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VeradiVerdict - Issue #161
Solana is a blockchain designed to be the most performant decentralized network ever. Since its launch in 2017, the network has accrued over 400 different dapps and a $38 billion market capitalization across its ecosystem.
The network, validated by a set of 1000 nodes, offers record-breaking block times of 400ms and a capacity to handle 50,000 transactions per second (TPS), greatly outpacing the 10-15 TPS of Ethereum. Solana’s efficiency is driven by 8 core innovations, including:
a custom Tower Consensus algorithm, which elects block proposers using a Proof-of-Stake mechanism and settles on the most recent state of the network using Proof-of-History hashes as a global source of time
highly efficient communications within the network, which involves partitioning blocks into smaller data packets that are broadcasted among nodes and forwarding transactions to scheduled block leaders
streamlined transaction processing for nodes, which executes non-overlapping transactions simultaneously and pipelines stages of transaction execution for higher throughput
specialized architecture to rapidly maintain and update the state of accounts and specific nodes for storing the history of the blockchain state
The network’s native token SOL is used to (1) pay transaction fees that compensate validators for computational effort and disincentivize network spam and (2) reward block leaders when a proposed block is confirmed. At genesis, 500 million SOL were minted, and the total supply has stayed relatively constant due to partial burning of transaction fees by the network. Today, SOL broke $200 and reached a market capitalization of roughly $105 billion, making it the 6th largest token by market cap.
Solana’s scalability makes it a prime platform for building dapps that require significant computational bandwidth and high transaction throughput. Some of the ecosystem’s most exciting projects across DeFi, NFTs, and gaming include:
Raydium, a decentralized exchange (DEX) where users can swap assets in an AMM liquidity pool or trade against an on-chain central limit order book (CLOB) supported by Project Serum (another Solana DEX)
Oxygen, a decentralized prime brokerage that enables users to make the most of their entire crypto portfolio as collateral for borrowing and lending
Star Atlas, a massive multiplayer metaverse set in futuristic space, where players can own in-game digital assets as NFTs and transact with each other using cryptocurrencies
Metaplex, a simplified interface for creators to launch NFT storefronts with low minting fees and versatile auction formats to engage with fans
Ultimately, as high gas fees and transaction latency continue to frustrate dapp developers and users on Ethereum, Solana’s unparalleled scalability and efficiency position it as an industry-leader in the multi-chain crypto universe of the future, uniquely enabling a vast array of use cases around DeFi, creators and digital ownership, and more.
What is Solana?
Solana is a blockchain that is designed to be the most performant decentralized network ever. The project, built by alumni of Google, Apple, Qualcomm, and more, launched its mainnet in 2017 and has since grown into one of the forefront blockchains of the cryptocurrency space, with over 400 dapps on the protocol and a $105 billion (6th largest) market capitalization by its native token.
Solana’s north star is to architect a decentralized, permissionless network of nodes that matches the computational performance of a single node; the network, operated by ~1000 nodes today, currently can process 50,000 transactions per second (TPS), well more than Ethereum’s and Bitcoin’s 10-15 TPS and even Visa’s 1700 TPS. This unparalleled efficiency makes Solana incredibly fast, scalable, and gas price-efficient, making it an ideal blockchain for building high-throughput crypto applications across spaces like DeFi and NFTs.
Solana’s Technical Backbone
Eight core innovations underpinning the Solana blockchain (TheTie)
To reach single node-performance from a decentralized set of nodes, state changes in the blockchain must be bottlenecked by computation and not by latency in the nodes communicating with one another. Solana achieves this groundbreaking efficiency through 8 key technical innovations:
Proof-of-History: One of a blockchain’s core functions is recording the order in which events (e.g. transactions) occur –– effectively operating a synchronized record of time. Bitcoin and Ethereum achieve this via nodes competing to add blocks (consisting of a batch of unprocessed transactions) to the head of the blockchain by solving Proof-of-Work consensus, which requires nodes to prove they have spent a certain amount of computational effort (or time) to increment the blockchain. This design, though effective, creates network conditions like 10 minute block times, which limits the scalability and throughput of the network. To solve the ordering problem, Solana uses a process called Proof-of-History (PoH), a decentralized clock operated by recursively computing a preimage-resistance hash function (SHA256) called a verifiable-delay function (VDF). Outputs of the VDF, which are inputs to the next round of computation, are associated with the state of the Solana blockchain at the time of computation. Since these values can only be computed by running the VDF recursively, this process “proves” that a given state of the blockchain comes before or after other states. Ultimately, this enables the blockchain to increment without network validators having to talk to one another.
