What is Solana?
Solana is a public, open-source blockchain that supports smart contracts, including non-fungible tokens (NFTs) and a variety of decentralized applications (dApps). Native to Solana’s blockchain is the SOL token which provides network security through staking as well as a means of transferring value.
Solana was created in 2017 by Anatoly Yakovenko alongside current Solana board member and Chief Operations Officer Raj Gokal. Yakovenko, now Solana Lab’s CEO, came from a background in system design and wanted to apply his knowledge toward a new blockchain paradigm that enabled faster processing speeds.
Table of contents
Quick facts:
- Solana is a proof-of-stake cryptocurrency with smart contract capabilities including DeFi dApps and NFTs.
- Solana boasts a theoretical throughput of 65,000 transactions a second with near zero fees.
- The boom in the DeFi and NFT spaces have pushed fees on Ethereum extremely high causing crypto users to seek other options like Solana.
- Solana has been at the center of controversy in the crypto industry as skeptics claim its transaction speed are only possible because the chain has sacrificed decentralization.
The founders aimed to create a brand new blockchain that could scale to global adoption. At the time, blockchain transaction speeds were limited to around 15 per second, a throughput that paled in comparison to Visa and Mastercard’s ability to process roughly 65,000 transactions per second. Yakovenko and Gokal sought to make a new blockchain that could meet demand at a global scale.
Solana now boasts a theoretical peak capacity of 65,000 transactions per second and has become one of the most highly used blockchains today due to its speed and cheap transaction costs.
Like almost any blockchain system today, Solana is still very new and not without controversy.
Solana’s blockchain
Solana runs on a hybrid protocol of proof-of-stake (PoS) and a concept Solana calls proof-of-history (PoH). Proof-of-stake is an algorithm that lets a blockchain maintain accurate information across all of its participants.
Proof-of-stake
With Proof-of-Stake, cryptocurrency owners pledge, or “stake,” their coins to a validator.
A validator is a computer running the blockchains software with its own copy of the blockchain. These validators are the equivalent of miners in a proof-of-work blockchain like Bitcoin’s.
Instead of competing with other computers to complete complex puzzles like in Proof-of-work, validators are chosen to add the next block of transactions based on how large their stake is (how many coins they have pledged to the network), how long they have staked for and a number of other criteria.
The idea is to measure the level of commitment network participants have and reward them for their dedication. The larger the stake relative to circulating supply, the more decentralized and secure the network becomes.
What is proof-of-history?
Proof-of-history is a method for proving that transactions are in the correct sequence and found by the right leader.
Solana’s blockchain is broken into slots or periods of time where a validator ingests transactions and produces a block. In this system, leaders are chosen ahead of each slot in order to save time.
A node (or validator) is chosen to be a “leader” of a slot through the proof-of-stake mechanism based on the quantity of SOL held. Each validator is responsible for continuing a count or tally of the passage of time, known as a proof-of-history sequence, and the next block of transactions for the slot they have been chosen for.
How proof-of-history works
- Validator A is assigned to slot one and spends five seconds finding the next block.
- Validator B is assigned slot two and takes five seconds to find the following block, amounting to the passage of 10 seconds.
- Validator C is assigned to slot three and takes five seconds to find a block. By the end, a total of 15 seconds have passed.
It takes each validator the same amount of time to complete this process. We know validator C is assigned to slot three and because each block takes the same amount of time, we know that slot three should only begin at the 10-second mark. Therefore, validator C cannot start before or after the tally has reached 10 seconds.
Because this tally of the passage of time can be seen by all validators, and the slot leaders are chosen ahead of time, everyone knows when a leader is supposed to begin. If there were a fourth validator (validator D) chosen as the leader for slot four, all parties would know that validator D is only allowed to begin at the 15-second mark.
Why use proof-of history?
This system lowers latency and increases throughput because slot leaders can stream transactions to the rest of the validators in real-time rather than waiting to fill an entire block and send it at once.
As validators keep the count of time, they can stamp each incoming transaction with a time, or proof-of-history value, so the other nodes can order transactions within a block correctly even if they aren’t streamed in chronological order. The other nodes can then verify these transactions as they come in rather than having to review an entire block of transactions at once.
What makes Solana different?
Solana parts ways with other blockchains in the way consensus is formed among the nodes. While proof-of-history has its benefits, there are some concerns around Solana’s voting mechanism and whether or not it causes centralization.
With Solana, nodes must vote on blocks and their transactions’ legitimacy in order for them to become part of the chain. Nodes send votes to the leader and the leader is then responsible for tallying the votes themselves and signing off on the block.
In a typical blockchain, validators are chosen via proof-of-stake. They then create the next block of transactions and broadcast this to all the other nodes in the network. The rest of the network then audits the new block against their version of the ledger. Each node then checks its version of the ledger and the new block against all other nodes in the network. From here, nodes individually choose whether to agree that this new block is legitimate or not.
