Solana: a blockchain for DeFi or Ethereum’s next killer?

Since the start of the year, Solana has surged by more than 13,000%, and by September it had risen to sixth in the top-10 cryptocurrencies by market capitalization. The network has also broken into third place by total value locked in DeFi protocols, ahead of only Binance Smart Chain and Ethereum.

ForkLog analyzed the key factors behind Solana’s ascent to the summit and its challenge to Ethereum, and assessed the project’s prospects of maintaining its current position.

Fast, cheap, and even scalable

We have already covered Solana’s history and the features of the technology it uses in educational cards in detail. Now we turn to the network’s defining feature — unrivaled performance.

Currently, the Solana blockchain processes more than 1,000 real transactions per second (TPS), and the network’s maximum throughput with 600 nodes and 1,000 validators exceeds 60,000 TPS. In the long term, developers plan to push the figure to 700,000 TPS.

For comparison, Ethereum’s throughput is a mere 20 TPS, Binance Smart Chain up to 60 TPS, Ripple up to 1,500 TPS, Tron up to 2,000 TPS, Avalanche up to 4,500 TPS (with potential to rise to 20,000 TPS), and Fantom up to 20 000 TPS. In other words, Solana is currently the fastest blockchain.

One factor behind such speed is the high block-generation rate. In the latest version of the protocol, blocks appear every 400 milliseconds — faster than most existing public blockchains. Moreover, as a prospective target, the block time of 80 ms is cited, which is comparable to NASDAQ’s exchange servers.

Achieving such speeds is made possible by an innovative approach to synchronization between nodes and validators using the Proof of History (PoH) algorithm, which creates a cryptographically secure time source across the network and dramatically accelerates consensus and transaction finality.

Unlike Ethereum, where transaction fees are a significant part of miners’ revenue, fees on Solana serve only to prevent spam and average about $0.00025. Equally important, Solana’s high speed and low fees scale well as the ecosystem grows—without compromising decentralization and security, and without resorting to sharding, sidechains, or layer-2 solutions.

If Ethereum’s theoretical limit is a little over 1.7 million transactions per day, Solana could process more than 5 billion operations in the same time, which in theory would enable truly global payment systems and online services serving the populations of the world’s largest countries. Attracting a billion users is the project’s current goal, according to its co-founder Anatoly Yakovenko.

That said, these are long-term prospects, and in reality Solana remains presented as a beta version, with periodic issues. Not later than September 14, 2021, due to a spam attack with up to 400k TPS the network became congested. As a result, blocks were not generated for about 16 hours. During that time, even the most ardent Solana fans saw that the project team still has much work to do before billions of users can trust it.

better now then when its a billion users

— Anatoly Yakovenko (@aeyakovenko) September 14, 2021

Investments: Fuel for Development

A major driver of Solana’s development and its ecosystem has been the large investments the project has attracted over the past three years.

In 2018, Solana Labs launched an alpha version of a testnet consisting of 200 nodes, demonstrating the previously stated transaction speed to potential investors. This helped attract $20 million in early rounds of financing led by Multicoin Capital, with participants including Distributed Global, Blocktower Capital, Foundation Capital, Blockchange VC, Slow Ventures, NEO Global Capital, Passport Capital and Rockaway Ventures.

In March 2020, Solana Labs conducted a public token sale in an auction format on the CoinList platform, raising $1.76 million, and also another private round of financing exceeding $2.2 million.

One of the largest rounds in industry history was completed in June 2021. Solana raised $314 million, with participants including venture firms Andreessen Horowitz and Polychain Capital, as well as Alameda Research, CMS Holdings, CoinShares, Jump Trading, Multicoin Capital, Sino Global Capital and others. The funds, according to the team, will be used to develop its technologies in decentralized finance.

