Behind Solana’s surge: Ethereum killer looms

Written by Sal Qadir, Galaxy Research Assistant

Compiled by: Chief Villager of Ivory Mountain, Carbon Chain Value

Recently, Solana's ecosystem has performed well overall, driven by the DePin concept and MeMe coin.Token The price of SOL also exceeded $100 on December 24. The transaction volume of DEX on Solana briefly exceeded that of Ethereum, and the voice of "Solana surpassing Ethereum" rose.

Can Solana Really Surpass Ethereum?

In order to have a deeper understanding of Solana and its ecological core and future development, I have read some past research materials on Solana and feel that Galaxy's report is more detailed and comprehensive. It is rare to see a panoramic description of Solana from its founding to its development and future planning. I have specially selected this in-depth report on Solana and its ecology released by Galaxy in 2022 for readers' reference/learning.

Introduction

Solana is a fast, low-latency, proof-of-stake, Layer 1 public blockchain with a differentiated technical architecture and growing usage across multiple Dapps. While fundamental design issues currently limit its resiliency and centralization issues are evident, complex technical fixes and upgrades suggested by the protocol team could mitigate or resolve these issues. Nonetheless, over the past 12 months, Solana has successfully distinguished itself from other Layer 1 public chains, challenging Ethereum as the dominant blockchain.cryptocurrencyDomain IntelligencecontractThe position of the throne.

Solana's unique approach to scaling stands in stark contrast to most other Layer 1 public chains - with a theoretical throughput of 50,000 transactions per second and low, fixed transaction fees. From a developer's perspective, Solana prides itself on achieving composability without relying on a module stack, Layer 2, or sharding. This report will provide an in-depth assessment of Solana and reveal its favorable conditions for gaining and maintaining market share in the Layer 1 public chain space.

Market Cap and Total Value Locked

Solana daily active users (paying users) since January 1, 2021

Solana SOL USD price since mainnet launch

Background and History

Who is Anatoly Yakovenko?

Anatoly Yakovenko founded Solana while working as an engineer in San Francisco, California. He spent most of his career at Qualcomm, where he used his application engineering expertise to solve challenging problems in the field of hardware optimization. Anatoly has earned a reputation for his strong technical acumen — his most noteworthy achievement is designing the high-performance DSP software that powers Google Tango, the first mobile device to support smartphone augmented reality. He first became interested in Solana in 2017 through a friend who was working on deploying deep learning hardware to the cloud.cryptocurrency(Unsurprisingly, this type of specialized hardware has many similarities to Solana validator nodes.) Anatoly and his friends will use these powerful computers to mine Bitcoin and realize a profit after deducting the initial capital expenditure. As Anatoly fell down the rabbit hole of researching proof-of-work mining, he began to wonder why proof-of-work is needed, what makes proof-of-work mining slow, and how proof-of-work can be improved.

One night in 2017, Anatoly explored single-threaded mining, which became known as the “red pill” moment. Anatoly reasoned that instead of measuring the amount of electricity that is essential for “proof of work” mining, it would be better to measure time. Anatoly firmly believed that theSafetyThe Solana protocol is based on the idea of connecting the network to physical constants such as electricity or time, which is crucial for long-term reliability. In this case, Anatoly had an epiphany when he realized that sequential hashing could be used to guarantee that a certain amount of time would pass between two events. Anatoly later described this concept as "Proof-of-History" and published these findings in a draft white paper in November 2017. By February 2018, Anatoly released the Solana testnet and the official white paper together with Greg Fitzgerald.

One of Anatoly’s Qualcomm colleagues, Stephen Akridge, suggested modifying Solana’s architecture to leverage GPU-parallelized signatures for verification. Stephen’s valuable contribution not only validated the merits of Anatoly’s original protocol design, but also motivated him to go all-in on the project. In addition to Greg and Stephen, Anatoly recruited Raj Gokal and three other senior experts from Apple/Qualcomm to form Solana Labs. Although the project was originally named Loom, the team encountered challenges with Loom Ethereum. L2 The network had a naming confusion problem. The team eventually decided to change the name to Solana, named after Solana Beach in Southern California (where the team lived and worked at the time).

Growing in a Bear Market

Solana Labs was founded in early 2018 and is led by visionary founder Anatoly. The Solana Labs team’s mission is to take Solana from Proof-of-Concept to a production-grade, permissionless public blockchain. The only problem is that they faced a difficult fundraising environment in 2018 – the ICO bubble had just burst. Bitcoin prices were plummeting, and many investors were concerned aboutBlockchain / Crypto startups were cold. Solana Labs co-founder and COO Raj Gokal described in an FTX podcast that at the time, the Solana team was trying to stand out from the fierce competition. Dfinity (now known as ICP) had just raised $100 million, and Avalanche Labs was founded by Emin Gun Sirer, a famous professor at Cornell University, based on a novel consensus protocol. To some people, Solana was just another Layer 1 public chain focusing on "vanity indicators" such as transactions per second (TPS). At the time, the Twitter-based "cryptosphere" was more enthusiastic about startups that focused on privacy and interoperability rather than scalability. Fortunately, Anatoly convinced a friend he met while playing underwater hockey to become an early investor, who then introduced the Solana team to two other supporters.

The team provides privateTokenSolana raised $20 million in a private token sale. Some early backers included Multicoin Capital, 500 Startups, and a founder of Race Capital. These investors were impressed by the Solana testnet’s ability to consistently support 250,000 high-frequency trades per second. The private token sale was announced as a Series A round in late 2019. While raising funds, the team also built a public testnet called Tour de SOL (most of Solana’s co-founders are cyclists). By March 2020, Solana conducted a $1.76 million public token auction on CoinList and launched a beta version of the mainnet.

Technical Architecture

SolanaBlockchainWith Nasdaq Speed

When Anatoly initially developed Solana, he drew on his personal fascination with programmatic electronic trading. As an average end user accessing the APIs of popular platforms like Interactive Brokers, Anatoly was frustrated that his trades were front-loaded by intermediaries with more capital and trading infrastructure than he did. He wants average Solana users to enjoy a level playing field with powerful institutions. In the long run, Solana aims to eventually achieve the scale and responsiveness of Nasdaq on a public blockchain. In fact, Solana’s early seed-stage investment proposal included a statement: “Solana’sBlockchainAnatoly’s design decisions for Solana emphasize speed and information flow over other blockchains like Bitcoin.BlockchainThe “store of value” use case of interest.

The key factors that distinguish Solana from most other Layer 1 public chains are: 1) hardware; 2) the physical passage of “wall clock” time; and 3) composability. These three key attributes together form the foundational pillars of the Solana technology stack.

First and foremost, Solana is very dependent on advances in hardware to meet the challenges of software-level protocol advances, ensuring that its speed and scale will continue to improve as the hardware continues to improve. Progress on Moore’s Law, which only applies to CPU transistor density, has slowed since about five years ago, but is still ongoing. More importantly, the AI/ML space is driving new breakthroughs in GPU/parallel processing power and shows no signs of slowing down anytime soon. The Solana team believes that software-level advances (such as Ethereum’s 2.0 update) have been notorious for being slowed down by a small number of people with the skills and experience to build and run the blockchain.SafetyDue to the technical depth of implementing protocol-level changes in a certain way, progress at the software level may encounter obstacles. No matter how fast they make progress on the underlying protocol, the Solana team is betting that the computer hardware industry will move forward year after year. This ensures that Solana's underlying scalability can take advantage of the development of the hardware industry, all other things being equal. This also distinguishes the Solana public chain from other Layer 1 public chains, whose expansion roadmaps rely primarily on advances in software design.

The second fundamental concept of Solana's technical architecture is time. Solana decouples time from state update consensus. Because every transaction on Solana is timestamped, transactions can be streamed in real time as they occur. This approach is different from most other public chains, which batch timestamp transactions in each block. The benefit of separating time from state updates is that validators can pre-process blocks to increase throughput because the ordering of their transactions follows a global clock.

Nonetheless, it is worth noting that the broader public chain development/researchCommunityTime is rarely acknowledged (outside of Solana) as a useful invariant for scaling public blockchains. The only notable example of time being used to scale distributed applications is in the telecommunications industry (which makes sense given the Solana founding team’s experience in the telecommunications industry). Specifically, TDMA has been the foundation of cellular networks since the 2G era. The details of how TDMA works are beyond the scope of this report, but it boils down to taking a limited resource (RF bandwidth) and cutting that bandwidth into time slots created by a global clock, allowing more devices to connect without requiring more network resources. Without this critical, time-based approach to scaling cellular networks, there would be no ubiquitous mobile broadband today. Below is a simplified diagram of how TDMA works.