Tower Consensus: Solana achieves consensus on the current state of the blockchain across all of its nodes via an algorithm called Tower Consensus, a modified version of Practical Byzantine Fault Tolerance (PBFT). In Tower Consensus, a node is selected as the “leader” (proposes the next block) of the network ahead of time based on a Proof-of-Stake election, where the probability of being selected is proportional to the amount of SOL the node stakes. The selected leader broadcasts a PoH hash to the network corresponding to transactions since the last block. The remaining nodes in the network (validators) vote to include or exclude the block in the chain; if ⅔ of nodes vote to include the block, the block is irreversibly added to the chain. Moreover, once a validator votes for a given PoH hash, they must satisfy a “time-out” in which they will not vote for any hash that is not a child of the given hash for at least N hashes. This exponentially decays the probability of an invalid block (fork) becoming the head of the blockchain. Empirically, with Tower Consensus, Solana is able to achieve 400ms block times.
Turbine: Network delays (latency in nodes broadcasting blocks or transactions to each other) are a well-known bottleneck on the efficiency of decentralized blockchains. Solana uses a unique block-propagation technique called Turbine, which partitions blocks into packets of data and then fans these packets out to a random set of peer nodes, which continue to propagate messages across the validator set. On a network of 40,000 validators, Turbine allows new blocks to be propagated in 400ms and finalized in 500ms. To maintain fault tolerance with this fanning procedure, each data packet is associated with Reed-Solomon erasure codes.
Gulf Stream: To process inbound transactions from clients of the network (e.g. wallets), Solana uses a mempool-management scheme called Gulf Stream. Since Tower Consensus selects network leaders ahead of time, any validator that receives a transaction from a client forwards the transaction to one of the upcoming leaders, reducing transaction confirmation times and enabling validators to execute transactions ahead of time. Clients also sign transactions with a reference to a recently-confirmed block-hash; if the associated block-hash is not confirmed by the network within the time-out period, the client can confirm that the transaction is invalid and will not be executed on chain.
Sealevel: Solana uses a unique parallelized transaction processing engine called Sealevel (a VM) to increase the throughput of the network. Transactions specify upfront precisely what data they will read-and-write. The system identifies transactions that don’t overlap (affect the same data fields) and executes them in parallel. Once Sealevel schedules transactions to be processed in parallel, a node’s native hardware executes the transaction using a highly-performant bytecode called the Berkeley Packet Filter (BPF).
Pipelining: Transactions on Solana are processed via a series of steps called the Transaction Processing Unit (TPU): data fetching at the kernel level, signature verification at the GPU level, banking at the CPU level, and writing back again at the kernel level. Since different layers of hardware are involved in each successive step, Solana can make progress on 50,000 transactions simultaneously; by the time a TPU is broadcasting the next block to validators, it has already begun reading the next batch of packets and verifying their signatures.
Cloudbreak: The memory required to keep track of the state of accounts is a major bottleneck to blockchain size and efficiency; LevelDB, the local database popularly used by many blockchain nodes, can process up to a maximum of 5000 TPS. Solana uses a custom-designed state architecture called Cloudbreak which optimizes for concurrent reads and writes across a RAID 0 configuration of SSDs. Importantly, the architecture enables validators to execute transactions ahead-of-time, reducing latencies in transaction confirmation.
