Digital Asset Review: Solana
Specialized development and tangible examples for a protocol that has seen explosive growth.
Specialized consensus, high transaction speeds, and solving a blockchain trilemma. Why Solana is a game-changing smart contract blockchain.
Solana was created in late 2017 by Solana Labs, led by chief architect Anatoly Yakovenko. Solana boasts 8 technological innovations that Yakovenko say make it the "first web-scale blockchain" and has positioned itself as a direct competitor to other projects like Ethereum and Cardano. The token launched in March 2020 as a financial tool that is more efficient, democratized, and innovative than the existing financial system. The price has risen dramatically in recent months as a result of more developer activity, institutional interest, and rapid growth of the NFT and gaming ecosystems on the platform.
Game-Changing Innovations
Solana aims to address the same market that Ethereum does: a virtual world computer that executes peer-to-peer contracts through code without a middleman. Ethereum is in many ways a huge success, but, has limitations. Mainly, it gets slow and expensive when too many transactions go through at once. This happens all the time now, which is why Ethereum is trying to upgrade to Ethereum 2.0.
Think of Solana as Ethereum 2.0, with a dose of rocket fuel. Solana is built to scale. It was not built with the expectation of needing a "layer 2 scaling solution" in the future, which is something Ethereum now needs. This is basically the equivalent of adding a second engine.
Consensus Mechanism: Proof-of-History
There are eight different innovations that Solana present as differentiators. We won't go into each innovation — the founder wrote about each one here and you can read about them yourself — but there is one worth pointing out: Proof-of-History (PoH). This is a brand new consensus mechanism (the way the blockchain agrees on transactions) that contributes to the high throughput capacity of the blockchain. The innovation gives a verifiable ordering of events as a direct function of time, so instead of the nodes on the network having to communicate with each other, each has its own cryptograhic clock and doesn't need to wait for other nodes.
Transaction Speeds
Solana's current transaction limit is between 50,000 and 65,000 transactions per second. This is thousands of times greater than the transaction limits of Bitcoin and Ethereum currently; however, competitor protocols like Ethereum, Cardano, and Polygon have upgrades pending. Ethereum founder Vitalik Buterin has said that Ethereum's upgrades could allow for up to 100,000 transactions per second. The space is extremely competitive and could determine the long-term winner. Solana network is designed to reach 710,000 transactions per second, but for now the competition is fierce and the long-term winner remains to be seen.
Solving the Trilemma
The blockchain trilemma is the difficulty of balancing scalability, security, and decentralization in a blockchain protocol. Solana claims to have solved this in large part thanks to the increased transaction volume as described above in addition to being low-cost, creating a developer-friendly environment, encouraging the creation of scalable apps. Solana has grown to become a significant and popular ecosystem in the space, especially with its successful social media campaigns and even recent celebrity partnership stories via FTX.
Key Projects Building on Solana
Civic
Civic has been around for a long time in blockchain years (founded in 2015). They have been on a singular mission to tackle identity verification and KYC/AML on the blockchain.
The way this works is that users of the Civic product create a profile with their identity information that is encrypted and secure. Companies and organizations partner with Civic to access this information. The blockchain serves to providing companies the ability to verify a user's information securely. Consider an example: if a venue like a bar has to verify a person's age to be able to get in, then users can show they were verified on their Civic app when they walk into a place and save a lot of time and reduce human error. This translates to automation of verification checks and is a huge use case for blockchain.
FTX NFT Marketplace
You may have heard about FTX. The company is making huge in-roads into almost every single area of crypto. The founder, 29 year-old Sam Bankman-Fried, is considered a crypto whiz-kid. FTX Arena is the new name of the Miami Heat's basketball arena, where they airdrop the fans crypto, and FTX has chosen to launch its NFT marketplace on the Solana blockchain. This could be huge for Solana, since FTX believes Solana will be the blockchain that is easiest to scale to infiltrate's the gigantic pop-culture industry. Given the amount of volume NFT's have contributed to the Ethereum network, this could really accelerate Solana's adoption and token price.
Defi: Serum
Serum is a decentralized exchange dapp built on Solana. Our favorite crypto whiz-kid Sam Bankman-Fried thinks Serum will be the biggest DeFi project.
Why? Solana offers the best solution for scalable integration with all other pieces of the ecosystem. In other words, Solana is the most scalable blockchain. Because of this, he thinks Serum, the leading native DeFi application on Solana, has the best chance of becoming a DeFi platform with 1B users. Based on Solana being a solution to the blockchain Trilemma there may be some merit to this argument.
Solana Crash: What Happened
Despite all of the seemingly good innovations Solana has brought to the Crypto Ecosystem, the network had a very high-profile crash in mid-September. A decentralized exchange launched a coin, and bots rushed in to buy and sell the coin. This spiked the Solana network up to 400k transactions per second and the Solana validators failed. The network was down for 17 hours until validators (akin to miners) agreed on a proposal to updated the network and restart it. This occurence stands out for a lot of reasons but the main one is that Solana is not infallible. It is an emerging technology that is still has its bugs. The Solana founder said that it's better this happened now so they can figure it out before they have one billion users. As of now, Solana patched the bug and will be releasing a much-awaited detailed report into what went wrong and what was fixed. Solana has a lot of promise for the future, but will have to make sure things like this don't happen again to have long-term staying power.
Some key stats:
Solana returned 10,989% in the past twelve months.
There is $12.88B locked on Solana DeFi products. Compare this to about $100B on Ethereum.
Solana's market cap is $61B, ranking 6th among all cryptocurrencies.
Resources:
Proof-of-History short explainer video.
Coinbases's report on ["What is Solana?"](https://www.coinbase.com/learn/crypto-basics/what-is-solana#:~:text=Solana can process around 50%2C000,congestion and fees remain low.).
Coinmarketcap's Solana page.
Sam Bankman-Fried, on Solana's crash
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG)and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.
Solana research was done by Justin Kim.