TDMA Simplified Diagram

Doubling down on monolithic architecture

最后，支撑 Solana 技术的第三个关键概念是可组合性。可组合性是指 Solana 有意将其设计为单体公链。虽然 Solana 所走的单体化道路在他们看来被定位为杀手级功能，但在更广泛的cryptocurrency领域，这种选择无疑是一种逆向的公链设计赌注。其他公链，如以太坊和 NEAR，将单体架构视为长期可扩展性的障碍。这些相互竞争的 Layer 1 公链正在探索各种解决方案，如模块化扩展（由以太坊中的 Celestia 和 Evmos 等项目推进）、Layer2 扩展（由以太坊中的 Starkware 和 Aztec 等项目推进）以及各种形式的分片（在以太坊的路线图上，目前已在 NEAR 协议中实施）。

The design tradeoffs between these technical approaches are worth discussing in a separate research report. Regardless, Solana is reluctant to stray from its vision of a monolithic future. The Solana team believes that the benefit of optimizing for composability is that building applications on the global state of a monolith is very elegant. The Solana team believes that under a monolithic architecture, developers have a hard time writing smart applications that require different pieces of Solana’s state.contract时，不会因为多个分片或 Layer 2 系统而感到负担。具体来说，如果一个应用程序开发人员想在 NFT 平台的 SPL 令牌和 DeFi 应用程序的 SPL 令牌之间创建一个原子交换，由于 Solana 的全局状态，他们现在可以很容易地做到这一点。如果同一个开发者要为分片状态编写智能合约，他们可能需要添加额外的逻辑来检查交换的每一部分位于哪个分片上，这就增加了相关交易的复杂性。

As blockchain applications become more complex and intertwined with each other, the development complexity of building on modular/or sharded systems may increase exponentially. From an end-user perspective, an application built on one Layer2 protocol may not be able to natively interoperate with an application built on another Layer2 protocol, despite the Layer1 being the same public chain (such as two independent applications built on Optimism or Arbitrum, both of which are Layer 2 of Ethereum). Solana takes the end-user experience very seriously, and they believe that modularity/Layer2/sharding is a "last resort" rather than a "necessary evil." It is worth emphasizing that Solana's thinking, while well-intentioned, is in stark contrast to the roadmaps of almost all other Layer1 public chains today. The jury is still out on how onerous the user experience will be for large-scale utilization of multiple Layer2 public chains. Today, most Layer1 public chains are still monolithic, and only time will tell how each blockchain's scaling methods can withstand high usage. Solana has made some reasonable guesses about the future of cryptocurrency under non-monolithic mechanisms, and for now, they are committed to maintaining the simplicity of the global state brought by a composable monolithic architecture.

Avoiding the EVM

The Ethereum Virtual Machine (EVM) is a computing engine that runs Ethereum smart contracts. Developers use the EVM to build decentralized applications on Ethereum.DApps). Its purpose is to manage "state" on Ethereum without permission.

Simplified EVM diagram

Many other Layer1 public chains and sidechains (such as Avalanche, Binance Smart Chain, Harmony, and Polygon, etc.) have EVM compatibility as a core feature. This is because there are already many Dapps running on the EVM written in Solidity, and it is a relatively simple matter to port these codes to EVM-compatible chains. These EVM-compatible alternative Layer1s can also take advantage of existing tools on the developer side (Hardhat, Truffle, Remix) and UI/UX side (MetaMask, Coinbase Wallet).

On the other hand, Solana is designed to run in LLVM instead of EVM. LLVM is a standard compiler toolchain that separates human-readable code (like code written in Rust) from assembler (low-level code that can take advantage of hardware optimizations). From a practical perspective, one can imagine a LLVM-based deployment pipeline of source code -> LLVM -> assembly. Solana made this architectural choice for two key reasons. 1.) Solana is designed to be hardware optimized, and Solidity/EVM does not natively support hardware optimizations. 2.) Programming languages like Rust allow for writing extremely fast low-level code that is very fast when developers are using them.CommunityAccording to the 2020 Stack Overflow Developer Survey, more than 65,000 developers voted Rust their most loved programming language for the fifth consecutive year (by a wide margin).

然而，Solana 做出这一决定的代价是，了解 Rust 的区块链特定开发人员并不多，因此从相互竞争的加密公司 / 协议中招募新人才往往是一项困难的工作。不过，有些人认为这是一个积极的方面，因为 Solana 开发者Community性质上不那么「唯利是图」，而且由于其技能组合只对基于 Rust 的区块链项目有用，因此更加致力于 Solana 生态系统。

The high-level technical decisions described above are the “why” behind Solana’s 8 core innovations described below.

Solana’s 8 Core Innovations

Proof of History (POH) is a pre-consensus clock:Proof of History is neither a consensus protocol norWitchResistance mechanism. In contrast, POH is a high-frequency, verifiable delay function (VDF). A VDF is a function that produces unique outputs in sequence and can be verified much faster than it can be produced. In other words, it takes time for a VDF to produce outputs in sequence, but it can be verified in parallel. In Solana's history proof, the VDF is actually a SHA256 hash function running in a constant loop. It works by initially inputting an arbitrary value (such as the word Solana) into the SHA256 function, and then feeding the output of each hash back into the SHA256 as input and hashing it again. By repeating this process, we can be sure that the time it took to produce the final output is real, because it is impossible to generate hash values in parallel that each depend on the previous hash value. This data structure that hashes in sequence allows Solana to effectively create a global "wall clock" that all transactions on the Solana public chain can refer to to prove the order in which these transactions occurred.

In short, history shows that:

SHA256 loops as fast as possible on a single core, with each output being the input for the next.

The Solana network samples this repeated cycle and records the number of iterations and status

Information can be inserted into the PoH cycle as a hash value together with the state. This ensures the order of information delivery.

Historical proof chart

Tower BFT Byzantine Fault Tolerance:Tower BFT is essentially Solana’s consensus mechanism. It refers to Solana’s implementation of Practical Byzantine Fault Tolerance (PBFT). As a recap, Byzantine Fault Tolerance describes a solution to the Byzantine Generals Problem — the problem of coordinating an attack between two geographically distributed generals who can only communicate via messengers. Fault-tolerant systems are designed to protect against bad actors trying to spread false information, or intercept “messengers” before they reach their destination.

In the Solana system, Tower BFT is an innovation to the traditional BFT system, where validators vote for a block in a certain way (we call this initial vote X), and in the next two blocks, validators will only vote for blocks starting from "X". This "rollback timeout" doubles every time a validator votes for a block originating from "X". Because of PoH, every validator can verify the information in the block, so they can abandon blocks that are inconsistent with Solana history. Nodes on the network can only receive inflation rewards within the maximum vote lock time. This helps ensure that the economic interests of validators are consistent with the fork they believe the majority of people in the network voted for.

Block

In Tower BFT, liveness (the ability to always add new blocks) takes precedence over consistency (the number of potential forks in the final block) (see figure). Tower BFT differs from standard PBFT implementations in that it relies on PoH as a global clock before reaching consensus. This allows Solana to reduce latency and messaging overhead, which are common drawbacks of traditional PBFT. Under Tower BFT, validators can vote during fixed time periods of hash values, or "periods." Typically, a period is equivalent to 400 milliseconds (although time slots will change as hardware continues to advance). As mentioned earlier, each subsequent period doubles the wall clock time (also known as the timeout) that the network must stop to "unfold" potential votes.

For example, if every validator on Solana voted 38 times in the last 15 seconds (15,000 ms / 400 ms = ~38 epochs), the network’s timeout is effectively ~3,400 years. (2^38*400)/1000/60/60/24/365. This BFT approach assumes that the timeout grows exponentially as blocks are produced. Unlike Proof of Work, once a supermajority of validators vote on a PoH hash, that hash cannot be rolled back. The final result is not probabilistic.

Under Tower BFT, the network can compute timeouts asynchronously without peer-to-peer communication. Each vote made by a validator contains a small piece of verifiable information (bound to the PoH). If other validators observe that a proposed vote contains information that the PoH cannot verify, then the vote is simply discarded. This is why the "wall clock" enabled by PoH and separated from the BFT mechanism itself is critical to Solana's scalability approach.