Archivers: Since blockchain networks grow in memory footprint extremely fast, data storage is a critical bottleneck to blockchain scalability. Rather than having each validator store the entire blockchain, Solana offloads data from validators to Archiver nodes, who do not participate in consensus and have the explicit function of storing pieces of the history of the blockchain state. Periodically, the network requires Archivers to prove that they are storing the data as required, which can be efficiently done in batches by validator GPUs.
The SOL Token
The Solana blockchain is underpinned by its native token SOL, which is a mechanism to incentivize transaction processing and honest validation of the blockchain. When a client submits a transaction to the network, they must include a transaction fee in SOL to compensate validators for the computational effort to include the transaction and to protect against network spam. When a validator successfully mines a new block, they receive a block reward paid out via newly-minted SOL, incentivizing them to continue honestly validating the network.
At genesis, the Solana blockchain instantiated 500 million SOL tokens. Though the token supply inflates when block rewards are paid to validators, Solana simultaneously deflates the token supply by partially burning the transaction fees paid by users. This, along with other token burning events, has kept the total supply of SOL at roughly 500 million.
Two weeks ago, the price of SOL broke $100 for the first time ever, approximately a 230% increase from 30 days prior. The token currently has a circulating supply of 290 million and is the 6th largest cryptocurrency by market capitalization.
SOL Price in August 2021 (CoinMarketCap)
The Greater Ecosystem
Solana’s core differentiator from Ethereum and other smart contract-oriented blockchains is its ridiculously high scalability and transaction processing efficiency (400ms block times and 50,000 TPS). Speed and scalability have been one of dapp developers’ biggest woes on Ethereum, contributing to absurdly high gas fees and slow transaction confirmations. Solana’s efficiency uniquely positions Solana as a prime platform for building any decentralized app (dapp) that requires high-throughput processing and non-trivial computational power. This is particularly important in areas like gaming, which requires high computational bandwidth, or DeFi and NFTs, where computational complexity and transaction throughput drives insane gas prices. Gas fees on Solana are deterministic and on the scale of ten-thousandths of a cent per transaction. In comparison, at time of writing, Ethereum’s average transaction fee is roughly $6.14.
Propelled by this efficiency, Solana’s ecosystem has rocketed to a whopping $38 billion (and growing) in market capitalization and $6.27 billion in total value locked (TVL).
Below are some of the ecosystem’s most exciting projects.
Project Serum is a non-custodial, decentralized exchange (DEX) for spot and derivatives trading that implements an on-chain central limit order book (CLOB), with sub-second settlement and extremely low fees. Maintaining an on-chain CLOB requires rapid consensus and efficient network state changes, uniquely enabled by Solana’s architecture. Serum has approximately $100 million in daily trading volume and $613 million in TVL.
Raydium is a DEX that uses an automated market maker (AMM) to provide liquidity to an on-chain CLOB. The DEX, which partners with Serum, informs users whether they can achieve a better trade price by swapping within a Raydium liquidity pool or trading via Serum’s order book. Liquidity providers (LPs) can also earn yields via the RAY token. Raydium has approximately $463 million in daily trading volume and $1.6 billion in TVL.
Saber is a cross-chain stablecoin and wrapped assets exchange on Solana. The project uses an AMM to facilitate instant trades across native stablecoins and assets (USDC, USDT, SOL, etc.) and wrapped stablecoins and assets (DAI, UST, BTC, LUNA) from other chains. Saber has approximately $1.8 billion in TVL.
Oxygen is a decentralized money market that supports lending and borrowing on Solana. Users can utilize their collateral in multiple ways, allowing them to simultaneously lend and borrow assets. Oxygen also enables cross-collateralization, allowing users to collateralize loans with their entire portfolio, reducing liquidation risk, and is order-book based, resulting in fairer rates for borrowing and lending. Oxygen has roughly $6.4 million in TVL.