Solana’s ecosystem: the crowd makes the king

The success of blockchain platforms is determined not only by the number of transactions processed and the investments raised, but also by the size of the ecosystem. The first steps in building Solana’s ecosystem were taken in the spring of 2020, when a non-profit organization, the Solana Foundation, was created to promote the technology and support developers. With its direct involvement, significant achievements were reached in just a few months:

• In August 2020, with the support of cryptocurrency exchange FTX, the first decentralized exchange Serum was launched on the Solana blockchain;
• On September 9, 2020, Tether launched USDT on the Solana blockchain;
• In October, another popular stablecoin joined the Solana ecosystem — USDC.

In November 2020, Solana Foundation launched the first grant program for projects developing the ecosystem’s core infrastructure: price oracles, decentralized exchanges, cross-platform bridges, and user wallets.

Thanks to grants and a series of hackathons sponsored by the Solana Foundation, which attracted thousands of developers and hundreds of DeFi projects, Solana’s network has by now acquired all the components of a mature decentralized ecosystem:

• decentralized exchanges with AMM technology (Radium and Saber);
• decentralized lending protocols (Solend);
• IDO platforms (Solstarter);
• NFT marketplaces (Solsea, Solanart, Metaplex, and others);
• Web3-compatible non-custodial wallets (Phantom, Solflare, Sollet, Solong, and MathWallet).

As of now, more than 330 projects are live on the Solana blockchain, and that number is growing. The user base is also expanding: Solana now has more than 4.2 million wallets, of which 400,000 hold more than 1 SOL.

Among Solana’s hundreds of DeFi services, the top by total value locked is the automated market maker Saber Protocol (TVL over $2.8 billion). It attracts users with a wide variety of yield-farming pools of wrapped assets and no impermanent loss risks (for example, mSOL-SOL, BTC-renBTC, wFTT-FTT), as well as pools of stablecoins USDT, USDC, and HUSD with no exchange-rate risk.

Equally notable has been the NFT track, which now counts more than 40 projects. In addition to the NFT platforms already mentioned, the popular cryptocurrency derivatives platform FTXlaunched its own cross-platform NFT marketplace, enabling trading of NFTs issued on the Ethereum and Solana networks.

Another notable event occurred on September 11: Moonrock Capital bought an NFT on Solana from the Degenerate Ape Academy collection for $1.1 million.

how to NFT on Solana:

— vatn 🦇🔊 (@vatn42) September 1, 2021

Solana’s high throughput and the low cost of NFT minting have also attracted developers of multiplayer online games. The creators of the Star Atlas metaverse, built on the Unreal Engine 5, released its in-game currency ATLAS and governance token POLIS on this chain. Although the game itself has not yet launched, NFT sales of in-game items have already exceeded $50 million.

There are also many projects in Solana’s ecosystem that began on Ethereum but migrated due to high fees.

One of the pioneers of this trend was the music streaming platform Audius, which started on the Ethereum blockchain but began a gradual move to Solana in October 2020.

Similarly, Kin Ecosystem, which started on Ethereum, launched its own blockchain but later opted to move to the higher-throughput Solana. In March 2021, Civic announced integration with Solana, a leading integrator of digital identity solutions.

From competition to coexistence?

Solana’s successes clearly show that this ecosystem has come to the crypto industry to stay. Users and developers clearly value the combination of high performance, fast transactions, and low fees.

The Solana Foundation’s work to popularize the blockchain platform among developers has proven surprisingly effective. Although Rust is used for smart contract development on Solana, developers should not fear isolation from the EVM-compatible blockchain community. Neon Labs this summer opened access to the Neon EVM, allowing decentralized applications and smart contracts written for Ethereum to run on Solana.

Despite the clear advantages, it is premature to hail Solana as Ethereum’s killer. For one thing, Ethereum’s position remains strong: it still hosts a legion of developers and millions of users. The rise of Layer-2 solutions like Optimism and Arbitrum, and the impending Ethereum 2.0 upgrade, will help scale Ethereum for further user growth.

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