Solana — What happened to the ‘Ethereum Killer’?

Published in

SMUB Research

13 min readJan 14, 2023

Co-authored by: Al-Maliki, Dhea Tho, ryankzl, and Kaydon

Nothing following this constitutes financial advice, please do your own research. All data presented henceforth are accurate as of 31 December 2022.

Introduction

Cryptocurrency is a form of a digital asset that utilises cryptography to ensure the security of financial transactions. Cryptocurrencies are decentralised, which means that no one entity, such as the government or financial institution has control over them. Instead, they rely on a decentralised network of computers to verify and store transactions on the blockchain. To guarantee the security and reliability of said transactions, cryptocurrencies adopt a variety of technologies and protocols.

Cryptocurrencies are often generated through a process called ‘mining’ in which computers solve challenging problems to validate transactions and add new units of cryptocurrency to the network. They normally have a fixed supply. The most well known cryptocurrency would be Bitcoin. Other well known ones are Ethereum, Litecoin and Solana.

Within this report, our primary focus would be to deeply analyse the Solana Blockchain. Among the various uses of cryptocurrency, the more common applications include making transactions, trade and storage of value. However, the space is still not well understood or accepted since it’s still new and ever changing but has the potential to revolutionise the way we view financial transactions and money.

Comparing the Solana price history, the all-time high stood at $267.40 but currently stands around $13.32 as of 1st Jan 2023. After SOL fell below $200 in Jan 2022, Solana has been on a bearish phase ever since. Based on the recent price action of the Solana token and technical analysis, it is evident that the digital asset may not be suitable for short term investment. Solana has still yet to update its Mainnet Beta to a full mainnet version after intending on upgrading it in the late Dec 2020 or early 2021 which then Solana would bring up its proposed inflation schedule. Focusing towards the side of long term investments, there are a few factors that need to be considered; Market Demand, Market Supply, Competition, Market Conditions and the Regulatory environment. According to changelly, the price of Solana and its changes over the recent years have been examined by cryptocurrency experts. The minimum SOL price is predicted to fall to $43.30 by 2025, while its maximum price will be $53.07. The cost of trading wll typically be in the ballpark of $44.88 which means that there is still potential for Solana to bounce back from its bearish phase since Jan of last year.

*Solana’s Price Action (Source:* *TradingView*)

Consensus

The Solana blockchain platform was developed to allow high-speed and low-delay transactions. It is a decentralised, open-source blockchain platform technology which uses “Proof of History” (PoH) method instead of “Proof of Stake” (PoS) and “Proof of Work” (PoW), it can execute transactions more quickly and effectively than other blockchains. PoH is a proof-of-stake (PoS) variant in which validators are chosen according to the quantity of SOL tokens they possess. Solana’s PoH algorithm, in contrast to the conventional PoS systems, does not rely on a block confirmation period or block reward to motivate validators. Instead, PoH relies on a theory known as “turbine” to protect the network. Turbine, a decentralised randomness beacon, chooses network validators at random. The blockchain’s “clocks” — messages that are generated and signed — are then added by validators. The use of the clocks yields a “proof of history” that can be used to confirm the chronological order of events recorded on the blockchain.

Solana’s PoH technology enables fast transaction times and inexpensive transaction costs, making it a desirable platform for developers to create decentralised applications (dApps). In terms of security, PoH also provides in that aspect by making it challenging for any one group to gain too much control over the network

Scalability is one of Solana’s standout qualities. It is one of the quickest blockchain platforms available, executing more than 65,000 transactions per second when comparing between other well known Blockchains such as Ethereum and Polygon.

Ethereum is one that has the slowest transaction speeds. Each Ethereum user holds a copy of the digital ledger, and the holder is responsible for running and managing the network. Since it’s one of the most used and well known blockchain systems today, Ethereum has a large queue of people waiting to confirm their transactions. As a result, the participant will have to pay a higher fee or wait for a very long time for verification. Because of this, only a small number of transactions between 13–15 — are handled per second which is lightyears slower than Polygon (at 50,000–65,000 per second) and Solana. This is achieved through sharding, which enables the network to execute transactions in parallel and a decentralised proof-of-stake (DPoS) consensus method. It is also designed to be more energy efficient than the (PoW).

*Solana Live Transactions (Source:* *Solana Explorer*)

Solana Foundation

The Solana Foundation is the company in charge of the creation and upkeep of the Solana blockchain. The following people are a part of the Solana team:

Solana’s CEO and founder is Anatoly Yakovenko. He has experience in computing and has worked on a variety of projects, including Project Honey Pot and the Hedera Hashgraph. He has a background in computer science

https://twitter.com/aeyakovenko

The CTO and co-founder of Solana is Greg Fitzgerald. He has experience in software engineering and has contributed to numerous projects, such as the Hedera Hashgraph and the Abacus

https://twitter.com/garious14

CEO of Solana is Eric Williams. He comes from a business background and has held a variety of executive positions in the tech sector, including those at Google and Hedera Hashgraph
Solana’s Head of Community is Eric Martindale. He has experience working on a variety of initiatives, including the Cosmos Network and Hedera Hashgraph, and he has a background in marketing

https://twitter.com/martindale

Tokenomics and Token Distribution

Solana has a fixed supply of approximately 4 Billion SOL tokens, and the distribution of these tokens are as follows; 50% of the tokens are reserved for the Solana Foundation and will be used to fund the development and maintenance of the platform. 25% of the tokens are reserved for the Solana ecosystem and will be used to incentivize developers and other stakeholders to build on the platform. 25% of the tokens are reserved for the Solana team and early investors.

