GiD Report#197 — How Solana makes web3 possible

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GlobaliD

11 min readFeb 1, 2022

Welcome to The GiD Report, a weekly newsletter that covers GlobaliD team and partner news, market perspectives, and industry analysis. Check out last week’s report here.

This week:

How Solana makes web3 possible
Tweet of the week — It’s time to build
The U.S. approach to regulations and innovation in a nutshell
The IRS learns that people care about their identity frameworks — a lot
Stuff happens

1. How Solana makes web3 possible

The arrival of the SMTP protocol in 1981 — based on a proposal by Jon Postel — allowed people to directly communicate with each other via email. Later, the invention of Tim Berners-Lee’s world wide web in 1989 and corresponding protocol HTTP allowed people to access websites through a browser.

These developments from the early internet allowed people to easily share information.

Satoshi’s 2009 white paper on Bitcoin took that one step further — describing an elegant system combining cryptography, consensus mechanisms, and networked computers that would enable people to directly exchange value online without an intermediary for the first time.

The next breakthrough would come in 2015 — the year Ethereum went live. Building on Satoshi’s core concepts, Vitalik Buterin conceived a system that enabled decentralized computation. Smart contracts are essentially programs or applications that run directly on the blockchain.

That framework would set the stage for use cases such as NFTs and DeFi, which came of age last year.

This concept of decentralized computation would plant the seeds for web3.

What if we could build an entire generation of decentralized applications on the blockchain?

Pioneers in the space immediately ran into roadblocks.

When Alameda Research and FTX’s Sam Bankman-Fried assessed Ethereum as a platform for building a global, decentralized exchange, it was a nonstarter.

SBF — as he’s often referred to — earned his stripes at Jane Street Capital, one of the most storied prop shops on Wall Street. As such, the bar for their decentralized exchange was high. Coming from a world where high-frequency trading is the norm, your trades have to move as fast as information flows. Cost is also a major concern as fees directly eat away at your trading model. Scalability is crucial.

In other words, Ethereum’s technology was too slow and too expensive.

That’s where Solana came in.

As Peter Thiel described in his book, Zero to One, you’re not moving the needle unless your offering is an order of magnitude better than what came before.

A host of so-called “Ethereum Killers” had been floating around that were potentially better than Ethereum but objectively, not that much better.

Released in 2019, Solana was different. Co-founder Anatoly Yakovenko would incorporate learnings from his time as an engineer at Qualcomm working on cell networks into his development of the Solana blockchain.

The result is a blockchain that can process 50,000 transactions per second (tps) compared to Ethereum’s 15 tps for a fee that’s fractions of a penny. Given the massive growth in Ethereum’s ecosystem in recent years, computation fees can cost hundreds if not thousands of dollars during peak usage — something anyone who’s tried to mint a popular NFT drop on Ethereum intimately understands.

For SBF, Solana was fertile ground for developing his vision around decentralized finance.

Here’s Sam speaking at Yahoo Finance and Decrypt’s Crypto Goes Mainstream back in November:

“Solana is one of the few currently existing public blockchains that has a really plausible road map to scale millions of transactions per second at, you know, fractions of a penny per transaction, which is a scale that you need for this.”
“That is not where a lot of other blockchains have been focusing, including ethereum.”

For the industry at large, Solana’s throughput and cost profile has taken decentralized computing from zero to one, paving a path forward where web3 is a legitimate reality.

Naturally, developers have followed suit — including Reddit co-founder Alexis Ohanian, who announced last fall that he would invest $100 million in decentralized social media projects built on Solana:

Today, much of the NFT and DeFi ecosystem lives on Ethereum, but what we’re seeing in the market is the product of the last few years.

If Github commits are any indication, much of the next generation stuff — what will emerge in the market in this next cycle — will likely live on Solana.

The rise of Solana’s futures and derivatives markets also suggests growing institutional participation:

Solana is not without its issues. With development only starting in 2017, the network is still going through growing pains given its explosive growth.

In a rocky start to the year, the blockchain suffered 6 outages in January alone. There’s clearly plenty more work to do.

Competition is also heating up as other next generation chains vy for market share including Avalanche, which offers its own scalability promises.

For end users, that can only be a good thing.

If you’d like to learn more about Solana, you can check out this report published last week by Two Prime (via /gregkidd).

It’s where we got these nifty charts from.

You can also check out Greg’s conversation with Anatoly from our YouTube channel here. (Another indication of Solana’s impact — it’s our most watched video with over 11K views.)

Relevant:

2. Tweet of the week — It’s time to build

The stock market — with crypto in tow — is having a rocky start to 2022, apparently the worst ever.

Here’s Axios:

State of play: As of the end of trading yesterday — the 16th session of the year — 2022 is now, officially, the worst-ever start in the history of the S&P 500, according to data from Ned Davis Research, a stock market research shop.

The silver lining? Market downturns can be the best time to build — without the frothy distractions of all the hype and conference parties. (Solana began development during the last crypto winter in 2017.)

And as SBF suggests, in a tweet responding Solana’s outages, there’s still plenty of building required:

Relevant:

3. The U.S.’s regulatory dilemma

First, here’s what happened — Bloomberg:

The U.S. Securities and Exchange Commission is scrutinizing cryptocurrency firms Celsius Network, Voyager Digital Ltd. and Gemini Trust Co. as part of a broad inquiry into companies that pay interest on virtual token deposits, according to people familiar with the matter.
The SEC enforcement review focuses on whether the companies’ offerings should be registered as securities with the watchdog, said the people, who weren’t authorized to speak publicly. The firms are able to pay customers rates higher than most bank savings accounts by lending out their digital coins to other investors, a practice that the SEC and states including New Jersey and Texas have said raises concerns about investor protection.