The process continues until a majority of nodes have agreed on one new version of the chain. While it is time-consuming, letting nodes come to an agreement without an intermediary tallying votes has been core to decentralized blockchains since Bitcoin was created.
Solana tokenomics
There are currently 315,100,273 SOL coins in circulation with a total supply of 511,616,946 without an established maximum supply.
The SOL token has two use cases. One is staking, where token holders can stake their SOL and receive rewards. The other allows users to use SOL as payment for fees associated with running smart contracts or other transactions.
Additionally, Solana distributes a fixed amount of inflation-based rewards across its weighted validator set that secures the Solana network. Each staking reward is weighted by the number of tokens that are staked. Yield is proportional to the number of tokens staked measured against the total token supply.
Solana launched with an inflation rate of around 8%, which is expected to decline by 15% each year, a downward trend that will decrease until the rate reaches 1.5% annually, where it will remain. Issuances are anticipated to be sent to validators, with 95% of issued tokens toward validator rewards and 5% reserved for operating expenses.
Token distribution
Data from Messari shows that nearly 50% of Solana’s initial token allocation went to insiders, like venture capital firms. Only a fractional amount went to the public.
Solana investors
Solana investors include some of the most prominent venture capital firms in the crypto space: a16z, CoinShares, Alameda Research, Coinfund, and Parafi Capital. The reputation and size of its investors and the money they have provided have helped to boost Solana’s presence in the industry.
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Solana network statistics
Solana’s network allows for a theoretical throughput of 65,000 transactions per second, a significant jump from Bitcoin’s seven transactions per second and Ethereum’s 15 transactions per second. (TPS). Combined with high gas fees on ETH’s blockchain, Solana offers a much lower barrier to entry, helping to increase its user base rapidly.
Transactions on Solana cost a fraction of the price of other blockchains, averaging at $0.00025. Solana attracts users worldwide due to its low costs and increased throughput capability.
Solana currently has 1,469 nodes in its ecosystem, with over 74% of the tokens circulating supply staked to the network generating rewards.
Solana’s DeFi
Solana’s (decentralized finance) DeFi ecosystem currently has over $8.6 billion in total value locked among its various platforms. This puts Solana in sixth place behind other chains like Ethereum, Terra, Avalanche and Fantom.
Solana’s leading platforms are the decentralized exchange Serum, the open liquidity mining platform Quarry and the Solana staking platform Marinade Finance.
Solana’s praises
As DeFi and non-fungible token (NFT) ecosystems have boomed in the last two years, Ethereum’s network has become overwhelmed and extremely expensive to use. Solana’s chain offers what Ethereum’s base layer currently cannot – fast transactions at little to no cost.
For this reason, activity on Solana’s chain has quickly grown in both the creation of decentralized applications (dApps) and transactions. While Ethereum still has over $125 billion locked within its ocean of dApps, Solana is growing exponentially.
Since its creation in 2017, Solana has become the sixth most used DeFi platform in value locked. There is currently almost $8.6 billion locked in various DeFi dApps on Solana, most of which accrued in 2021 alone.
Solana’s speed and low cost make it easy to use compared to other blockchains, adding to its appeal to both beginner and advanced crypto users.
Solana’s criticisms
Although Solana has quickly grown in popularity with its low-cost transactions as crypto users seek faster and cheaper platforms outside of ethereum, it has received criticism for a number of reasons.
Uncertainty around SOL Supply
In November 2021 accusations swirled that Solana lied about the total circulating token supply and had created millions of new tokens. Justin Bons, the founder and chief investment officer of the crypto fund manager Cyber Capital, made a series of tweets calling out Solana and what he believed to be a “long series of lies, fraud & deception” by SOL.
In the Tweets, he claimed that Solana’s team initially stated that SOL’s circulating supply was just 8.2 million tokens but that they had, without notifying the community, loaned an additional 13 million tokens to a market maker.
In response to the allegations Solana’s founder, Anatoly Yakovenko, wrote a Medium post to explain the additional coins. Yakovenko said that the tokens were provided to a market maker in order to provide liquidity in the aftermarket
“The Solana Foundation agreed to lend the market maker ◎11,365,067 tokens for a 6 month period. The problem: we did not disclose this information to the public, as well as the size and nature of the loan, during the CoinList auction and subsequent Binance listing,” said Yakovenko in his Medium post.
While the purpose of the coins seemed reasonable, many community members were concerned with the lack of transparency and the foundation’s willingness to release an excess of tokens into the marketplace, an act that could have drastic effects on SOL investors.
Centralization of Solana
Some opponents of Solana argue that a number of its aspects result in a centralized system. Roughly half of the token supply is owned by venture capitalist firms and other insiders. While some see this as counter to the philosophy of a decentralized network, others view their involvement as a necessary evil to fund blockchain adoption.