BFT

Gulf Stream non-memory pool forwarding protocol:In the memory pool, unconfirmed transactions sit idle, waiting to be processed by the network. Under a memory pool structure like Bitcoin or Ethereum, transactors who pay higher fees (or tips) can incentivize network miners or validators to confirm their transactions faster and remove them from the memory pool. The size of the memory pool and the cost of getting a transaction approved by the blockchain both represent the supply and demand for block space on a particular blockchain.

Regarding Solana, imagine if Solana validators could manage a “Mempool" (Solana does not actually use a literal Mempool). Under these parameters, assuming a throughput of 50,000 transactions per second, Solana validators can clear this memory pool in seconds. However, this oversimplification ignores the importance of public chain propagation. In most public chains, mempool transactions are propagated across a network of nodes via a gossip protocol. A gossip protocol refers to a peer-to-peer communication method that transmits data across a distributed network of nodes. The reason why the gossip protocol works so well is due to advanced techniques such as Bloom filters, which are used to help nodes propagate transactions to other nodes more efficiently. This efficiency stems from the fact that bloom filters use hash functions to identify whether an element is not contained in a given data structure (constant time). However, as public chain throughput increases, the computational cost of running bloom filters may be too expensive due to the large number of hash values that need to be calculated each time a bloom filter is instantiated. Therefore, the Solana team has adopted a block propagation method that is very different from most other public chains.

Solana Transaction Workflow

Gulf Stream describes Solana’s unique transaction propagation method, which pushes transaction caching and forwarding to the edge of the network. Since validators know the order of transactions and who the future leaders are, they can execute transactions in advance. In this way, validators who are leaders are more likely to be successful.Xiaobai NavigationThe innovation that makes Gulf Stream technology possible is the known leader schedule (again, using the running metaphor, teams participating in a relay race determine in advance the order in which each member will run). This leader schedule is generated every epoch (about 2 days), which means that transactions are sent directly to the current and next leaders instead of being randomly propagated like in the Ethereum mempool. Most public chains do not have this specific leader principle. In addition to allowing transactions to execute early and facilitating seamless leader switching, this approach also reduces the memory load of validators because they do not need to keep track of unconfirmed transactions and shortens confirmation times. The main risks of Gulf Stream are: 1) increased risk of validator collusion (because leaders are predetermined, but the Solana team believes this risk is minimal due to Solana's fast block times); 2) spam propensity, because Gulf Stream is mempool-free and spam transactions are sent directly to the leader.

Sealevel Parallel Smart Contracts:Sealevel is a virtual machine that allows smart contracts to be executed simultaneously on blockchains with the same state. In contrast, public chains compatible with the EVM are single-threaded, and only one smart contract can modify the state of the public chain at a time. Sealevel's smart contract parallel execution engine is powered by its core validators, enabling transactions to be executed simultaneously on public chains with the same state. Sealevel works similarly to an operating system technology called "scatter-gather". Developers on the Solana ecosystem must declare in advance the states they will read and write. While this increases the complexity of development, it also allows Solana to execute any smart contracts that are considered non-overlapping in parallel. Sealevel ultimately uses Berkeley Packet Filters to hand over transaction execution to the hardware level. By leveraging the Sealevel virtual machine, transactions on Solana that only read the same state can be executed concurrently, and non-overlapping transactions can also be executed simultaneously.

First batch

Second batch

Turbine Block Propagation Protocol: Turbine's block propagation method is largely based on the principles of platforms such as BitTorrent. Turbine works by breaking down the data stored in a block into smaller packets. The leader of the current block divides the block data into packets of no more than 64kb in size, and each packet is sent to a different validator. After receiving the packet, the validator transmits the packet to other neighbors. These neighbors then propagate the packet to the neighbors below. In addition, Turbine also takes into account potential dishonest nodes, which may send wrong data or no data to neighboring nodes. To solve this problem, the leader generates a Reed-Solomon erasure code. The erasure code allows each validator to reconstruct the entire data block without receiving all the packets. If the leader sends a packet of 30% with an erasure code, the network can discard any packet of 30% without losing the data block. The leader can also adjust this ratio based on the state of the network. These changes are based on the packet loss rate observed by the leader from previous data blocks.

pipeline

Pipelining (Transaction Processing Unit for Validation Optimization): Pipelining refers to a hardware-level optimization that enables Solana to split the input data stream into different processes running on different hardware. Pipelining utilizes message queues powered by Rust channels to build a 3-stage pipeline.

Solana Pipeline

In the first phase, data is acquired and sent to the kernel (operating system) level block. Specifically, the kernel space will pass the data to the next GPU stage, where the signature can be verified in parallel. Once the signature is verified, the GPU will hand over the data to the CPU for the next banking phase. Meanwhile, the kernel space has acquired the next set of data and will get the data to be written to the public chain from the central processor and then send it to other blocks.

An analogy that can help explain this concept is washing dishes. Typically, dishwashing is divided into multiple stages: rinsing, sanitizing, drying, storing. Instead of one person completing each step in sequence, the first person will be responsible for rinsing the dirty dishes and storing the clean, dry dishes. However, they will hand the dishes off to another person who will only be responsible for sanitizing. Perhaps this person can also use a basin full of clean, soapy water to soap/sanitize many dishes at the same time. (This is a rough analogy for GPU parallelization). Finally, a third person will focus on drying the dishes and handing the washed dishes back to the first person, who will store the dishes where they belong.

Cloudbreak scales out the account database:Cloudbreak enables Solana to take advantage of concurrent reads and writes at the hardware level. Rather than relying on traditional databases to achieve this (which is very difficult), Solana has built a different type of database, borrowing from the principles of operating systems. Architecturally, Cloudbreak handles account data as follows:

• Account and fork indexes are stored in RAM

• Accounts are memory mapped

• Each memory map stores accounts from a single proposed fork

• Mappings are randomly distributed on SSDs

• Leveraging copy-on-write semantics

• Add writes to a random memory map of the same fork

• Update the index after each write is completed

The Solana team had to build all query and data manipulation tools from scratch, rather than relying on general-purpose database abstractions. As a result, the Solana network can compute the Merkle root of state updates for a given fork via scaled-out sequential reads on SSDs. Even when Solana exceeds 10 million accounts (which would result in data that is too large to store entirely in RAM), Cloudbreak can still support 1 million reads and writes per second on a single SSD.

Archiver Distributed Ledger Storage:Archivers are best thought of as light clients that don’t download Solana’s entire ledger. This is important because Solana generates about 4 PB of data per year, and only large validators with large storage specs can store all of this data. Archivers help reduce centralization risk by enabling more nodes to store Solana’s historical data. Essentially, Archivers are the same validators that verify transactions, they also download parts of Solana’s ledger and provide Proof of Replication (ProReps) to a wider set of validators to determine that they are not acting maliciously.

Solana’s Actual Performance

Comparison of Solana voting and non-voting transactions from January 1, 2022 to date

It is impossible to objectively evaluate Solana’s performance as a scalable public chain without considering factors that may invalidate “apples to apples” comparisons with other public chains. For example, Solana’s whitepaper claims a theoretical 710,000 transactions per second. However, at the time of writing, Solana’s website shows an average of about 1,500 transactions per second (TPS) over the past 6 hours. This shows that there is a gap of about 500 times between Solana’s ideal future and the current reality. It is problematic to take Solana’s own reported TPS at face value because it counts internal consensus information as transactions, which is not a standard practice on any other public chain. In Solana, consensus information is called “voting transactions” – they are validators with voting accounts that handle vote registration, vote collection, and new vote signing. On Solana, transactions involving Dapp smart contract interactions are called “non-voting” transactions (most other public chains only count “non-voting” transactions towards their TPS numbers). According to Dune Analytics, voting transactions accounted for 80-901 tps of all Solana transactions between March 2, 2022 and April 3, 2022. Therefore, subtracting "consensus overhead" from Solana's reported metric of ~1,500 tps gives a true TPS of ~300 non-voting transactions per second (although this is a moving target).