*Solana statistics on CMC (Source:* *coinmarketcap*)

Metrics

Financial metrics are important for crypto because they can help you understand the financial health and performance of a cryptocurrency or crypto project. By analysing financial metrics, you can gain insights into factors such as a project’s profitability, liquidity, solvency, and efficiency. We will be looking at Total Value Locked, Number of Daily Transactions.

Total Value Locked

Total Value Locked (TVL) is a measure of the total value of cryptocurrency that has been ‘locked up’ or committed to a particular decentralised finance protocol or smart contract. In this case, the TVL of Solana represents the capital that has been locked on Solana, reflecting levels of user adoption and engagement.

At the time of writing, Solana has a Total TVL of 232.15m USD, placing it at the 11th place compared to other chains.

*TVL on Solana (as of 4 January 2023) (Source:* *Defillama*)

*Total TVL of all chains (Source:* *Defillama*)

Number of Daily Transactions

Number of Daily Transactions measures the transactions processed on a blockchain within a given day. High number of Daily Transactions can be seen as a positive sign as it indicates that the blockchain is being widely used and has a strong network effect.

Given its ability to handle high TPS as well as its cheap gas fees, it is no wonder that Solana has a much higher number of Daily Transactions compared to similar chains which can run dApps, averaging in the high teens for the last couple of months.

*Daily Transactions Comparison (Source:* *GokuStats*)

Daily Active Addresses

Daily Active Addresses (DAA) is a metric that measures the number of unique addresses that are actively being used ona particular blockchain within a given day. Similar to TVL and Number of Daily Transactions, high DAA could imply a widely used blockchain.

Solana, although having seen a decline in DAA compared to the previous months, still has comparable interaction when contrasted against other popular chains such as Ethereum and Polygon

*Daily Active Addresses Comparison (Source:* *GokuStats*)

Initial Token Distribution

The Solana team distributed tokens in 5 different funding rounds, 4 of which were private sales, with them beginning in Q1 2019. The initial distribution of SOL tokens are as follows:

15.86% to Seed Round inventors
2.63% to Founding Sale investors
5.07% to Validator Sale investors
1.84% to Strategic Sale investors
1.6% to Public Auction sale investors
12.5% to team members
12.5% to the Solana Foundation
38% to the Community Reserve Fund (Managed by the Solana Foundation)

*Funding Rounds Timeline (Source:* *Messari*)

Recent Solana News and Potential Drawbacks

FTX Saga

On 2 November 2022, a series of events revolving around FTX unfolded causing the crash of the enamoured crypto exchange. In a press release that followed slightly more than a week later, FTX announced that it, along with Alameda Research and around 130 other affiliated entities, will be filing for bankruptcy.

FTX & Alameda had first purchased SOL six months after Mainnet Beta launched in August 2020. The summary of the sale of SOL to both FTX & Alameda is as below:

*Breakdown on Alameda’s funding (Source:* *Solana*)

Locked tokens on Solana can typically be staked, and broken into smaller stake accounts, but the tokens within stake accounts cannot be transferred on-chain until the lock has expired. However, in light of FTX & Alameda’s file for bankruptcy, it is unclear how the assets will be settled following the proceedings.

Additionally, the Solana Foundation, a non-profit that supports the Solana blockchain, also holds 3.24M common shares in FTX, along with 3.43M FTT tokens and roughly 135M SRM tokens. All these assets are stuck on the FTX exchange. They also have an approximate total of $1M in cash and cash equivalents on FTX when they ceased to process withdrawals on 6 November 2022. With this being less than 1% of the foundation’s cash and cash equivalents, the impact on Solana’s operations was deemed as negligible.

With the largest holders and backers of the project going bankrupt, other investors bailed on Solana to the tune of about $8 billion. This caused the price of SOL to be pushed down to $10. In comparison to ETH & BTC in the same time period, the saga had caused SOL to drop by 51.14%, whereas ETH had only fallen by 21.3% and BTC 17.6%.

DeGods Migration

DeGods, the most popular NFT collection in the Solana ecosystem announced on X December 2022 that they will be migrating to Ethereum blockchain. Frank the founder of the collection has said that this move was to open the collection to more opportunity as well as additional space to grow, attempting to reach a broader audience of NFT users. However, this announcement has spurred discussion on crypto twitter as this move comes after Solana suffered a rough year due to the FTX saga as well as the general bear market.

Although a top project has begun its moves to shy away from Solana, the NFT space has yet to crumble as people are looking for the next project to take its place. The current project with the top volume is named ABC, founded by a crypto whale HGE. Building an Automated Market Maker, the project has pumped from the high teens during the FTX saga to a current floor price of 198 SOL.

