Fundamentals of the #Solanasummer

Justmy2Satoshis
11 min readSep 8, 2021

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This fundamental analysis is one part of a paid newsletter from Crypto Consulting Institute. For more information visit: https://www.cryptoconsultinginstitute.com/newsletter

Identify the problem

The blockchain trilemma.

The development of novel blockchain technology seeks to solve a trilemma.

Security, scalability and decentralization.

The trope is, optimizing a blockchain for two of these features occurs at the expense of the third.

Ethereum, in its current Proof of Work (PoW) state, is considered one of the most decentralized and secure blockchains there is. These are significant features, but they can only process 8–15 transactions per second (TPS).

The burden on the network can increase the transaction costs from $2 up to $150. Issues achieving scalability are apparent and are no secret given Ethereum’s ongoing efforts toward transitioning to a Proof of Stake (PoS) consensus algorithm.

Many layer-two projects like Polygon or Ethereum Virtual Machine (EVM) compatible blockchains like the Binance Smart Chain (BSC) recognized these scalability issues. While they have made phenomenal progress towards solving scalability, both have received criticism for lacking decentralization due to the KYC requirements to deploy a validator node.

Solution?

So, what is it?

Solana is a third-generation blockchain powered by a Proof of Stake (PoS) consensus that involves users staking the $SOL token on the network to obtain rewards. The technology behind Solana is immensely complex and rather impressive. One key feature worth examining is the Proof of History mechanic that sets the global state for the Solana Blockchain.

An essential function of blockchains is issuing time stamps to a transaction.

This process involves multiple nodes in the network having to agree with one another on the timestamp. While it sounds simple, it creates congestion problems on blockchains such as Bitcoin.

When multiple nodes are responsible for validating a transaction, this creates a temporary fork of the chain. The node that achieves a higher block height by validating more transactions is rewarded $BTC for updating the ledger. Transactions that get caught up in the unsuccessful fork chain fail to be processed. While preventing what is known as the double-spend problem, this method is inefficient and requires multiples confirmations which increase the time of transactions.

Solana uses a refined version of Bitcoins Sha-256 algorithm powered by GPUs that secures a recursive verifiable delay function. Think of it as a decentralized, immutable, trustless atomic clock attached to a conveyor belt that churns out a new block every 400ms. Nodes are selected to validate transactions into the block, while other nodes subject to the same global time state monitor the validator node’s activity. This mechanic enables Solana to have industry-leading finality and TPS amongst layer one blockchains.

Team and backers

Who’s behind Solana?

Linked-In shows a roster of 85 employees on the Solana Labs team. Most notable is founder Anatoly Yakovenko with over a decade working as an Engineer Manager at Qualcomm, building wireless technology and distributed systems. As it goes for the latter, Anatoly had a hand in Dropbox, one of the most well-known compressed distributed data systems. The website describes the team as having worked for “Qualcomm, Intel, Netscape, and Google [with] some of the team members also coming from Microsoft, Apple, Twitter, Dropbox, General Catalyst, Omada and Cern” (yes, the Hadron Collider). Collectively, the team has experience in leading technological and scientific breakthroughs.

One of the key backers of Solana is Sam Bankman-Fried (SBF). 29-year-old billionaire at the forefront of innovations in blockchain technology. SBF manages $2.5B worth of assets under the Alameda Research group and is the CEO of FTX ($FTT token) centralized exchange. He has a sharp focus on regulatory compliance in his operations, while also pursuing innovation through blockchain technology to enhance his products and service offerings.

Chef Nomi, the pseudo-anonymous founder of Sushiswap, had dumped his tokens on the market, effectively destroying the price of $SUSHI in September of 2020. SBF was branded a ‘saviour’ of the project by purchasing control from Chef Nomi to bring it back from the dead. The user interface of Sushiswap had inspired the likes of Pancakeswaps to emerge on BSC, which has seen meteoric success. It is significant to consider the value proposition of Sushiswap when it comes to viewing Solana as a formative piece of SBF’s grander vision.

Sushiswap was the minimally viable product SBF needed to test out flaws in the ecosystem. Three noticeable flaws in Decentralized Finance are costs, transaction speeds and a scarcity of order book functionality. This brings us to Serum.

“Solana is a fast, secure, and censorship-resistant blockchain providing the open infrastructure required for global adoption. The Serum [$SRM] DEX was built on the Solana blockchain. Solana was selected for its performance and technical innovations, allowing it to achieve extremely low transaction latency (by blockchain standards), high throughput, and low fees.” — Serum Gitbook.

With a driven billionaire visionary and an experienced core development team in their corner, the future looks bright for Solana.