Auto MM

According to research by Dragonfly Capital, Solana’s true scalability performance is 10-25x higher than competing Layer 1s, but if Solana’s reported metrics are taken at face value, they are not 100x or 1000x higher as is often reported. Dragonfly’s approach is to normalize the public chain performance of each network by using fully packed blocks for AMM transactions on a test network. While this is not a perfect metric, it is certainly a better apples-to-apples comparison than what the various Layer 1 public chains claim. While Solana’s actual performance based on these benchmarks (~272 Orca swaps per second) pales in comparison to the 710,000 TPS theoretical performance mentioned in its whitepaper, it is still an incredible number compared to other protocols such as Ethereum’s 12-15 TPS limit. This also highlights that Solana technology appears to be the best of the best (for now) from a scalability perspective. That said, it is also possible that other non-EVM public chains such as NEAR can achieve higher “real throughput”.

Solana Transaction Processing Unit

Combining all the concepts described so far, here’s an overview of the theoretical Solana transaction lifecycle:

Pre-Transaction: During development, Solana smart contract developers explicitly declare a list of all accounts a transaction interacts with — this is critical to Solana’s ability to parallelize state changes via Sealevel.

Dapp sends transaction to userwallet(such as Phantom) for signing

The user signs the transaction with their own private key and pays a fee of 0.000005 SOL (this number is currently fixed and deterministic)

Dapp uses the sendTransaction HTTP API call to send the user-signed transaction to the Solana RPC server

The RPC server reads the validator schedule (which changes every 2 days) and forwards the transaction as a UPC packet to the current and next validator leaders

The leader validator receives the transaction through its transaction processing unit (pipeline)

For a detailed overview of this process, see the following article.

Tokenomics

The SOL token is Solana’s native cryptocurrency and operates similarly to other smart contract platforms like Avalanche and Ethereum. SOL has three main uses. 1.) Pay transaction fees in exchange for using computing resources on the Solana network 2.) Ensure the security of the Solana network by depositing SOL tokens directly on your own validators or delegating to other validatorsSafety3.) Vote in governance decisions related to the Solana network.

Solana Initial Supply Breakdown

In addition to Solana’s native SOL token, Solana also supports the Solana Library for developers to create their own fungible tokens that are compatible with Solana. Simply put, the Solana SPL token standard is to Solana what the ERC-20 token standard is to Ethereum.

According to Coingecko, the total market cap of SOL + SPL tokens is estimated to be around $25.1 billion. This number pales in comparison to Ethereum’s ETH + ERC-20 market cap of around $510 billion (SOL’s ecosystem size is around 5% of the size of ETH’s ecosystem). These numbers suggest that the SOL ANA ecosystem still has a lot of room to grow before it begins to seriously challenge Ethereum. Some of the more well-known “pure” SPL tokens (as opposed to cross-chain tokens) include STEPN (GMT), Serum (SRM), Marinade Staked SOL (mSOL), and Audius (AUDIO).

Token Sale

The Solana team has raised five rounds of funding, four of which were private. These private rounds began in Q1 2019 and ended in July 2019, when MultiCoin Capital led a $20 million Series A investment in Solana Labs. Other companies participating in the fundraising included Distributed Global, BlockTower Capital, Foundation Capital, Blockchange VC, Slow Ventures, NEO Global Capital, Passport Capital, and Rockaway Ventures. In exchange for their investment, these companies received SOL tokens (the specific amount has not been disclosed). Solana announced this capital raise in a Medium post in mid-2019.

In 2020, Solana completed its fourth private sale (called a strategic sale) and held a public auction organized by CoinList, adding about another $4 million to its coffers. On April 8, 2020, Solana Labs also transferred all IP related to the protocol and 167 million SOL tokens to the newly formed Solana Foundation. The remaining tokens from the initial SOL token supply were distributed as follows: Solana Labs team members, the Solana Foundation (to fund development and balance validator voting power), and a "community reserve" to support community activities and application developers (also managed by the Solana Foundation).

After the network launched, the Solana Foundation’s grant began to be cashed out monthly. At launch, the Foundation also unlocked 11 million SOL to lend to market makers for six months. This caused some backlash within the community, who were unhappy that these tokens were not included in the circulating supply calculation, believing that this drastically changed the distribution of tokens. While working with market makers is a common practice in the cryptocurrency community, Solana holders were unhappy that this action seemed to be carried out in secret. These lingering concerns ultimately led the Solana team to destroy an equal number of tokens from the Foundation’s allocation.

Token Supply

Solana's token supply has an inflation schedule, with its inflation rate currently at 7.2%. The inflation rate will decrease by 15% per year (referred to as the "deflation rate"). Solana's inflation rate will decrease by 15% until it stabilizes at 1.5%. In other words, Solana's inflation rate has a straight-line depreciation schedule of 15%, starting at 7.2% and ending at 1.5%. Newly issued tokens will be distributed to validators and stakers in proportion to their stake in the network. In the long run, Solana plans to keep its inflation rate at 1.5% permanently.

As you can see from the supply curve, the pre-launch private token sale had a lockup period of only 9 months. These tokens unlocked on the 17th of 2021. Additionally, the founders’ allocation will fully vest in January 2023. These two massive allocations have unlocked a significant amount of token supply. The entire grant pool allocation was also fully unlocked in January 2021. These tokens will be used for ecosystem funds, such as the $100 million fund announced in January 2022, and to grow the validator ecosystem through incentive programs.

Token Liquid Supply Schedule

Validator

Solana’s proof-of-stake network consists of 1,763 validators (as of May 6, 2022, according to solanabeach.io). The stake distribution of these validators is relatively concentrated, with only 22 validators holding approximately 33% of all Solana stake in the network. In other words, due to the huge influence of the stake held by these 22 validators on the network, they can theoretically stop the network from moving forward alone. This problem of concentrated stake is not unique to Solana (Avalanche’s validators have also shown similar levels of concentrated stake).

There are several factors that contribute to this level of concentration. First, custodians and centralizationexchangeWith a large Solana token balance through day-to-day operations, they can earn additional income by running their own validators. Running a proof-of-stake validator is much simpler than running mining machines on a public proof-of-work blockchain like Bitcoin. Compared to purchasing dozens of Bitcoin mining ASICs that require data center-grade cooling systems and large amounts of electricity, a Solana proof-of-stake validator can be run on just a single (albeit powerful) computer. Centralizationexchange只需将其庞大的 Solana 余额指向自己的验证器，就能立即开始投票并向 Solana 网络提出区块。权益证明网络上的验证器只需控制（直接或通过委托）大量该网络的本地代币，就能实现规模经济。如果一个中心化交易所的资产负债表上有大量的 Solana，那么该交易所几乎可以立即运行一个非常有利可图的验证器业务，而只需付出极少的努力 / 管理费用。如果该交易所想开始开采比特币，情况就不一样了，因为大规模运行工作量证明型比特币矿机的运营挑战超出了中心化交易所业务运营的核心能力。

Additionally, from a retail user perspective, it is also very easy for users to delegate their Solana token holdings to popular validators. Some centralized exchanges even include delegated holding as a feature of their products and offer users additional benefits on static token balances in exchange for a cut of staking rewards. Additionally, users may be more willing to delegate tokens to token providers they recognize from a brand perspective. In this sense, the "rich get richer" as dominant validators attract new delegated capital and further enhance their influence over the network. This is a particular centralization vector for a proof-of-stake system like Solana, but there are two potential solutions that can help alleviate the current high degree of centralization of the Solana proof-of-stake network.

On the demand side, the first potential way to mitigate the centralization issues of proof-of-stake networks may be the growing trend of “liquid staking”. A liquidity staking provider (such as Marinade) is a protocol that delegates staking on behalf of users, just like any staking provider. Users choose to delegate their stake through a provider such as Marinade, and in exchange, the liquidity staking provider will issue liquidity staking tokens (such as mSol). These tokens are issued at a 1:1 ratio with Solana’s stake, and users are free to use other DeFi products in the Solana ecosystem while earning staking returns on Solana’s principle stake. Because liquidity staking providers have an audited onboarding process with new partner validators, they are able to delegate user tokens in a way that optimizes decentralization (i.e. they will spread their stake across smaller validators). In fact, the fastest way for new Solana validators to receive delegations to achieve profitability is to work with liquidity staking providers and receive delegations from liquidity staking users. However, there is no guarantee that liquidity staking providers will ultimately provide or encourage more validator decentralization. Seeking decentralization in terms of underlying validator selection is not an inevitable choice for liquid staking protocols, but it can be a powerful strategy.