Additionally, just 19 nodes hold over a third of the cumulative stake and therefore validate over a third of transactions. On top of that, over 37% of staked SOL was held by validators run on Amazon Web Services as of Sept. 2021.
The hardware requirements and amount of SOL a validator must own to maintain a node are significant and likely push more individuals who wish to participate toward other solutions like AWS.
Solana’s staking system
The nature of Solana’s staking system has also led to centralization concerns. SOL rewards are proportional to the number of tokens staked. If a node were to split their stake between two validators to have two votes, they would get the same rewards and have to pay double the voting fee.
For this reason, stakers and validators seek to hoard tokens under fewer validators to win more blocks instead of spreading tokens and propagating the network. This process also creates a large barrier to entry to become a Solana node as small validators receive small rewards relative to the fees paid for a server and voting costs.
While this is true, young blockchains are almost always centralized to some extent until they grow to a certain level. Solana is a relatively young blockchain and may very well become significantly more decentralized over time.
Solana node and validator requirements
Technically, anyone can become a validator on the Solana network and there is no strict minimum of SOL required, though running a validator does cost money. Solana nodes are required to vote each day on new blocks. To cast votes validators must spend SOL and one day’s worth of voting costs 1.1 SOL or $133 per day at current prices. This translates to over $48,000 a year.
Hardware requirements may cost up to $6,000 or more to start a node so those who wish to become a validator should prepare to make an investment.
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Outages
Solana’s network has come under fire for a number of network issues, some of which were complete network shutdowns. One such instance was in Sept. 2021 when the network was offline for 17 hours due to “resource exhaustion.”
The network has had a series of issues that haven’t seemed to spook many investors given the increase in Solana’s usage and price over time. That said, many skeptics worry about the network not being sufficiently decentralized given that a small group of developers could make a unilateral decision like shutting down the network.
It’s important to note that Solana is a newer blockchain and that most blockchains, including Bitcoin and Ethereum, have experienced brief moments of downtime.
As Solana co-founder Yakovenko said to his community on Reddit, “If it takes 2 years to build, it will take 2 years to stabilize.”
Much of the innovation in the tech sphere in the recent past has come from the philosophy of “move fast and break things,” an internal motto used by Facebook and a concept where things should be built quickly and issues should be worked out later in order to not stifle innovation.
While it’s true that this model produces results quickly, it can also have a profoundly negative impact on the users of products and services built with this mentality, especially services that deal with finance and people’s money.
While no users lost coins during Solana’s outages, the value of SOL dropped from roughly $191 to $123 in September as investors dumped the coin on the news of its outage.
How to stake Solana
Staking allows holders to earn rewards for helping to secure the network. They delegate their tokens to validators who process transactions and run the network, which follows a shared-risk, shared-reward financial model. The more stake that is delegated to a validator, the more often that validator will be chosen to write new transactions to the ledger and the more rewards it earns.
SOL can be staked on some exchanges as well as with personal wallets. While staking on an exchange is a great option for beginners, using a personal wallet and choosing a stake pool yourself helps to spread tokens across the network and further decentralize it. Using a hardware wallet like Ledger or Trezor is the best practice for keeping your private keys safe.
Wallets that you can stake Solana on include:
- SolFlare
- Sollet
- Phantom Wallet
- Math Wallet
- Atomic Wallet
- Exodus Wallet
- Zelcore
Exchanges that you can stake Solana on include:
- Binance
- Kraken
- FTX
- Crypto.com
Where to buy Solana
Solana can be purchased on the following centralized exchanges:
- Coinbase
- Kraken
- FTX
- Binance
- Crypto.com
- BitMax
Solana can be purchased on the following decentralized exchanges:
- Raydium
- Orca
- Serum
Solana’s roadmap
Solana has several exciting developments that are coming online or have just been announced.
Solana Pay will allow merchants to accept USD Coin and other tokens using Solana’s speed and low cost. The new product came as a result of Solana’s partnership with Checkout.com, Citcon, and FTX and Phantom integrations.
Coachella, one of the world’s most famous music festivals, which will take place in Q2 2022, also announced an NFT collection built using Solana. Some of the NFTs have real-world value that include lifetime festival passes, guest passes, VIP passes, and other special perks that have not yet been announced.
Frequently asked questions
How much does SOL cost?
Where can you buy Solana?
Solana can be purchased on almost all popular exchanges.
What consensus mechanism does Solana use?
Solana uses proof-of-stake as well as a protocol known as proof-of-history.
How many transactions can Solana do per second?
Solana has a theoretical throughput of 65,000.
How much is the average transaction fee on Solana?
The average fee on Solana is just $0.00025.
Get educated. Check out The Investor’s Guide to Bitcoin, The Investor’s Guide to NFTs, The Investor’s Guide to DeFi, The Investor’s Guide to the Metaverse or The Investor’s Guide to Music NFTs.
This is not an endorsement of any project, and should not be interpreted as investment advice. This Guide is for educational purposes only.
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