Phantom is the leading wallet on the Solana blockchain. It supports holding Solana tokens and NFTs, staking SOL natively within the wallet, and token swaps natively in the wallet via a built-in DEX. Users can use the Phantom browser extension to plug into web3 dapps on Solana, much like how MetaMask is used on Ethereum.
Synthetify is a DEX for trading synthetic assets. Synthetic assets are backed by the SNY token, which users stake in a global debt pool. This global debt pool acts as a counterparty for users to trade against and also rewards stakers with a fee earned from asset exchanges. Asset prices are determined by oracles that post to the Solana blockchain.
Star Atlas is launching out a massive multiplayer metaverse set in futuristic space. In-game assets are represented as NFTs, giving players unique ownership over their game state. The game also has tokens for in-game actions (e.g. purchasing a skin or voting in governance) and links with the Serum DEX to support a capital efficient in-game economy. Seamless use of tokens within a game requires significant computational bandwidth, uniquely enabled by Solana’s architecture.
Stardust is building a suite of APIs to support game developers in using blockchain assets in their games. Stardust offers painfree, low-fee creation of NFTs, streamlined player management on-chain, simplified fiat payments, and various integrations with other projects on the Solana ecosystem.
Aurory is creating a digital metaverse to facilitate play-to-earn. Characters in the game (called Aurorians) are NFTs which represent an in-game identity that grants access to certain in-game features (e.g. skins or experiences). Players can trade characters to earn a profit or access different game states.
DefiLand is building an agriculture-themed metaverse to gamify DeFi to accelerate mass adoption. In-game experiences will correspond to core DeFi actions including swaps, liquidity providing, staking & yield farming, governance, and more.
In the creator economy:
Solanart is a marketplace that allows anyone to buy or sell Solana-based NFTs with insanely low gas fees. It has over 1 million SOL in cumulative trading volume and 18.5 thousand SOL in average daily trading volume. The marketplace’s most popular NFT collections include the Degen Ape Academy, SolPunks, and Bold Badgers Squad.
Audius is a decentralized streaming platform that facilitates direct payments between artists and listeners using Solana-based tokens, bypassing the inefficient and predatory business models of record labels or distributors like Spotify and Apple Music. Artists can release collectibles as NFTs to drive engagement from their fans. The platform has over 100,000 artists including Skrillex, deadmau5, and ODESZA and recently announced a partnership with TikTok. (Read my previous writeup on Audius here).
Metaplex is building a Shopify-esque experience for creators to launch their own NFT storefronts with a simplified drag-and-drop interface. The service supports record-low minting fees (generally less than a dollar) powered by Solana’s architecture, seamless splitting of profits and royalties on-chain, and multiple auction formats designed to build stronger relationships with fans.
Despite its recent growth, Ethereum’s pronounced concerns with speed and scalability could significantly limit the future of its ecosystem. As the network becomes more and more saturated, high gas fees and slow transaction times continue to frustrate users and dapp developers alike, surfacing the need for a vastly more scalable, computationally-efficient layer one architecture.
The network’s 400ms block times and capacity for 50,000 TPS make it a prime choice for dapps that must handle a sizable base of users and a high throughput of transactions. These computational improvements over other chains enables a galaxy of unique use cases beyond siloed DeFi projects, including capital-efficient, composable DEXes, vibrant digital asset economies inside games, and tools for creators around NFT sales and verticals like music. The community’s confidence in Solana’s capacity to support the future of dapps is reflected in the ever-appreciating SOL token, breaking $200 today. As crypto progresses towards a multi-chain universe, Solana is shaping up to be an unparalleled platform for dapps demanding low latency and high scalability.
- Paul V
As we mark the first full month since setting sail we’d like to take a look at how Clipper is faring within the motley world of DeFi.
LETS MEET UP
Los Angeles, Sept 16-17
Mainnet 2021, New York City, Sept 20-24
NFT.NYC, New York City, Nov 1-5
Breakpoint, Lisbon, Nov 7-10
Coffee meetings or walks in San Francisco
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.