在供应方面，提高 Solana 网络去中心化的解决方案是激励更多验证者确保 Solana 网络的安全。验证者加入 Solana 的速度一直很缓慢，因为其网络目前是最难、最昂贵的验证网络之一。运行验证器的经济可行性并不特别诱人，主要是因为 Solana 的价格上涨速度远远快于协议修改验证器核心要求的速度。也就是说，验证者高昂的投票成本、高昂的硬件成本以及所需的大量委托质押（以美元计）都是阻碍 Solana 验证者经济繁荣的主要因素。尽管如此，与雪崩（Avalanche）等其他网络相比，Solana 在某些方面仍然更具吸引力。Solana 对委托质押与自我质押的比例不设上限，这就增加了有积极性的验证者实现规模经济的机会，一旦他们的验证者开始运行，就可以根据其验证者的质押权重吸引无限量的委托 SOL。Solana 实验室团队意识到了运行验证器所面临的经济挑战，他们已经对修改高投票成本等参数表现出了一定的兴趣。不过，Solana 验证器网络的运行始终需要极快的计算机，与在其他大多数 Layer1 公链上运行验证器相比，在 Solana 网络上运行验证器的成本不太可能特别低廉。由于最低计算要求较高，Solana 网络上的验证器可能会有一定程度的中心化。广大加密社区需要思考的问题是：去中心化的程度到底有多高？

Key players

wallet — Gateway to Web3

Non-custodial cryptocurrencieswalletIt is a prerequisite for users to enter the crypto world. Wallets are the fundamental backbone between end users and decentralized applications, enabling these actions to be conducted entirely on-chain - from minting NFTs to obtaining mortgages in DeFi to paying for goods and services. In the "accountless Internet" model embodied by Web3, wallets act as the identity of users, and many people point out that the wallet user interface has been a bottleneck for mainstream cryptocurrency applications around the world. In 2021, Solana's bull run produced multiple Solana-compatible wallets, including Solflare, Sollet, and Phantom. However, Phantom stands out and has become the current giant in the Solana ecosystem (similar to the role of MetaMask in Ethereum).

Founded in March 2021, the Phantom wallet went through several phases of private testing before going public in July 2021. In just nine months since then, Phantom’s user base has climbed to around 2 million monthly active users. The wallet itself is both a browser plugin and a mobile app (just like MetaMask). However, Phantom stands out from the crowd by emphasizing a user-friendly interface and advanced features. These features include staking SOL directly to validators and displaying users’ NFTs on separate tabs within the wallet. In addition, it supports key management and exchange functions for hardware wallets such as Ledger (provided by Raydium). Through a direct integration with FTX, users can purchase Solana with cash and deposit SOL tokens directly into Phantom (Coinbase offers a similar service through its exchange and wallet coupling). According to Phantom’s Twitter account, the wallet has facilitated $16.1 billion in SOL staking, $1.37 billion in trading volume, 2 million Dapp transactions, and 1 million token transfers. In addition, the wallet has a 2 million MAU user base, of which 1.6 million users own at least one NFT. Such high participation has raised $109 million in funding for the Phantom team, with a valuation of $1.2 billion. In comparison, MetaMask's parent company Consensys recently raised $450 million at a valuation of $7 billion, bringing 30 million MAUs to MetaMask.

Phantom’s success to date, coupled with its financial strength, has brought synergistic benefits to Solana developers, who can rely on the battle-tested Solana Wallet API to connect the existing 2 million user base to their respective Dapps. This is an important aspect of Solana’s unique ecosystem that is often overlooked, and explains why Dapp usage on Solana has been high compared to other Layer1 public chain platforms.

Number of active wallets

The Solana Ecosystem

Solana's ecosystem can be divided into the following parts: DeFi, NFT, Payment,DAO, gaming and infrastructure.

Needs update

DeFi

DeFi is currently the largest vertical in the Solana ecosystem, and perhaps the most important. Solana’s technical infrastructure is built from the ground up to accommodate trading use cases, enabling any user of Solana to operate like a high-frequency trader in traditional finance.

According to DeFi Llama, Solana has a market share of approximately 3.74% in DeFi TVL across all chains. This share currently lags behind Ethereum (63.78%), BSC (8.26%), and Avalanche (3.89%). However, these high-level metrics do not fully reflect the level of innovation of each network from a DeFi perspective. Beyond Ethereum, it can be said that BSC and Avalanche, while more impressive in terms of absolute TVL, are not as impressive once you delve deeper into the DeFi protocol dominance within these chains.

The most popular public chain

In the case of BSC, 47% of BSC’s TVL is driven by PancakeSwap, which is known to be the DEX of choice for problematic, low-volume token projects. Additionally, Avalanche has 21% of TVL coming from Aave, which was ported to Avalanche for its EVM compatibility. In other words, Avalanche’s top projects in terms of TVL aren’t even built specifically for the network (although, given the ease of integrating existing EVM-based projects into AVAX, some might argue that this could be a feature rather than a bug). On the other hand, Solend is Solana’s top DeFi protocol, dominating with just 13%. The top 5 protocols for Solana TVL are, in order, Tulip (#2), Atrix (#3), Raydium (#4), and Marindate (#5). All of these protocols have comparable levels of total value locked, and they represent a variety of use cases in Solana’s growing DeFi ecosystem. Below we will introduce several key primitives that enable developers to build powerful DeFi applications on the Solana network.

Serum

On August 31, 2020, Serum was released as an open source software project built on Solana. It was initiated by the Serum Foundation and supported by a group of cryptocurrency trading and DeFi experts, including FTX, Alameda Research, and the Solana Foundation. Serum aims to become the "infrastructure layer for $10 trillion worth of economic activity" by building a centralized order book, matching engine, fast settlement/trading, and low transaction costs on the chain. There are two key assumptions that drive Serum's design philosophy.

Central limit order books will replace automated market makers (AMMs) and become the de facto standard for DeFi transactions

The composability of DeFi will achieve step-change improvements in functionality due to the collaborative specialization of different protocols.

Before Solana, central limit order books (CLOBs) were considered a pipe dream in DeFi. Ethereum’s scalability limitations combined with its high gas costs have led to an explosion of automated market makers with rudimentary design patterns, such as the constant product formula that powers Uniswap. On Ethereum, it is simply not feasible to run all the transactions required for CLOBs on-chain due to the huge demand for block space. Passively traded, two-way liquidity pools based on a constant product pricing model are the only reliable way to bring decentralized trading completely on-chain. The Serum team realized the limitations of AMMs during the DeFi Summer peak in 2020 and made the move from Ethereum to Solana as a result.

Limitations of AMMs

The main challenge facing AMMs centers around the idea of impermanent loss. Essentially, AMMs can only benefit liquidity providers (LPs) when the two assets that make up a particular liquidity pool have a mean-reverting price relationship. Stablecoin pairs (such as USDT/USDC) are an ideal example of a pair for AMMs that both maximizes fees for LPs and minimizes impermanent loss in the form of adverse price movements that arbitrageurs can exploit. However, users want to trade much more than just stablecoin pairs. This is where the crux of the matter lies. Many people believe that AMMs will never take off due to their limitations, even though AMMs have proven to be a very useful platform that has been able to garner significant volume even outside of mean-reverting assets. However, the rise of AMMs may have been largely due to the lack of on-chain CLOBs. It is speculated that the implementation of decentralized CLOBs will eat up a lot of volume from AMMs, as AMMs have several advantages:

• Active liquidity management (each order shows a desire to execute a certain amount at a certain price)

• Market makers (attracted by CLOB activity)

• Limit orders (helps reduce invisible losses)

• More liquidity (leading to greater trading volume, lower slippage, and hedging capabilities)

The second key factor driving Serum's design philosophy is that DeFi should be open, permissionless, and composable. In other words, people should be able to combine Serum with other DeFi protocols to build something more powerful than the sum of its parts. Composability means that any DeFi-based application can simply integrate Serum into its existing stack to create its own full-service financial service system. What does this composability look like in practice?

Let’s say someone wants to launch a fast, cheap decentralized exchange on Solana. That person can learn Rust, create an on-chain matching engine, test it, find market makers for liquidity, build a GUI, and finally release the application to a trading environment. With Serum, that same person can create a DEX GUI, plug Serum into its backend, and have a fully functioning application running in 10 minutes. More importantly, all applications built on Serum can share Serum’s liquidity. This approach achieves huge economies of scale, similar to the rise of cloud kitchens in the competitive catering and food delivery space.

