Exploring Solana (SOL) for Beginners
Solana is a layer-1, decentralized application blockchain similar to Ethereum, that uses its native SOL token to power its network.
Founded by Anatoly Yakovenko in 2017, the Solana network would first go live in 2020 with its initial investors coming through pre-release sales, which I’ll touch on later.
Although similar in concept, where Solana really makes its difference compared to Ethereum is in its speed and its price.
While Ethereum struggles to reach double-digit transactions per second, Solana can achieve tens of thousands.
Where Ethereum will charge you a noticeable amount for each transaction on their network, you can make a few thousand Solana transactions before you even notice a cent leaving your account.
As you can imagine, the promise of a quicker, cheaper Ethereum certainly got investors interested, but how does it work exactly?
How does Solana work?
The SOL token is the fuel that powers the Solana ecosystem.
Unlike Ethereum, which has been both Proof-of-Work and Proof-of-Stake, Solana runs a Proof-of-History consensus mechanism to verify its transactions.
Proof-of-History essentially works out the time between two events.
To achieve this, more timestamps are added to all transactions so the order of the transactions can be tracked.
Interestingly, transactions aren’t tracked in order under Proof-of-Work or Proof-of-Stake, but ordering them in such a way requires less overall memory consumption to run as each transaction does not require the entire network to be updated.
Instead, they can work consecutively, meaning they build off the last transaction instead of the entire network history.
This allows Solana to be lightning-fast and highly scalable.
Critics will argue it hasn’t been as heavily road-tested compared to Proof-of-Work or Proof-of-Stake. However, should it prove to be as secure and scalable as it appears over the long run, we can only imagine this consensus mechanism would become more popular in the future.
What makes Solana unique?
In addition to Proof-of-History, Solana also has a few other unique features running under the hood.
For example, Solana runs the Turbine Block Propagation Protocol which essentially helps break data into smaller fragments so they can be more efficiently transferred across the network. This is similar to techniques that are commonly used in GPUs and SSDs.
Additionally, another crucial aspect of the Solana network is the Gulf Stream. In essence, this allows validators to forward transactions early which results in transactions being processed ahead of schedule and less memory strain on the network overall.
Further, Solana also utilizes a concept called Pipelining, which is a technique of assigning a sequence of input data to different hardware components.
Lastly, Solana uses Archivers to store their blockchain data. Storing the immense amount of data involved with running the Solana blockchain extends into petabytes each year.
Eventually, the amount of data could become so large it requires centralization to successfully store, which undermines the purpose of most blockchains.
To combat this, Solana uses Archivers to offload data from the validators and onto a separate network of nodes, which is checked periodically to verify the accuracy of the recorded data. The purpose of these features, as with most things regarding Solana, is to improve transaction speed and reduce energy consumption.
The result of all these features is a blockchain that is scalable at a base level and doesn’t require any layer-2 scaling solutions to achieve upwards of 50’000 transactions per second.
For reference, that is almost as fast as VISA, and up there as one of the fastest blockchains online.
But, as always, crypto projects live and die by their tokenomics, so let’s see how the SOL token stacks up.
SOL Tokenomics
To fund the project initially, the Solana Foundation sold a portion of its SOL tokens.
In the beginning, there were 500 million SOL tokens. If we exclude the over 11 million SOL tokens burned by the Solana Foundation, we get a starting supply of somewhere around 488 million.
Of this supply, 16% and then 12% were sold during their seed and foundation sales in March and June 2018.
A further 5% was sold during the validator sale held in July 2019.
Later, 2% in February 2020 as part of a strategic sale, before a final 2% was sold in March 2020 during their public auction.
Of the remaining 64%, 25% was split between the team and the foundation, and 38% was allocated to the community reserve.
However, there is no limit to the amount of SOL tokens that can be produced. Instead, their creation is determined by inflationary and deflationary forces.
The biggest inflationary reward is their staking rewards which are paid out on pre-determined dates. Over the next decade, hundreds of millions of SOL tokens will be released into the ecosystem via staking rewards.
The amount released does decrease over time, with roughly 8% annual inflation occurring initially. However, this will decrease to a final inflation rate of 1.5% around the year 2030.
To counter this, there are also deflationary forces in play such as a percentage of the transaction fees being burned. As such, there is a possibility that in the future SOL could become a deflationary asset.
If the burn percentage from the transaction fees exceeds the 1.5% inflation rate, you could end up with an asset that is vital for function with a decreasing supply. Typically, this would increase the price of that asset.
However, the elephant in the room is that 67% of all locked SOL tokens are held in wallets owned by Alameda Research. That is the same Alameda Research mixed up with FTX and Sam Bankman-Fried.
While it is true that companies in similar positions have taken 10 years for their liquidation process to complete, it will certainly unsettle some investors that over half of all staked tokens in the Solana ecosystem could be sold onto the market as soon as their locked staking period ends.
In Conclusion, Solana is a layer-1 blockchain similar in function to Ethereum.
Its purpose is to be the platform on which decentralized applications are built, with SOL acting as the currency that binds them together.
The main difference between the two is Solana is a lot faster to process transactions and a lot cheaper to use.
I won’t pretend the unfortunate connection with Alameda Research may cause significant downward price pressure if the liquidators force these assets to be sold.
However, if it can weather the upcoming storms, Solana has impressive fundamentals and still boasts an impressive transaction speed that is almost unmatched by other blockchains.