A look at Solana’s main pros and cons and the reasons behind its stunning 167% rally.
Crypto market observers noticed a long time ago: after a significant surge in Bitcoin price, there always comes the “alts” time. The whole market seems to be dragged by the leading crypto, but some coins outperform the others.
Over the past month, Bitcoin surged 38%. Ethereum gained 31.5%. Meanwhile, Solana spiked 167% 🚀, and Grayscale’s GSOL trust shares surged to a jaw-dropping premium of 784%. This means that both retail and institutional investors are turning their eyes to this underdog blockchain, which has been declared dead so many times in the past.
Solana is indeed infamous for numerous network outages, and its reputation was badly hurt by the FTX crash (the bankrupt exchange invested heavily in $SOL and co-founded the blockchain’s main DEX Serum). Speaking of FTX: for the past two weeks, it has been selling between $250,000 and $700,000 worth of $SOL every day, creating additional selling pressure on the coin. Despite that, its price never ceased climbing 🤷
At this point, the larger crypto (and not only) public starts wondering what’s the secret to Solana’s ability to bounce back after every obstacle? And why are investors rushing to it now, leaving the market leader Ethereum behind?
We tried to answer this question by looking at the current state of Solana and its main pros and cons: the outages, the activity, and the tokenomics. But first, a quick reminder of what sets this blockchain apart from its competitors 👇
Solana is a Proof-of-Stake blockchain that relies on validators who stake its native currency $SOL. In addition to that, it also uses the so-called Proof of History mechanism, which allows it to speed up transaction validation, all while keeping the blockchain synchronized.
“Traditional” blockchains synchronize on blocks, which means that a transaction cannot be processed until a block time has passed. To allow PoS blockchain validators determine the order of the blocks, those need to be timestamped, and in order to counter the clock drift and network latencies, the block time needs to be lengthened.
Solana is different in that its leader nodes “timestamp” the blocks with cryptographic proofs that some duration of time has passed since the last proof. Validator nodes verify these proofs in any order, allowing network participants to synchronize at their own pace.
Overall, this system streamlines the transaction validation process and allows Solana to scale as its network grows.
This scaling promise has been challenged on multiple occasions, especially in 2022, when the network faced no less than 10 partial or full outages, some of them lasting many hours. On occasions, the Solana clock 🕰️ was also noticed to be running adrift of real-world time.
In November 2022, Solana founder Anatoly Yakovenko admitted that the validator count doubling in the previous year put the system to the test and revealed a number of inherent problems. He ensured that the team was working on resolving them, and indeed, so far in 2023, the network suffered only one major outage in February. The current streak of 260 days of uptime is the second-best in Solana’s history. Whether it should be attributed to the upgrade-process improvements and new technical features, or rather the bear market’s relatively low network activity, remains to be seen.
Last year Yakovenko also announced that Solana Foundation had partnered with the development firm Jump Crypto to build an alternative client. Having a “second implementation and a second client developed by a different team with a fully separate code base” was supposed to help eliminate the same type of bugs.
This alternative validator client, named Firedancer 🔥 💃, was revealed two weeks ago (in testnet version), at Solana’s Breakpoint conference in Amsterdam. $SOL gained over 66% since then.
As of today, Solana is the most used blockchain, as it processes around 37 million daily non-vote transactions – more than any other chain. For comparison, Ethereum processes around 1.1 million transactions per day. Adding its most popular layer-2s, this number can rise to 4.5 million (Polygon PoS 2.5M, zkSync 738k, Arbitrum 620k, Optimism 347k, Base 255k).
Solana’s current TPS (transaction per second) stands at around 4000 (including vote transactions), and the developing team claims it can go up to 50,000. The blockchain counts nearly a million unique monthly active users and 2,000 validators.
This year for Solana was marked by several important events, such as the release of its phone Saga 📱, an Android reinforced with a native crypto custody system and web3 integration. Solana was also chosen by VISA for USDC stablecoin settlement, and one of the DeFi OGs MakerDAO decided to leave Ethereum for a new blockchain forked off Solana.
DeFi activity is steadily gaining intensity after a dramatic fall at the end of 2022, while the NFT activity has fallen. Messari issued an interesting report detailing Solana’s activity, you can check it here.
However, amidst this enthusiasm, a key problem persists – Solana’s tokenomics.
While low fees are good for the users, this is not always the case for the blockchain. Solana’s average fee of $0.0002 is so low that it would need 8.8 billion daily transactions to just break even on the current 4% inflation. In other words, multiply the current activity x237.
Despite its high transaction throughput, Solana is still the poor neighbor: while Ethereum currently earns $4.7 million per day in gas fees, Solana collects only $10k (source: Nansen).
This situation takes its toll on the validators too. Although the network does not require a minimal staking amount, according to this profit calculator, Solana validator node’s yearly break even currently stands at 106k of delegated $SOL ($6.2M) or 5.3k of self-staked $SOL ($310k).
For comparison, a person who wishes to solo run an Ethereum validator node could break even and even gain a little income by staking 64 ETH, or $131.4k. Both simulations include server costs and current crypto rates.
For liquid staking, Solana’s current rate is 2.9%, vs Ethereum’s 3.9%.
Solana’s business model is built on the idea of hyper-scalability, and if the blockchain does not attract the necessary amount of activity, it will not be able to sustain itself. And as it turns out, a lot of people believe that this level of activity is just a matter of time. The Solana community is big and enthusiastic, and pushing through a rough patch after the FTX crash may have made it even stronger 💪
It is a very long way ahead for Solana to make its business model work, and the reason the markets are now treating $SOL with irrational premiums is based solely on the positive future outlook.
The Lindy effect says that the future life expectancy of non-perishable things, like technologies or ideas, is proportional to their current age. As Solana stubbornly refuses to die, methodically solving the problems that come its way, the blockchain’s chances to be here for the bright web3 future increase accordingly.