There are many products and protocols that have been built on top of Serum, which from a technical perspective were only possible due to the monolithic and speed-optimized architecture of the Solan public chain. The most typical example is perhaps Raydium, which created a DEX frontend on Serum that was so compelling that it caused Serum to abandon its own DEX frontend and focus solely on building backend DeFi primitives for other protocols to use. Raydium's focus on creating a killer DEX frontend gained a huge advantage over Serum and forced both parties to continue doing what they each do best. This is the path forward that Serum envisions for the rest of DeFi.

Python

In addition to liquidity, pricing data is the most important raw data for developers to build decentralized financial applications. In Ethereum, oracles such as Chainlink (a third-party service that connects on-chain smart contracts and off-chain data) are responsible for handling pricing sources for DeFi. Therefore, while Ethereum DeFi smart contract calls can only access information within the Ethereum state, Chainlink oracles can allow smart contract developers to access data outside the Ethereum state (such as the current USD price of Bitcoin). Most decentralized applications rely on oracles as critical infrastructure, and Solana is no exception.

In Solana, Pyth is the primary oracle data provider. Pyth is governed by the Pyth Data Association, whose members include Jump, Jane Street Capital, and Susquehanna International Group. The Pyth network was built to meet the needs of these trading giants, whose daily trading operations rely on fast and accurate pricing data. Pyth is also architected to be free for developers to use, though developers can pay, which is effectively an insurance against inaccurate pricing data. The Pyth protocol can be divided into 3 main stakeholders:

Publishers: The source of all Pyth data. This includes existing market participants such as exchanges, proprietary trading firms, and market makers. Publishers earn PYTH for sharing their data sources.

Consumers: Decentralized application developers fall into this category. Consumers can use pricing data for free or choose to pay a data fee in exchange for reduced risk when pricing information sources fail. Consumers use Pyth’s API to incorporate off-chain data into their smart contracts.

Delegators: Delegators further secure the network by pegging Pyth tokens to specific data publishers. In exchange, delegators earn a portion of the data fees paid by consumers. However, if the data publisher's data is inaccurate, delegators will lose their stake. Delegators effectively act as insurance if pricing information is inaccurate. Consumers pay a premium directly to delegators, and delegators are required to pay consumers their staked Pyth in the event that the data source is wrong.

These three key stakeholders of Pyth form a virtuous cycle, delivering high-quality off-chain data to Solana, becoming an important cornerstone of Solana's emerging DeFi ecosystem. Ultimately, Pyth's success will be closely tied to Solana's network performance. Because Pyth updates its prices on every Solana block (every ~400 milliseconds), it can provide more frequent and accurate price updates than platforms like Chainlink. This opens up a whole set of programmatic trading use cases that may not be economically feasible on Ethereum-based trading mechanisms. On the other hand, when Solana's network goes down, so does Pyth's network. In one infamous incident, Solana experienced a 17-hour outage in September 2021, causing the Pyth-reported Bitcoin price to drop by 90%. While uncommon, these types of systemic errors could jeopardize hundreds of millions of dollars in the Solana DeFi ecosystem and undermine trust in Pyth as a data provider. So far, Pyth has continued to thrive as an oracle.

Smart contract call tracking for 30 days

NFTs

According to Hyperspace.xyz, the Solana NFT space has quietly amassed a total market cap of around $1.4 billion. In comparison, the Ethereum NFT space is currently worth $10.5 billion, according to Coinmarketcap. However, the degree of "Yuga dominance" in the Ethereum NFT landscape is incredibly high. The NFT collections owned by Yuga Labs (Bored Ape Yach Club, Mutant Ape Yacht Club, Bored Ape Kennel Club, Otherside, CryptoPunks, and Meebits) are worth a total of approximately 70% of the entire Ethereum NFT market cap. In contrast, Solana's top NFT project STEPN currently only accounts for approximately 18% of Solana's NFT market cap. This means that the Solana NFT space has a less "power-law" distribution than Ethereum's NFT space. If you subtract Yuga Labs' collections, Ethereum's NFT market value is about twice that of Solana. Data from Dune Analytics shows that Solana NFTs have a monthly trading volume of approximately $45 million, while Ethereum-based NFTs have a trading volume of $3-5 billion (equivalent to 1% of ETH's trading volume). While the overall scale of Solana NFTs continues to grow, its use appears to be driven by small mainstream users.

Solana’s ease of use compared to Ethereum-based NFTs has made it increasingly important in the NFT space, which is what prompted OpenSea to add Solana to its list of supported Layer1 public chains in April 2022. Kraken followed suit, announcing that its upcoming NFT marketplace supports Ethereum and Solana. FTX’s marketplace already supports Ethereum and Solana NFTs. This move by all of these well-known companies is particularly noteworthy given that potential Solana integration is the most complex from a technical perspective (considering that the chain is not compatible with the EVM). OpenSea, Kraken, and FTX all believe that the opportunity cost of their scarce engineering resources is worth making Solana NFTs serve their large user base, regardless of whether there are new potential vulnerabilities in Solana’s Rust-based smart contracts. The collective recognition of industry incumbents represents a win for the entire Solana ecosystem and further enhances the credibility of Solana’s unique approach to building a user-friendly, scalable Layer1 public chain.

Top 10 Solana Collections

The chart below outlines the top 10 Solana NFT collections. What’s particularly impressive is that most of these collections have only been launched in the past 6 months. Okay Bears, in particular, took the NFT world by storm in late April 2022 when it sold out its 1.5SOL mintage in a matter of hours. Within days, its reserve price soared to 170SOL. On April 27, Okay Bears became the collection with the highest single-day sales of all OpenSea collections with $18 million in sales. This milestone represented the first time that daily trading volume for Solana-based NFTs exceeded that of all Ethereum-based NFTs. As of early May 2022, Okay Bears still regularly ranks in the top 10 by volume on OpenSea. Clearly, Solana NFTs are not a fad. They are being included in multiple top-tier marketplaces and, in some cases, are trading at volumes comparable to the top Ethereum NFT collections. From a business perspective, it makes sense that a company would want to capitalize on the growing prominence of Solana NFTs. To date, no other Layer1 public chain has reached the level of popularity of Solana NFT. The public chain Flow developed by Dapper Labs, which supports popular NFT platforms such as NBA Topshot, is perhaps Solana’s only major "competitor." (Yuga Labs is rumored to be considering using Flow for a possible future ETH due to scalability challenges of its Otheride Mint). However, Solana has been permissionless from the beginning and has a stronger set of primitives beyond NFTs, including a strong DeFi protocol and integration with prominent US exchanges. This may play an important role as Solana continues to promote cryptocurrency to the mainstream population, especially the mainstream population in the United States.

Market volume

Celebrities have also taken notice of Solana’s rise as a cheap, fast Layer 1 public blockchain alternative to power NFT applications. Solana’s mature wallet infrastructure, coupled with its ease of use and predictably low transaction fees, makes it a popular choice for influential people (especially those outside of crypto) to launch NFT ventures. Here is a list of some of the notable NFT projects backed by celebrities and built on Solana:

HEIR:This is a Solana-based NFT platform founded by Michael Jordan (also an investor in Metaplex and Mythical Games) and his son Jeffrey Jordan, connecting fans with professional athletes. The platform launched its first collection in early March, inspired by Michael Jordan's six championship rings. The collection has a total of 5,005 NFTs, priced at 2.3 SOL ($221 at launch), with net sales revenue of approximately $1 million.

2974 Series:An NFT series launched by NBA superstar Stephen Curry to commemorate Stephen Curry's surpassing the NBA's historical three-point record. Among Stephen's 2,974 three-pointers, each three-pointer has a unique NFT, and each sketch is made entirely of the numbers 2, 9, 7 or 4. The profits of 100% in this series will be donated to the "Eat" charity foundation. The foundation was created by Stephen and his wife to help the lives of children and families in the Oakland/Bay Area.

Fractal:Co-founded by Justin Kan, co-founder of Twitch (Twitch was sold to Amazon for $970 million in 2014), Fractal is a Solana-based NFT marketplace focused on gaming NFTs. Fractal works directly with game studios to support verified NFT drops, and also allows players to trade NFTs directly with each other. By leveraging the gaming industry as a wedge, Fractal’s ultimate goal is to become an important player in the Metaverse.

