Solana is being heralded as the main contender to knock Ethereum from its perch as the world’s pre-eminent network for decentralised finance.
The Swiss-developed “high-performance, permissionless” blockchain was launched in March 2020, by lead designer Anatoly Yakovenko.
Its sol (SOL) token has soared in value by more than 15,000% since the beginning of this year, reaching an all-time-high of $260 on 7 November. Approximately 77% of sol is staked on the solana blockchain — this limits the total supply of the token, and has thus acted as a tailwind on the price. The market capitalisation for the Swiss-developed blockchain has grown to $74bn (£54bn), flipping cardano (ADA) for fourth place in rankings.
The Geneva-based Solana Foundation has the backing of Sam Bankman-Fried, CEO of the FTX centralised cryptocurrency exchange. Sam Bankman-Fried, known by his abbreviation SBF, is developing a decentralised derivatives exchange for the innovative new blockchain, called serum.
To date there is already $14.5bn locked into solana-based decentralised exchanges (DEXs). The support of SBF and a number of key innovations that the Geneva-based developers have coded into this new blockchain has attracted the attention of institutional investors.
Speaking to Bloomberg about the reasons why solana has had, “a lot more interest institutionally”, Bankman-Fried said the network is “one of the only blockchains that has a compelling long-term road map” because of its ability to support industrial uses of the technology, at scale. In June 2021, Bankman-Fried’s Alameda Research and venture capital firm Andreessen Horowitz poured a combined investment of $314.2m into the Solana Foundation.
The ability of solana to handle large scale blockchain movements is key to its current appearance in the limelight of the crypto-sphere. Solana can average 65,000 transactions per second (TPS). When this is compared to Ethereum’s 13 TPS, it becomes evident that the Swiss-developed blockchain is a major challenger to Vitalik Buterin’s brainchild, Ethereum.
Solana has many key innovations that could see it flip Binance, which is next in line in the market capitalisation rankings. However, Solana is much more decentralised than Binance, with more than 1,000 validators compared to only 28 validators on the Binance smart chain (BSC). The lack of decentralisation on the BSC leaves it vulnerable to manipulation or even a blockchain-wide hack, which in the long-term makes institutional players wary of deploying smart contracts on it.
Thus, the real target for Solana is Ethereum, and it is expected to continue munching away at large chunks of Ethereum’s market share because of its advanced transaction speed, lower transaction cost, innovative “greener” consensus mechanism and being composed of an attractive programming language that is “one of the most loved by developers”.
Ease of use for application development accelerates the wider adoption of a blockchain by both users and developers, which is a key factor in long-term success.
The developers of the Solana blockchain have a mechanism for validating transactions called "proof of history". The method involves a cryptographic time-stamping mechanism that speeds up the settlement of on-chain (recorded on the main blockchain) transactions. This fundamental innovation in Solana’s blockchain validation method, where every block is time-stamped, allows a large multitude of transactions to be processed simultaneously.
The Solana Foundation’s website states that it maintains “a single global state as the network scales and never deals with fragmented layer two systems or sharded chains”. Thus, it does not need a layer two solution as its main blockchain can settle transactions at high speeds and with a fraction of the costs required on the Ethereum network.
Ethereum must rely on layer two solutions to handle large scale transactions, as its layer one main network, where monetary settlements are recorded, experiences crippling congestion when a large number of transactions need to be verified. Layer two solutions can handle transactions at high speeds and with a fraction of the usual gas-fees, but are settled "off-chain", and then validated on the main blockchain network in a singular bundle at a later time.
Yahoo Finance asked Austin Federa, head of communications at Solana Labs to explain why Solana’s transaction speeds are faster than Ethereum.
He said: “Solana is a proof of stake blockchain whose architecture unlocks network speeds and transactional capacity comparable to NASDAQ. It leverages proof of history, a decentralised clock before consensus, to timestamp incoming transactions, allow for faster block finalisation and increased transaction throughput.”
Federa described how Solana’s "proof of history" consensus mechanism has a low energy requirement when compared to the "proof of work" method used to validate ethereum and bitcoin settlements. He said that “one main difference from most of the chains is that Solana is using proof-of-stake which is a kind of a new mechanism. It's greener because it doesn't use energy and it allows for the next generation of optimisations in technology improvements to make these networks much faster and scalable.”
The programming language that Solana is based upon is attractive to developers — this is a key factor in accelerating the rate of adoption of a blockchain.
If many decentralised applications are developed for a blockchain, then the proportion of users who flock to the network will appreciate.
Federa described Solana as being “built on Rust, one of the most-loved programming languages by developers. It can be used to create smart contracts on Solana using a universal coding language that possesses a powerful toolkit of community resources developed by Google (GOOG), Amazon (AMZN), and Facebook (FB). Combining these tools with Rust’s compiler means developers can use less energy thinking about technical errors and spend more time focusing on smart contract logic, so it’s easier to write safe code for DeFi.”
Another reason why capital is pouring into Solana is because the platform has exploited the growing interest in non-fungible tokens (NFTs). Purchasing these one of kind digital artefacts on Solana is much cheaper than the gas-fees that must be forked out to buy equivalents on the Ethereum network.
The Ethereum network has average gas fees of $41 per transaction. Whereas, on the Solana network, the average gas fees cost $0.00025 per transaction. NFTs are Solana’s second biggest market after decentralised finance (DeFi). In the last 3 months NFT sales on Solana reached half a billion dollars.
Some critics of Ethereum suggest that Vitalik Buterin’s network is hanging on solely because of its first-mover advantage which has seen it consolidate 78% of all known DeFi applications (dApps). But there are reasons to hesitate before concluding that Solana will supersede its older rival. Ethereum 2.0 phase 1.0 and 1.5 are coming out in 2022. The developments promise to make the network faster and less energy intensive. Also, hardware costs to run a Solana node could see a diminishing number validators on the network over time, making it less decentralised and at a higher risk of network weaknesses long-term.