Other popular projects have also pumped in the recent month following the FTX saga, showing that Solana’s NFT space is still doing decently well. This could potentially be seen as a bullish signal as the community is still here to stay.

*DeGods announcement (Source:* *DeGods Twitter*)

*ABC’s Floor Price (Source:* *MagicEden*)

Bonk!

Despite the bad news floating around Solana. An interesting development has occurred at the end of 2022. 50% of the total supply of a memecoin named Bonk was airdropped to the Solana community, specifically to collectors, traders, artists, and developers.. The memecoin was made ‘For the people, By the people on the Solana blockchain’, where the contributors of Bonk were tired of toxic ‘Alameda’ tokenomics and wanted to give everyone a fair shot. The memecoin has soared up to 1000% in 2023, garnering plenty of attention as well as hype within the Solana community. A potential reason as to why SOL has pumped by almost 75% from the $8 low seen in the past week.

History of Network Outages

According to Solana uptime tracker, Solana suffered 14 network outages in 2022, with each outage leading to a negative price action of about 10%.

Notable outages:

Jan 2022 — Outage was due to bots performing “excessive duplicate transactions.”

May 2022 — Minting of NFT Collection, OkayBears, flooded validators and crashed the network

June 2022 — Solana validators stopped processing blocks, eventually forcing a network restart

Oct 2022 — A misconfigured node caused an unrecoverable partition in the network resulting in the outage.

Solana’s frequent network outage and downtime has cast doubt on its scalability and reliability. However, Solana’s Co-founder, Anatoly Yakovenko, acknowledges this issue and states that a solution to this problem is their priority.

Roadmap

After enduring a painful 2022, Solana, together with the crypto market, aims to get back on track, to introduce the next wave of DeFi and unwrap its potential. So what’s in store for Solana as it attempts to shake off 2022 bears for upward price discovery?

Saga on Solana Mobile Stack (SMS)

Saga — a Web3 Smartphone to securely and easily interact with the Solana blockchain. Powered by the Android Operating System, this device enables seamless integration for Android Web3 Apps.

Together with Saga, Solana introduces the open source Solana Mobile Stack, which includes the following:

Seed Vault: Securely sign transactions and store private keys
Solana dApp Store: An application store on Android for decentralised applications
Solana Pay: Decentralised payment rail on Solana to capture Solana payment URLs via QR codes, NFC taps, messages, and web browser interactions.

Nitro — Sealevel Virtual Machine (SVM)

Nitro is Solana’s first L2 and will be the gateway between the Solana and Cosmos ecosystem, essentially paving the way for the SVM, a core development standard similar to Ethereum Virtual Machine (EVM). This enables cross-compatibility for developers to launch dApps across the Cosmos and Inter-Blockchain Community(IBC) ecosystem.

Google Cloud supporting Solana

In early November, Google Cloud revealed that it now runs a Solana validator and will soon add features to welcome Solana developers and node runners.

Alongside running a validator, Google Cloud also aims to bring its Blockchain Node Engine to Solana. Furthermore, Google Cloud announced that it will index Solana’s data and add it to its BigQuery data warehouse, allowing developers easy access to historical data for Solana.

Thesis

Ultimately, Solana is a decentralised, public blockchain platform that is designed to support a high transaction rate and enable the creation of scalable decentralised applications. It aims to offer fast, secure, and low-cost transactions, and it has been used to create a number of decentralised finance (DeFi) applications, as well as other types of decentralised applications.

Despite major NFT projects like DeGods and y00ts leaving the network, it is undoubted that Solana still takes the lead in high transaction throughput, low transaction fees, fast confirmation times, modularity, and ecosystem support. As such, it isn’t really seeing many other projects migrating off the blockchain as they require the performance and power that it provides. Infact, a handful of developers are continuing to stay and build on Solana because they’re unable to do so on other networks.

Additionally, while Solana had lost more than 70% in total value following FTX’s November bankruptcy filing, it only highlighted the need to return to the basics of the crypto industry– a transition away from centralised exchanges, in favour of decentralised finance and self-custody. In fact, cryptocurrency investment firms like Multicoin Capital continue to maintain a bullish stance on Solana even after the implosion of FTX, recognising the certainty for it to underperform due to its close affiliations with Sam Bankman-Fried and FTX.

Despite prices being at an all time low, the future of Solana is still debatable as the Solana NFT community starts to pick up again, showing signs of strength in the community. According to NFT data tracker CryptoSlam, Solana had more than $80 million in NFT sales in the last 30 days. Of which, there were more than 800,000 transactions in that timespan, surpassing Polygon and ImmutableX. Additionally, SOL was sent up 20% on 2 January 2023 thanks to memecoin project Bonk, whose “airdrop” included a large portion of its tokens being sent to Solana users.

As such, while the price of SOL is still a long way from climbing back to its all time high, the future of Solana is still optimistic in the long run, with it continuing to be one of the leading contenders in the smart contract blockchain space, and the number of developers who maintain on the network as such.

To quote Ethereum co-founder Vitalik Buterin,

“…There is an earnest smart developer community in Solana, and now that the awful opportunistic money people have been washed out, the chain has a bright future…”