Technology Stack

Solana Payments

According to Visa’s “Return to Commerce 2022” study, 59% of small businesses plan to use digital payments entirely within the next two years. Traditionally, small businesses have shied away from cryptocurrency payments due to the price volatility of cryptocurrencies and the high transaction fees caused by the scalability challenges of cryptocurrencies. In February 2022, Solana announced a partnership with Circle to address these two common pain points. Solana Pay is a decentralized payment standard and protocol that allows merchants to accept USDC (and other SPL tokens) to enable digital native payments through the fast effectiveness and low transaction costs associated with Solana. Currently, USDC issued on Solana accounts for 10% of the current USDC issuance (as of February 2022), and Solana Pay aims to gradually increase the utility of Solana-based USDC.

From a merchant perspective, USDC on Solana can be deposited into a merchant’s Circle account. From there, USDC can be converted to fiat and transferred to the merchant’s preferred bank account. From a consumer perspective, payments work similarly to other crypto apps, with users either scanning a QR code at a physical point of sale (POS) or signing transactions in a browser using a non-custodial wallet. From an end-user perspective, the main challenge is getting an initial balance of USD into their non-custodial wallet, though partnerships like FTX’s direct fiat deposit feature on Phantom can partially mitigate this. Additionally, merchants can attach NFTs to purchases and deposit them directly into the user’s wallet. This additional utility can only be achieved by paying in a crypto-native way, providing merchants with new channels to increase customer loyalty and ongoing engagement. In the Web2 world, companies like Chipotle are already engaging repeat customers through in-app gamification and tiered reward systems. It’s not hard to imagine a world where these siloed loyalty programs can interoperate via permissionless public blockchains.

Bank of America noted in a research report that Solana has the potential to become the "Visa of the digital asset ecosystem." While Solana still has a long way to go, it does stand out from other Layer 1 public chains and poses a credible threat to the massive payments industry, which is expected to bring in $2 billion in revenue by 2021, according to a McKinsey report:

Solana as the technical foundation of a user-friendly public chain –> Fixed and low transaction fees, fast confirmation time

Solana’s mature wallet infrastructure with built-in fiat conversion capabilities through FTX –> The wallet has a powerful mobile and web UI, allowing users to convert fiat to part of the Solana ecosystem with minimal steps

Solana Strong Business Development/Partnerships -> Solana Pay -> Circle Partnership

STEPN - Cryptocurrency's first mainstream breakout application?

Stepn

Stepn

Stepn claims to be the world's first Web3 "Move-To-Earn" game. Stepn combines elements of Game-Fi and Social-Fi. Users can obtain SPL tokens (Greenwich Mean Time or GST) in the game by "wearing" the NFT sneakers in the game and running or walking outdoors. Stepn's game mechanics require users to activate the sneakers before walking/running and share GPS data throughout the exercise. Stepn also sets an upper limit on the number of tokens that users can obtain per day. All these mechanisms work together to limit the number of cheating users who try to obtain GMT/GST tokens from the game. Stepn makes money by charging small fees from in-game asset sales, asset transactions, sneaker minting, and sneaker rentals.make money. These fees can obviously add up, as STEPN is apparently generating $3 million to $5 million in net profit per day, making up to $100 million per month from it. To prove the power of Web3, all in-game assets, including two interchangeable SPL tokens and NFT sneakers, are owned by users. One thing to note is that STEPN uses a hybrid custody model, which means that both actively used sneakers and newly released sneakers will be stored in the custodial wallet until the user is ready to transfer their assets to the non-custodial wallet. However, STEPN allows users to manage both custodial and non-custodial wallets on the same interface. Through the non-custodial wallet, users can freely trade their tokens on any Solana DEX, and can also list their NFT sneakers for sale on any Solana NFT marketplace (such as Magic Eden). As a Web3 game, Stepn is able to unlock a lot of liquidity, which is the ultimate value for users who invest time to earn assets through Stepn. Compared to the "walled garden" spirit of Web2, Stepn has taken a monumental "step" in showing the world the future of crypto gaming. Most importantly, Stepn brings positive externalities to users in the form of increased exercise.

The user metrics behind Stepn support the narrative of how Web3 technology is transforming gaming applications. Since launch, Stepn has seen an almost daily increase in active users, doubling its user base approximately every two weeks. Due to the composable nature of the Solana ecosystem, Stepn is able to leverage oracles to handle all in-game exchanges for its native tokens (GMT and GST). As the number of users and in-app interactions increase, so too does the oracle’s daily active users. This is another example of the power of composable primitives in Solana and how the broader ecosystem can deliver positive-sum outcomes for all participants while minimizing the development redundancy required to create feature-rich applications. Stepn is likely the first Web3 application to bring crypto to the mainstream, and it likely won’t be the last. It’s no accident that Stepn is built on Solana. No other Layer1 public blockchain combines powerful developer/user tools with low transaction fees to enable frequent game-like interactions.

Disruption: Solana’s Existential Risk

One of Solana’s biggest criticisms has been its history of outages. Dating back to September 2021, Solana has experienced 12 days of partial or full outages. This equates to approximately 4.44% days of degraded or stopped network performance from September 2021 to May 2022 (inclusive). While each outage is different, the primary factors that have led to these outages can be traced back to the same core issue: spam. Solana’s fixed-fee architecture incentivizes spam when there is a strong enough economic incentive for actors to spam the network. Whether that economic incentive takes the form of capturing Grape Protocol’s tokens during the Raydium IDO or more recently minting NFTs through Metaplex’s Candy Machine initiative, spammers have at times completely overwhelmed the Solana network.

triangle

These spam-driven Solana network outages highlight a larger problem that has plagued the internet itself since its inception. The problem of combating spam transactions is perhaps better studied through the “transaction quality” framework first proposed by Polynya. Similar to the scalability trilemma of blockchains, the transaction quality trilemma argues that transactions on a blockchain must choose between two properties: spam reduction, censorship resistance, and low fees. In the Web2 world without blockchains, censorship resistance is often sacrificed to combat spam and fees. In the blockchain world, both Bitcoin and Ethereum employ fee markets and memory pools to prevent spam while retaining their decentralized networks (censorship resistance). Solana, on the other hand, prioritizes a good user experience over low fees and a relatively decentralized network. Therefore, the transaction quality trilemma correctly suggests that Solana is paying for its low fees and decentralization with a propensity for spam. The level of spam on the Solana network is also unique due to Solana’s unique technical architecture choices and is not seen on any other popular Layer1 public chain.

Timeline

On one hand, some interpret Solana’s spam problem as a “good problem” because it shows that:

Solana is able to handle a large number of transactions (before shutting down)

The Solana network has enough economic value so participants have an incentive to capture that value first (the prevalence of bots)

Developers on the Solana ecosystem have not been deterred by this recurring issue (Solana Dapp and developer activity continues to grow despite the outage)

On the other hand, Solana’s critics point out that the spam problem will continue to occur until Solana makes fundamental changes to its protocol that are already being used by almost every other major Layer 1 public chain: specifically, the memory pool and fee market. These two tools exist precisely to prevent spam transactions from clogging up valuable block space. Despite experiencing multiple outages, the Solana team has insisted on not implementing the Mempool and fee market, which puts them in a very unique design space that has the potential to solve these problems. In light of the recent outage caused by Metaplex’s “Candy Machine”, the Solana team announced three major changes to combat spam on the network:

QUIC:Short for Quick UDP Internet Connection. QUIC was originally developed by Google to increase network speed and efficiency. QUIC will replace UDP for packet transmission on the Solana network (packets are sent directly from RPC nodes to block leaders). Solana initially chose UDP because UDP connections do not require handshakes or receipt confirmations. However, as seen in the outages caused by spam, UDP’s inability to assign sources and control network traffic meant that all spam was sent to the blocking leader via UDP. By switching to QUIC, Solana can retain most of the speed-oriented features provided by UDP while improving its ability to control incoming spam traffic. QUIC will help ensure that block producers are not overwhelmed by the millions of transactions sent through Gulfstream and that they can verify all transactions within Solana’s 400 millisecond block time.

