going down in February and congestion causing a large number of failed transactions in April. Solana needs to make continued progress on bug fixes and network stability.
The success of the application sectors building on Solana is another important driver. As DEPIN projects favour the network, positive trends for this sector will benefit Solana. Conversely, the extremely high share of memecoin activity on Solana poses a risk – both due to its high concentration in terms of Solana’s volumes and revenues, but also because the memecoin sector lacks fundamental value and therefore it is more vulnerable to collapse than economically viable sectors.
Shifts in sentiment and narrative are also important – for the last two years, the market narrative has strongly favoured Solana’s integrated approach to scaling. However, the integrated vs modular approaches both have advantages and disadvantages, and there is a risk that sentiment shifts on this if certain catalysts alter the market’s perception.
Ultimately, for Solana to successfully challenge Ethereum in the long run, it needs to shape future technological cycles and become the birthplace of groundbreaking decentralised applications that capture the market’s imagination and drive widespread adoption.
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