Performance to date

History of Solana

Anatoly initially conceived of Solana in 2017 and raised $25M during the ICO boom. Solana quietly worked away on their Beta Mainnet, deployed in March 2020. The $SOL token launched at IEO at 22 cents. Since then, developer activity on Solana has been buzzing with over 400 projects built onto the Solana blockchain.

At this point, you might start to wonder how Solana managed to remain in stealth during development?

March 2020 was the same time that exponential user activity was taking place on Ethereum Mainnet. DeFi projects demonstrated resilience while the market was undergoing a significant downtrend. ‘DeFi Summer’ was a profound event that served as proof of concept for blockchains aspiring toward deploying a virtual ecosystem for decentralized applications (Dapps) to deploy into. While many blockchains sought to integrate with the EVM (BSC) or build a layer-2 (Polygon), Solana’s virtual ecosystem continued to develop in silence.

All light casts a shadow

Six areas of concern are worth mention.

1. In December 2020, A coding error stopped the network from producing blocks. The team did act swiftly within 6 hours to identify the problem and activate the 80% consensus required to restart the network. However, as recently as September 15th 2021 the Solana network peaked at 400k TPS capacity that forced a fork of the network. This created a massive memory storage burden on the network which had to be taken offline to resolve.

2. A blatant discrepancy in the circulating supply of the $SOL token. The community had recently developed Solana blockchain explorers and discovered a mysterious account containing over 13M $SOL tokens. It is a topic Solana would elect to avoid. They failed to keep a story straight around why there were twice as many tokens in circulating supply than what had previously been indicated. The team stated they would retrieve and burn 11,365,067 $SOL from market makers, but were unable to fulfil their promise.

3. Deep concerns that the vested token release schedule would see a drastic increase to circulating supply in April caused fear of the token price being destroyed. 60% of the initial supply of $SOL is owned by the Solana Foundation, team and venture capitalists. Given that the price has held up remarkably well, I sense a gentlemen’s agreement exists to engage in strategic selling among the heavily vested.

4. Solana is developer-friendly. When you hit their landing page, you are immediately drawn to an array of beginner resources for developers. In addition, Solana has over 400 projects deployed on their beta mainnet. A phenomenal outcome of several hack-a-thons hosted by the Solana Foundation. However, issues arise over their use of the computing language Rust. It does not easily assimilate with Solidity developments in EVM compatible blockchains. To get an existing EVM product onto Solana often requires the developer to start from scratch in a different language or rely on cross-chain mechanics that are still in their infancy.

5. Solana claims to be decentralized, but this is not entirely the case. In the long term, this claim is most likely to impact Solana if things are left as-is. When deploying a blockchain project, developers need to be able to modify their technology. If bugs are encountered, they can be addressed. To develop for decentralisation from the outset means less capability to mitigate errors as they arise, it is difficult to put the yolk back into the smart egg once cracked. Typically this involves a project starting off as highly centralised with promises made toward future decentralisation.

6. Solana, a blockchain for the rich? This notion yet again brings into question where Solana sits on the decentralisation spectrum. Firstly, it is prohibitively expensive to set up and run a validator node. To obtain high-end hardware you would be looking at around $12,000 USD. The consequence of this is that validators are not practical to run from home, 31% of validator nodes come from data centres. Currently, the top 5 data centres control over 50% of the staked $SOL on the network. The whitepaper mentions slashing validator bonds to punish bad actors, but this has yet to be implemented. Furthermore, while there is no minimum on $SOL staked, to be selected as an effective validator you would require a 100,000 $SOL worth $13M USD at the time of writing. Currently, it is not a blockchain that you and I can play a meaningful role in without the initial resources.

Tokenomics

$SOL

Circulating supply: 291M +

Maximum supply: 488,630,611

o Deflationary mechanic; all transaction fees burned.

o Inflationary mechanic; delegator stakers receive $SOL.

· 1.5% of all circulating $SOL would need to be burned for an overall deflation to nullify inflation at the current reward schedule.

· Governance token — In the future, DAO will enable stakers to put proposals to a vote on the network, such as adjusting fees and emission rates.

Non-speculative token use:

o Common base asset in yield farming pairs on Solana.

o Common currency for purchasing NFT products on Solana.

o Common bridging asset.

o Stake $SOL as a delegator or validator.

Socials and Community

What you talkin’ about?

Jumping into the Solana telegram group, the chat is almost exclusively euphoria from $SOLs price movements. Typically telegram community moderators seek to discourage price discussions, but there was no one in sight. Nor were there any pinned messages.

This is not entirely unusual. Decentralized applications (DApps) being built on the Solana provide community engagement. Solana boasts over 330 projects deploying on their blockchain, each with growing communities. Solana’s main Twitter account of over half a million followers consists mainly of retweets of projects within the ecosystem — of which there is no shortage of volume. #Solanasummer tag has most certainly caught on.

