Solana is a high-speed layer-1 blockchain created in 2017 to provide a fast, secure, scalable infrastructure for decentralized applications (DApps). It is known for its high throughput, surpassing that of well-known blockchains such as Ethereum and Bitcoin, while maintaining low transaction costs.
History of Solana
Solana was founded in 2017 when Anatoly Yakovenko published a white paper describing proof-of-history (PoH), a technique for keeping time between computers that do not trust one another.
He then collaborated with Greg Fitzgerald, a former Qualcomm colleague now serving as Solana’s chief technology officer, to establish a PoH blockchain testnet. Together with Greg and a few others, the core team at Solana Labs — the company behind Solana — was formed.
In the second quarter of 2018, Solana Labs initiated fundraising efforts led by Multicoin Capital, which raised approximately $20 million in private token sales by July 2019. An additional $1.76 million was raised through its inaugural auction on CoinList.
As the fundraising progressed, Solana’s protocol underwent development, reaching various permissionless testnet stages. Solana’s beta mainnet was launched by Solana Labs in March 2020, with its first block being created on March 16, 2020.
Solana Labs remains the primary contributor to the network, while the Solana Foundation — a nonprofit organization based in Zug, Switzerland — supports ongoing development and community-building activities through financial assistance.
This article provides an extensive overview of the Solana ecosystem, exploring key elements such as the Solana platform, Solana’s (SOL) cryptocurrency, Solana DApps, tokenomics, Solana’s decentralized finance (DeFi) ecosystem, staking and consensus mechanism. There is also a discussion on Solana’s fast-growing nonfungible token (NFT) marketplace, developers and ecosystem projects.
Understanding the Solana platform
At the core of the Solana ecosystem lies its blockchain platform. Designed to overcome the scalability limitations of traditional blockchain networks, Solana leverages innovative technologies to deliver a high-throughput, low-latency infrastructure. In doing so, it caters to various DApps, from finance to gaming, showcasing its versatility and adaptability.
Solana blockchain technology
Solana has a unique combination of PoH and proof-of-stake (PoS) consensus mechanisms. Its protocol introduces an inventive PoH timing mechanism that precedes and seamlessly integrates with its PoS consensus.
Solana’s blockchain mechanisms depart from traditional proof-of-work (PoW) systems utilized by early cryptocurrencies like Bitcoin (BTC) and Litecoin (LTC). Solana opted for a unique approach at the core of its protocol, providing a digital record of events occurring on the network at any given time.
Solana’s white paper highlighted that existing publicly available blockchains (PoW and PoS) lacked a reliance on time. Each node in their network depended on its own local clock without awareness of other participant’s clocks. The absence of a trusted time source or a standardized clock introduced uncertainty when utilizing message timestamps for accepting or rejecting messages.
With the introduction of PoH, Solana introduced a mechanism that enabled the blockchain to achieve consensus by validating the chronological order of events. In contrast to existing blockchains that lack a standardized clock, PoH provides a verifiable digital record of network events, facilitating consensus by encoding the passage of time into the ledger.
This synchronized, decentralized clock system equips all Solana network nodes, eliminating the need for validators to wait for transaction verifications. The result is an exceptionally high throughput and swift block creation time, distinguishing Solana as a frontrunner in efficient and scalable blockchain technology.
However, Solana has experienced several significant outages. One notable incident involved a misconfigured node that led to the network going offline. In addition, some outages were caused by denial-of-service attacks from bots targeting specific protocols within the network, such as the Raydium protocol, or the network became overloaded due to high traffic caused by NFT applications. These incidents have highlighted vulnerabilities related to the handling of peak transaction loads by validators on the network.
Solana cryptocurrency ecosystem
SOL is the native cryptocurrency of the Solana network and serves various functions, including transaction fees, staking and governance participation. SOL uses the SPL protocol, which is the Solana blockchain’s token standard, similar to ERC-20 on Ethereum.
Primarily, SOL covers transaction fees incurred during network interactions and smart contract executions, aligning with a common practice among blockchain networks. Beyond transactional functionality, SOL plays a pivotal role in Solana’s PoS consensus mechanism through staking. Holders can lock up their SOL tokens to contribute to network operations, earning rewards as an incentive.
Validators, who play a crucial role in securing the Solana network, are rewarded with SOL tokens for validating and confirming transactions. This incentivizes a robust network of validators, enhancing the security and efficiency of the blockchain.
