5 Minutes Cryptocurrency: L1 Blockchain — Solana

With the growing enthusiasm for Non-Fungible Tokens (NFTs), Decentralized Finance (DeFi), and other crypto-related products, the problem of managing the enormous volume of transactions has also increased. Though Ethereum is relatively stable when it comes to NFTs and DeFi, the problem of speed, high gas fees, and scalability looms. To tackle these issues, an opportunity was presented to satisfy the need for a platform that offered high scalability at low cost, without compromising on security — Solana.

In a previous blog post, we took a closer look at the Layer 2 technology and solutions built on Ethereum. Now we will turn back and look into Layer 1, the foundational blockchains. In this blog, we dive deep into one of the popular Layer 1 blockchains, Solana, starting with what makes it popular, how it is different from Ethereum, how it accelerates the development of NFTs, DeFi, and Web3, and finally a glimpse of the potential risk associated with it.

Layer 1 Blockchain– Solana

Solana is a blockchain platform primarily focused on decentralized applications. It offers a high processing speed of 65,000 transactions per second, at a relatively lower cost which is always remained less than $0.01. Unlike most other blockchains, which use Proof of Work (PoW) and Proof of Stake (PoS) consensus mechanisms, Solana uses a method called Proof of History (PoH) that helps to address the issue of scalability while maintaining network security.

Solana primarily is powered by its PoH algorithm in conjunction with the PoS method. In the PoS mechanism, network participants stake their crypto, and in the case of Solana, its native cryptocurrency SOL, to get an opportunity to validate the transactions and earn rewards.

In simple parlance, PoH ensures that a timestamp is maintained between computers on a decentralized network without requiring all the computers to communicate about it to reach a conclusion. This is different from the consensus mechanism in other blockchains wherein validators have to communicate with each other and confirm the transaction block. It is this difference that makes Solana work faster and capable of handling more transactions with increasing scalability.

Comparison of Solana and Ethereum

Solana is often referred to as the ‘Ethereum Killer’ as it poses stiff competition to its rival. First, Solana offers a great extent of scalability with a throughput of over 50,000 transactions per second compared to Ethereum, which is just 15 transactions per second. Second, the average transaction cost is $0.00025 on Solana, while it is much higher, $3.01 on Ethereum, at the time of writing.

On a technical front, Solana uses multiple consensus algorithms, including the PoH, to ensure the time spent on processing the transactions is considerably reduced. Instead of following Ethereum using sharding technology to solve performance issues, or adopting a mainstream Layer 2 expansion scheme, Solana relies on optimized hardware to achieve the underlying scalability. This also brings Solana a great advantage, that is, there is no need to worry about the composability issue of the DeFi Lego.

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Benefits of Solana

NFTs are a primary feature in the crypto space. They are a major differentiator of Solana from Ethereum. While Ethereum supports numerous NFTs, creators and investors are rapidly migrating to Solana because of its high processing speed and low costs. Solana’s features enable NFT enthusiasts to mint their tokens more efficiently compared to Ethereum. As a result, most NFT collectors and investors are resorting to Solana digital marketplaces.

Solana has a lot to offer to DeFi users with its rapidly growing DeFi ecosystem. In the wake of Solana’s meteoric price rise, most DeFi projects shifted their focus to this smart contracts platform. Its quick block times, PoH mechanism, and scalability help avoid network congestion and keep transaction fees low. These are ample factors for Solana to thrive in DeFi ecosystems, with users as early adopters of DeFi projects to benefit from air drops, liquidity mining, and more. Port Finance and Solend are Solana-based projects looking forward to acting as decentralized banks.

With Web 3.0 around the corner, Solana seems to be the right platform. The Opera browser partners with Solana, stating that its great speed and low costs would enable many users to scale their projects. This partnership will help Opera Android users to enjoy remarkable access to Solana Dapps at a good speed and at low costs.

Potential Risk

While Solana is highly recommended for its high speed and low costs, severe network congestion issues cause concern to users and investors. In January 2022, Solana continued to experience congestion issues due to the high volume of transactions, which impacted SOL withdrawals on crypto exchanges. This is the fourth instance of Solana facing network issues since last year when Solana went offline for hours due to a DDoS attack. This was caused due to overloaded transactions.

Later, Solana experienced a seven-hour outage in May 2022, and in June 2022 the platform operations were hampered by another outage caused by a bug in the durable nonce transactions. Most issues were fixed timely, still, the continuous network failure issues elicited the potential network risks and have raised concerns in the community.

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You may also be interested in:

📰 DeFi Empowerment is Not Going Away — Here’s What to Watch

📰 Ethereum Layer 2 Blockchain Technology — A Step Forward to Scale

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DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.



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GMO-Z.com Trust Company

GMO-Z.com Trust Company

Building Financial-Grade Digital Assets. The World’s First Regulated JPY-Pegged Stablecoin Issuer.