RF Capital
Published in

RF Capital

DeFi Deep Dive: Solana

R.F. Capital Alpha Score: 79

In the Summer of 2021, there were not many hotter topics than aptly named Solana. The fabled darling of this mid cycle correction for crypto markets as a whole saw an increase of over 700% since its lows in July at $24.00. It has been the market leader during this time, outpacing other smart contract platforms like Ethereum, Cardano, and Polkadot. As of September 14th, Solana has retraced 26% from its all time high price at $213 to $158 at a market cap of $47 billion. During this historic run, there have been a few narratives that have helped it run and subsequently fall to this point

On the positive side for them:

  • Ethereum gas fees have been the highest in history costing hundred of dollars per transaction while Solana transactions cost less than 1 penny.
  • Not only is Solana cheaper than Ethereum but it is also much faster, boasting an average of 50,000 transactions per second. New blocks are generated every 400 milliseconds.
  • NFT summer may be the only hotter narrative than Solana and they took full advantage of this with their own NFT platform Solanaart.io who launched the highly acclaimed Degenerate Ape Academy (shown below)- Highest sales have been in the millions of USD value
  • They have a host of dApps that intend to rival the ETH ecosystem such as Raydium, Serum from FTX, and SolStarter.

On the downside:

  • At this current point in their timeline, they have only 1,000 node validators which is 10x less than Ethereum.
  • This lack of decentralization recently led to the entire blockchain being offline for several hours, showing there is a long way to go as it appears they are not “infinitely scalable” at this time.
  • Cost to run a node and actually be chosen as a validator on transactions is upwards of $1.5 million which is contrary to their claim that anyone can be a validator with any amount of SOL.
  • It will always cost 32 ETH to run an Ethereum node which is roughly 10x cheaper and extremely lucrative.

How did Solana take the crypto world by storm? What makes them different? Maybe some things are the same. Let us take a closer look.

History

Solana was founded by Anatoly Yakovenko who first published a whitepaper in 2017 detailing a new method for running distributed systems called Proof of History (POH) that in theory would automate the transaction ordering process for blockchains and lead to much faster transaction times than Bitcoin or Ethereum networks. He enlisted the help of a former colleague at Qualcomm, George Fitzgerald to build a blockchain in the Rust language. Rust is by no means a popular language compared to Solidity, Python, or even Java. The language would serve as the timing mechanism for their new POH system. The powerful duo added on heavyweight engineers from Apple to from Solana Labs and began sourcing funding in 2018.

Capital Funding

This massive project was funded through 4 funding rounds: Seed Round, Founding Round, Validator Round, and Launch round. Each round was over the course of 3 years and with a token sale that varied from $.04 to $.25. In total, they raised roughly $24 million to bootstrap their funding while not being allowed to U.S. customers as to avoid issues with the SEC. Investors in their Seed Round are currently up over 700x, not a bad return on investment.

At the time of the genesis block, the token distribution was as follows:

  • Community — 38.89%
  • Seed Sale — 16.23%
  • Founding Sale — 12.92%
  • Validator Sale — 5.18%
  • Launch Sale — 1.88%
  • CoinList Auction Sale — 1.64%
  • Team — 12.79%
  • Foundation — 10.46%

Almost equal amounts of SOL were allocated to the community and various token sales which helped get them off the ground. There was a vesting period of roughly 9 months from each sale before the tokens were unlocked and able to be deployed on the open market.

What does it do?

As a Layer 1 solution, Solana provides the blockchain architecture that allows for decentralized systems to be built on top of it at scale. It aims to bring competitive Decentralized Exchanges, NFT Marketplaces, Automated Market Makers, Lending/Borrowing Platforms, and all else that crypto has to offer on their chain. With the previously mentioned low transaction fees and speed of transaction, it is an attractive alternative to Ethereum while still being in Beta at the moment. There are 488 million SOL tokens with 297 million of them currently in circulation.

The SOL token has 2 main use cases:

  • Staking which helps validators to confirm transaction on-chain and is 8% annually while decreasing by 15% annually to eventually bottom out at 1.8% APY — an inflationary property
  • Paying for transactions on various dApps that burn SOL in the process in a deflationary mechanism

With an inflationary and deflationary mechanism at play, the goal is to cancel out inflation of 1.5% by having enough transactions to burn between 1–1.5% of supply annually. This comes into play with trillions of dollars in the ecosystem that they are not at quite yet. The developers have a long term vision for Solana being a worldwide payment network that requires both mechanisms to work together as they scale.

Current Innovations

As of now, there have been 8 major innovations from the Solana team that are unique to them and also drive this narrative of them being a true competitor to Ethereum in the long run if they can pull it off. These innovations could entail a whole technical deep dive in and of itself so we will not completely delve into it but they are:

A detailed look at these innovations can be found here.

Roadmap, Progress, and Sentiment

Surprisingly, the Solana team has been on par with their current and past rollouts. They are on time, buttoned up, and ready to go. So far they have successfully launched Smart Contracts, Move Virtual Machine, On-Chain Programs, Cloud Testnet, Mainnet Beta, and the key here is that this was all launched on time. We stress this because this is a rare feat in the blockchain space. The notorious Cardano has spent 4 years releasing peer reviewed journals and building a rabbid community all while not even having a live Mainnet or Smart Contract launch. For Solana to do this in 2 years and gain the level of adoption that it has, they have something that others do not: Reliability. Their next release is Mainnet in Q3 of this year and if history proves right again, that should be relatively soon.

The Bottom Line:

Solana has become the hottest crypto under the sun not because of a CEO that shills it publicly to a mass following but through hard work, innovation, and delivering a product that the masses can use. Their lack of decentralization is a bit alarming but should improve over time as more large net worth individuals move to run nodes on this platform while we would encourage them to be able to make node validating more affordable. They have not taken over Ethereum as the King of DeFi but they are a major competitor that is making waves and creating real adoption all without the launch of their Mainnet. They say competition breeds innovation right? That seems to indeed be the case.

About RF Capital

RF Capital is an alternative investment firm with a special focus in the underlying infrastructure of the blockchain space. Other areas of specialization include real estate, debt/equity markets, and OTC trading.

Website |Newsletter |Twitter | Medium

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Jared Gabaldon

Jared Gabaldon

Principal for R.F. Capital - Decentralized Finance Fund