The Solana team are in a great place right now, and they have a functioning virtual machine in Beta with marketing that organically flows from projects deployed into their ecosystem. Couple this activity with the parabolic rise in token price, Solana is receiving organic attention that many projects would die for — or rather have died from never achieving.

Discussion

Fun[damentals] in the #Solanasummer

Solana has shaped up to be a key piece of infrastructure that CEXs and DEXs will look to leverage going forward. There is always hunger in the market to move value at a low cost, which the Solana network delivers in spades. But what about the network effect and the emerging trends toward NFTs and Play-to-earn metaverses?

We cannot underestimate the value of investing in the native token for blockchain infrastructure with virtual machine capabilities. Take a moment to reflect on $BNB’s meteoric rise in February. Interestingly, total value locked (TVL) and transaction volume went up simultaneously, reaching $52B at the time of the May correction. TVL on Solana has increased by 350% to reach 5.3B in the last six weeks while the price has 5xd. Similar to BNB, we can expect non-speculative use to create a network effect. In other words, you need $SOL if you’re going to yield farm or purchase NFTs on their mainnet. Further, $USDC and $SOL are the primary units of value entering their DeFi ecosystem.

No other layer 1 blockchain comes close to meeting the TPS and finality of the Solana chain. From my experience using DApps on their mainnet, I was blown away by how quickly transactions were finalized. Even BSC and Polygon have invariably struggled with network demand. At the same time, the primary narrative that Solana leads the pack in feeds into a positive feedback loop for contemporary trends in NFTs.

Take a moment to reflect on the network effect. When Dapps that offer yield farming opportunities are deployed, they often rely on the native token for the blockchain as their main source of liquidity. This captures $SOL from circulation as it has done for $BNB, $POLY, $FTM, $AVAX and $ETH in their respective ecosystems.

When new projects decide to launch their token onto a blockchain, they need to give their token value that has adequate liquidity. This is true for all markets. What gives the token value is pegging it to an asset with existing value. In effect, by purchasing Dapp tokens, you are often locking up the native network token with it to sustain a pegged token value.

Solana appears to be winning both the scalability AND the play-to-earn narrative. By deploying a highly scalable and composable network, Solana can offer unique opportunities for innovation in NFT technology. The most popular trend right now in cryptocurrencies is play-to-earn metaverses and functional NFTs.

It is expensive to innovate on Ethereum and limiting due to poor finality and TPS. BSC and Polygon, you can enter Metaverses, but over time it does become prohibitively expensive when your transaction volume increases significantly with on-chain tasks. By providing industry-leading speed and finality, developers can implement projects that do not inhibit complex activities requiring a high volume of transactions.

Many Play-to-earn Metaverses struggle to build high-quality games entirely on-chain. The transactions required of the user to interact within the virtual world are too high in volume requiring the gaming engines to be built off-chain. Some Metaverses claim to have overcome this but still face accumulative strain on the user’s wallet for gas fees. Projects deployed onto Solana also involve existing decentralized data storage solutions such as Aleph. The integration of higher on-chain storage capabilities opens an insane level of innovative capabilities.

Revisit the network effect. When users purchase collectible NFTs they do so in an often illiquid market with low trading volume. They may be stuck holding a costly bag or may find themselves selling for significantly less. But what if the NFT had a non-speculative application that can create value in ways unique to the NFT itself? We would likely start to see more liquidity locked in virtual environments where everything is tokenized.

Apart from a handful of scandals, the team are in a blessed place where they focus exclusively on deploying a full mainnet once they iron all the wrinkles out of the current Beta mainnet.

A bearish prediction would be based on the continuation of the glaring decentralisation issues that haunt Solana. The quicker a full mainnet is deployed with DAO governance to manage on-chain issues, the better. EOS is one project that sacrificed decentralisation and is now a zombie chain. Could Solana share the same fate? As it stands, the most decentralized aspect of Solana is the Proof of History mechanism powered by the SHA-256 algorithm.

Bullish predictions would be entirely contingent on the network effect and continuing user adoption. If Solana’s network TVL stands to increase, it is likely that the price will closely resemble $BNB. I recommend reviewing the growth of $BNB from $40 to an all-time high of $691.80. It happened very quickly, within 3 months.

Projects deploying onto Solana may experience an uptake, similar to, Polkadot para chain auctions. Further, I expect Solana will play a key role in P2E and NFT adoption going forward.

This fundamental analysis is a sneak preview of an up and coming newsletter from Crypto Consulting Institute. For more information visit: https://www.cryptoconsultinginstitute.com/newsletter

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Justmy2Satoshis

Fundamental analyst at CCI. Full-time obsession with disruptive applications of blockchain technology.