Moreover, SOL holders wield governance power, actively participating in decisions related to the platform’s parameters, upgrades and overall improvements. The versatility of SOL extends into Solana’s DeFi ecosystem, NFT marketplaces and other initiatives that require tokens for utility and access.
Solana tokenomics
Solana’s tokenomics are designed to support the platform’s growth and sustainability. When SOL launched, it had an initial total supply of 489 million tokens, but there was no capped max supply. Instead, Solana employs a unique inflation model to reward network validators and tokenholders.
New SOL tokens are created through the protocol at a rate determined by the network’s tokenomics. This inflation rewards validators for securing the network and incentivizes tokenholders to participate in staking. Currently, the initial inflation rate for Solana is 8%, which will reduce by 15% each year until 2031, with an aim to reach its stable long-term inflation rate of 1.5%.
But the Solana team also burns a small portion of its transaction fees in SOL to keep its supply under control. When users pay transaction fees in SOL, a percentage of those tokens is permanently removed from circulation, contributing to the overall scarcity of the token.
Various incentive programs and grants are provided to developers to encourage the development and adoption of DApps on the Solana blockchain. These incentives are often denominated in SOL tokens, promoting the ecosystem’s growth.
Solana ecosystem and services
The Solana ecosystem has experienced expansion, drawing in an array of DApps in DeFi, gaming and NFTs, expanding its user community. Notably, the protocol has achieved an unprecedented milestone in total value locked (TVL), reaching $134 billion as of Jan. 22, 2024.
NFT ecosystem and market
Solana offers exceptionally low transaction fees, making it an attractive choice for NFT artists and collectors who seek to avoid the burden of high gas fees. NFTs on Solana show a diverse portfolio across collectibles, artwork, music, gaming, virtual estate and more.
Magic Eden is the most popular NFT marketplace on Solana, while others commonly used include SolSea, Rarible, Solanart and Hyperspace.
Wallets and crypto exchange support
A wide range of wallets and crypto exchanges contributes to the seamless management and exchange of digital assets. Popular hot wallets include Phantom, Solflare and Exodus, while cold wallets like Ledger are also compatible. SOL is listed across all major cryptocurrency exchanges, including OKX, Binance, Coinbase, Kraken and KuCoin, among others.
DeFi and DEXs
Smart contracts on Solana enable the creation of lending and borrowing protocols, liquidity pools, yield farming and more. Notable DeFi platforms and swaps, such as Jupiter and Raydium, offer users diverse peer-to-peer opportunities with unparalleled speed and cost-effectiveness.
Solana’s controversial past with FTX
Once a Sam Bankman-Fried favorite, Solana’s prominent vocal backing by the FTX founder took a controversial turn with FTX’s collapse. SOL plummeted heavily, resulting in a significant price decline and speculation about Solana’s survival.
The intertwined financial dealings between Bankman-Fried’s firms, such as Alameda Research and FTX, and the Solana Foundation and Solana Labs, came under public scrutiny. The purchase of large amounts of SOL tokens and the involvement of these entities in bankruptcy proceedings added a layer of complexity to Solana’s narrative, raising questions about the impact on the platform’s stability and the handling of assets amid the legal challenges faced by FTX and its co-founder.
Speaking exclusively to Cointelegraph at the Solana Breakpoint in November 2023, Solana co-founder and Solana Labs CEO Yakovenko then recalled his concerns about Solana projects getting affected by the controversy. However, he articulated Solana’s value proposition, raising hopes that Solana would get back on its feet as even Ethereum venture capital investors like Chris Burniske showed confidence.
Structured efforts by Solana Labs and its team in 2023, focussing on building resilience, incubating projects and continuing technological innovation, have resulted in confidence in Solana gradually returning across the industry.
Is it worth investing in Solana?
Investing in Solana has garnered considerable attention as the blockchain platform showcases robust performance and innovation within the cryptocurrency space. With its emphasis on high throughput, low transaction costs and scalability, Solana has become an attractive option for investors seeking an alternative to established platforms like Ethereum, with many referring to it as the “Ethereum killer.”
As with any investment, potential investors must do their own research, considering factors like the project’s fundamentals and the broader market conditions. It is essential to stay informed about the evolving developments within the Solana ecosystem and the wider crypto space to make informed investment decisions.
Written by Shailey Singh