Equity-weighted trading service quality:Stake-weighted QoS works in parallel with QUIC. It essentially ensures that network traffic is not flushed out by any node that has at least X stake. This change is intended to address the issue of prioritizing network traffic when bandwidth is limited. In this respect, stake-weighted transaction QoS will operate similarly to proof-of-stake, with transaction "quality" being weighted in part by the weight of a particular stake relative to the rest of the network.

Fee and priority changes:Users will soon be able to attach arbitrary "extra fees" to transactions to increase their trade's execution priority. Prior to this, users were unable to express the urgency of their transactions. All fees are fixed and all transactions are first-in, first-out. Some in the Solana community are calling this upcoming change a "neighborhood fee market." In other words, during times of network congestion, fees may surge for users of certain Solana programs, such as DeFi protocols. However, this fee surge will be local to DeFi programs and will not affect other smart contract programs on the network.

The unfortunate reality of this situation is that until these protocol-level changes are put into production, Solana applications will be left helpless in some cases to create their own fee markets. Metaplex already charges a fee of 0.01 SOL to any wallet that attempts to complete an invalid (spammy) transaction. Application-based fee markets are a suboptimal and inefficient solution to this problem, and application developers are not equipped to design custom on-chain economic incentive structures that reduce spam while maintaining a good user experience. These are decisions that are best left to Solana’s protocol engineers, and the team appears to be implementing their 3 protocol-level changes with urgency.

The more important question here, though, is how Solana will ensure that future outages don’t set off a dangerous domino effect for multiple stakeholders in its ecosystem. Unlike NFT and gaming applications, where outages in DeFi applications are likely to only inconvenience and impact individuals, DeFi applications are too intertwined to be out of service forever. Time-based DeFi systems are most at risk because liquidations could be triggered when a lost oracle is restored. In this nightmare scenario, positions could suddenly appear undercollateralized, triggering hundreds of automated trade alerts, affecting a large number of people in a short period of time. As more and more capital flows into the Solana ecosystem, the impact of a system outage will multiply. Solana has had the good fortune to have dealt with these outages while its network was still relatively nascent, and they would be wise to leverage these valuable lessons as they build a sustainable protocol. Finally, it’s important to note that while these improvement proposals are technically elegant and potentially very powerful, they are still untested innovations that may fail to mitigate problems or cause new ones. If in the long run the Solana team is ultimately forced to adopt existing, more proven solutions like mempools and network-wide fee markets, a lot of time may be wasted and technical debt incurred in the meantime.

in conclusion

Solana stands out in the ultra-competitive Layer1 public chain space because it doubles down on its commitment to a fast, singular vision of scalability. Perhaps best demonstrated by the fact that Solana’s gaming projects accounted for only 3% of total NFT and gaming transactions in Q3’21, but by Q4’21 and January 2022, that proportion had risen to 11% and 22%, respectively (according to data from The Block). Clearly, investors are paying close attention to what Solana can offer in the DeFi and gaming sectors with its low transaction fees and high throughput. That said, the Solana network has also experienced its fair share of ups and downs, such as outages and degraded network performance. So far, these hardships have not hindered its adoption by users and developers. Over the past year, Solana has become the most complete alternative to the Ethereum network, as evidenced by its full integration with multiple well-known NFT platforms, the rapid rise of consumer Dapps such as STEPN, and impressive engagement metrics such as active wallet addresses. When the Solana network is live, it has an excellent user experience, strong fiat onboarding from Coinbase/FTX/Moonpay, strong DeFi primitives from Pyth/Serum/Raydium/Orca, a fully composable execution environment, and strong growth in both end-users and developers. Solana's growth is relatively diversified, as it has high adoption rates in NFTs, DeFi, and Web3 applications. All of these factors combine to make Solana an extremely attractive platform on which entrepreneurs can build cryptocurrency, Web3, DeFi, gaming, and/or NFT companies. Today, Solana cannot be considered a theoretical playground. The only question for this thriving ecosystem is whether it can handle further growth in concurrent users given the existing technical architecture. Recent outages show that large-scale changes at the protocol level are necessary to take the network to the next level. However, without improving the resilience of the network and the decentralization of the validator set, Solana will continue to face problems that could hinder its development and adoption.

Main points

Solana is currently the best hedge against EVM.While Solidity is still king when it comes to public chain development, the scalability of the EVM itself seems to have reached its limit. Ethereum is still years away from achieving its scalability vision. In the meantime, blockchain demand shows no signs of slowing down. In this context, Solana will capture part of the demand in the blockchain space with its unique approach of being completely decoupled from the EVM. Even the academic community is skeptical that the EVM in its current form can meet the needs of billions of users. Solana is the most well-developed Layer1 public chain, and its scalability performance has reached or exceeded that of the EVM (including EVM derivatives such as Binance Smart Chain).

Solana is built on a set of powerful DeFi primitives.Serum, Raydium, and Pyth together form a powerful combination of building blocks on which new applications can be built. These primitives were built for institutional use cases and are somewhat over-engineered for retail users. The large margin for retail usage helps ensure a consistent user experience. As Stepn grows in popularity, the use of oracles is also rising significantly.

Compared to other Layer 1 public chains, Solana’s key participants and partnerships give it a unique advantage.From the fiat on-chain experience, the protocol itself, the user-friendly browser wallet to the application suite, Solana has relatively mature products, which gives Web3 developers the confidence to use existing tools to create new blockchain-based experiences for users. FTX directly connects to Phantom and provides hosting services for new application developers, which is a major attraction of the Solana ecosystem for developers. Compared with Binance having to intervene in the Ronin hacking incident, Jump patched the Wormhole hacking incident at a price of $600 million, which shows that it has strong financial support to deal with interruptions and worst-case scenarios. Finally,DAO Tools and Phantom are ensuring that the user experience at both the group and individual level meets a certain threshold, opening the floodgates for building novel applications across the entire stack of existing infrastructure.

Solana is a reverse bet against monolithic public chains.Most public chains to date have been monolithic, but few plan to remain monolithic forever as they seek to improve scaling. Avalanche, for example, is planning to launch subnets to split blockspace requirements to isolated applications that rely on a limited sample of the main validator set. Ethereum appears to be doubling down on its modular stack approach to scaling. Solana, however, has chosen to continue with a monolithic approach and bet that the hardware coupled with its unique protocol design will be able to handle rapidly growing blockspace requirements. While a monolithic approach is the most elegant for sharing state between different applications built on the same chain, it is unclear whether this approach is feasible as Solana looks to 100x its user base and go mainstream. Jevan's paradox could become a difficult challenge for the blockchain industry to overcome, and a monolithic approach is the least suited to address this trend.

Solana’s frequent failures are the biggest risk to its long-term viability.Ultimately, what this brings us to is whether it is better to have a public chain with 100% uptime but an unstable user experience, or 99% uptime but a consistently good user experience. However, the caveat to this comparison is that Solana has experienced outages at inopportune times, such as when traders needed to top up margin to avoid liquidation. Due to the widespread use of public chains in the DeFi space, with billions of dollars at stake, it is difficult to say that any downtime is acceptable. Some people believe that this is acceptable, pointing out that in Web2, server downtime for maintenance is a common practice. Regardless, the Solana team is working hard to solve this problem, and only time will tell if their latest adjustments to the protocol can finally solve these recurring downtime issues.

Solana is leading the development of NFT and GameFi outside of Ethereum.Solana has already seen a lot of success in the NFT and GameFi space with its consistently low transaction fees (StepN is a great example of combining these two spaces). As liquidity flows into the Solana ecosystem to transact in these economies, Solana's strong DeFi product (in the form of deep liquidity pools) may increase its capital allocation moat in this space compared to other public chains. Users who earn DUST dollars using DeGod NFTs and GMT in STEPN may prefer to deposit these accrued income into USDC on Phantom rather than flocking to another GameFi or NFT application on another chain. This effect can be compared to the gaming industry, where incumbents such as PlayStation and Xbox have high user switching costs and ultimately rely on exclusive games to retain their user base. As long as Solana can provide killer applications in NFTs and GameFi, it will be able to control a larger retail user base, and these users will not rush to move to other chains even if there are shiny new incentives such as higher yields. This is perhaps best reflected in the TVL metric compared to the wallet address metric. Retail users don’t hold as much capital, but their influence is still reflected in wallet activity, enough to convince developers to choose Solana over other public chains when offering novel product ideas.

The article comes from the Internet:Behind Solana’s surge: Ethereum killer looms

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