Here’s also what happened — Matt Levine:

The other story is about … well, see, there’s a billion-dollar Ponzicoin called Wonderland, 1 which as of about 11 a.m. today was advertising an annual percentage yield on staked deposits of EIGHTY-THREE THOUSAND, SIX HUNDRED EIGHTY-SEVEN POINT FIVE PERCENT (83,687.5%), and it is in the news today because one of the pseudonymous people running its treasury is allegedly a famous convicted serial scammer who previously co-founded Quadriga CX, which was the biggest Canadian crypto exchange before it collapsed in an exit scam in which the other co-founder apparently stole most of the money and may or may not have faked his death.

And here’s Matt Levine aptly summarizing the current state of affairs when it comes to crypto regulation in the U.S. his Money Stuff newsletter:

Man, come on. Read that sentence. If you were an SEC enforcement lawyer and you had the choice of (1) calling up the “revolution needs rules” guys to tell them that under SEC precedents interest-bearing crypto accounts paying 8.05% have to be registered as securities or (2) looking into the very popular billion-dollar Ponzicoin run by an exit scammer that is offering an 83,000% APY to U.S. investors … just … what are we doing here?
What is the difference between Gemini and Wonderland? I think two critical differences are:

Wonderland is hilariously riskier and less compliant than Gemini in every respect.
Gemini answers the phone when the SEC calls.

There is a certain drunk-under-the-lamppost element to current U.S. crypto regulation. If you incorporate a company in the U.S. and walk into the SEC’s office and ask “hey what are we allowed to do,” the answer is “almost nothing.” If you just launch the wildest thing in the world pseudonymously, call it “decentralized,” and advertise eye-popping investment returns to U.S. investors, then, I mean, I don’t want to give you legal advice, but look around.

As Matt points out, it’s also why Facebook/Meta’s crypto project failed to launch:

Or we talked yesterday about stablecoins. Specifically we talked about the fact that Facebook Inc. (now Meta Platforms Inc.) announced in 2019 with enormous fanfare that it was going to launch a stablecoin and work closely with all of the relevant regulators blah blah blah, and it went to the Federal Reserve and said “what do we need to do to launch a stablecoin,” and the Fed said “you must bring me the egg of a dragon and the tears of a unicorn,” and now the Facebook stablecoin is shutting down. One of the largest companies in the world devoted millions of dollars to figuring out how to launch a stablecoin and concluded that it was impossible. It is demonstrably not impossible! Tether did it! Tether has a hugely successful stablecoin! Tether does not care at all about working closely with all of the relevant regulators! That’s why!

So there you have it, the U.S. approach to regulation and innovation in a nutshell.

Relevant:

4. People care about their identity frameworks — a lot

People’s trust in institutions are at an all-time low. They’ve also become increasingly cognizant of and educated on what’s at stake with the ever-expanding digitization of their lives, accelerated by the pandemic.

And so what the IRS likely expected to be a lowkey update regarding new digital identity requirements has boiled over into a firestorm of controversy.

It started with a blog post by Brian Krebs.

Here’s a quick overview from Axios:

The IRS’ move to require some taxpayers to use facial recognition to identify themselves is reigniting a debate over how the government should use such technology.
Why it matters: Critics warn that, without sufficient guardrails, information collected by one agency for a seemingly benign purpose could easily be re-used in other ways.
Driving the news: The IRS will soon require taxpayers to provide a third-party company — ID.me — with a combination of documents and a video selfie to verify their identity before undertaking certain online interactions with the agency.
…
What they’re saying: “This announcement signals one of the largest expansions of facial recognition technology in the U.S. and there is no question that it will harm peoples’ privacy,” says Caitlin Seeley George, campaign director at Fight For the Future.

“This will essentially create a new, massive database for law enforcement to use to track people without their knowledge,” Seeley George said.
ID.me’s terms of service, she notes, give the company the right to share peoples’ data with police, government and “select partners.”

And the latest — Axios, again:

A growing number of civil rights groups are calling on the IRS to sever ties with ID.me over concerns about the company’s face recognition technology as well as its lack of transparency.
Driving the news: A coalition of groups, including Fight For the Future, the Algorithmic Justice League and EPIC, have launched Dumpid.me, an online petition urging individuals to indicate their opposition to the agency using the private company’s video selfie-based technology to verify identity.

Meanwhile, as Bloomberg reported on Friday, the IRS is weighing alternatives to ID.me. “Treasury and the IRS are constantly in search of ways to improve taxpayers experience, and are looking into alternatives to ID.me,” the agency confirmed in a statement to Axios.

…
Catch-up quick: The IRS plans to require taxpayers who want to do certain online transactions to use ID.me’s video selfie-based authentication system.
…

Those concerns were exacerbated after revelations that ID.me compares selfies to a database of those who have previously used its service, despite previously denying using so-called one-to-many face recognition.
In an interview with Axios, [ID.me] CEO Blake Hall apologized for misleading the public, but defended the practice as an important step in fighting fraud.

To be clear, we’re not taking shots at ID.me here — or any identity service provider at that.

The big takeaway here is that people are wisening up to their individual needs when it comes to their digital identity, their data, and their privacy. With this IRS debacle, they’re showing that they’re willing to push back in order to get those needs addressed.

Relevant:

GiD Report#197 — How Solana makes web3 possible

1. How Solana makes web3 possible

2. Tweet of the week — It’s time to build

3. The U.S.’s regulatory dilemma

4. People care about their identity frameworks — a lot

5. Stuff happens

Written by GlobaliD