Solana Is Beginning to Dominate the Conversation
Over the past few weeks, I've been diving fully into the world of cryptocurrency and the blockchain. I started with my piece on how to avoid cryptocurrency taxes thanks to the meteoric gains many have experienced this year. Then I moved on to what Bitcoin actually is, as well as the blockchain itself. Finally, I moved to Ethereum, covering the little brother of the cryptocurrency duopoly.
However, when I was doing my research for those pieces and scanning through various sites and forums, I noticed something extremely interesting: other than very loud Bitcoin maximalists, the conversation in the cryptocurrency space really wasn't really all about the top two. Coins a little bit further down the market capitalization list were the main topics of conversation, particularly one coin that currently sits fifth on the list: Solana. So today, I'm going to explore Solana to figure out what it is, how it started and potentially where it's going.
What Is Solana?
Solana is, essentially, the Bugatti Veyron of the blockchain. According to its website, it's "the fastest blockchain in the world and the fastest growing ecosystem in crypto." But what does that actually mean?
Solana's Scalability Solution
In my earlier write-ups about both Bitcoin and Ethereum, I discussed the main problem facing their networks: scalability. Ethereum has overcome the scalability issue much more effectively than Bitcoin, but both networks are still really slow in terms of both transaction speed and number of transactions per second. For Bitcoin, this is thanks to the 1MB block size on the blockchain. For Ethereum, the network is currently undergoing an evolution from proof of work to proof of stake that should theoretically help lower the fees associated with network priority. However, both of them currently pale in comparison to Solana.
But how is Solana that much faster than Ethereum? It all comes down to one part of the blockchain transaction called a "mempool." A mempool is essentially a digital waiting area where transactions go before they are validated and recorded on the blockchain. Thanks to its earlier start back in 2015, Ethereum's blockchain technology is reliant on this mempool technique in order to control the flow of validation on their network for each transaction. Being a later technology, Solana was built after the mempool was essentially phased out, meaning there is no transaction purgatory for each person looking for validation. Solana transactions can be essentially instantaneous in the same way that Visa or MasterCard operate their networks.
The Proof of History (POH) Model
This is going to get technical again, isn't it? Yep, sure is! So recall back to my earlier write-ups on Bitcoin and Ethereum and you'll remember that there are two main operating models for how cryptocurrencies are validated: proof of work and proof of stake. Proof of work involves computers solving complex equations in order to get rewarded with that network's token. Proof of stake involves staking the existing tokens in a liquidity pool and get rewarded with more tokens, making the process similar to interest at a traditional bank. Well Solana said "fuck that, hold my beer" and decided to make a new one.
Solana's operating model, as explained in its 2017 whitepaper, is called "proof of history." Proof of history is built on the notion of one master clock with a single reading of time on it. This single source of time allows the network to timestamp each and every transaction, allowing all of the transactions to be validated in order. This accomplishes two things:
Eliminates the need for mempools like I mentioned above since each transaction is being validated as it comes in, and
Keeps transaction fees low since there is no bidding for network priority like there is in Ethereum's network
The new model is...pretty elegant, actually. The POH model essentially skirts around the Ethereum-based architecture and helps the network accomplish its main goal, which is pure, unadulterated output. As you can see in the table above, it accomplishes this in spades.
Where Did Solana Come From?
Anatoly Yakovenko is the co-founder of Solana and author of that 2017 whitepaper outlining his new POH model. Ironically, it's his background in traditional distributed systems engineering at Qualcomm that actually gave him the idea to include one central time source in order to accelerate the transaction speed and volume of the network.
However, it was Yakovenko's colleagues at Qualcomm that are responsible for implementing the other facets of the new network that allowed this version of the blockchain to scale up past 10,000 transactions per second, so Yakovenko recruited them in order to build his new company, Solana. But why the name Solana? Well that was the name of the city where the founders lived, just outside of San Diego.
Following the naming of the company and the first network test, Solana was officially born in 2018. Since then, the network has been on an absolute tear, skyrocketing to a $55 billion market capitalization (at time of writing) and officially processed their 40 billionth transaction in December of 2021. The token, SOL, is now the fifth biggest cryptocurrency on the market today.
What Is The Future of Solana?
Solana has kicked the living crap out of most other cryptocurrencies as an investment this year. If you had invested $10,000 in Solana on January 1, 2021, you would be a millionaire today, with a total return of 11,800%. That's compared to Ethereum's measly 458% rise in 2021.
But given Solana's absolutely ridiculous rise over the past 12 months, does it still have room to grow? Here's why it might:
DeFi and NFT Projects
This isn't going to be my place to fully explain NFT's. If you want the lowdown on that space, go check out my piece on them from a few months ago. I bring them up here to say that Solana's network is essentially tailor-made to handle the congestion that NFT's bring to a network. Ethereum experienced unexpected bottlenecks basically throughout 2021 thanks to the NFT boom, bringing with it hyper-inflated gas fees. Solana, thanks to its transaction speed and volume, doesn't really have that issue. However, the network only has about 400 active DeFi and NFT projects on-chain at the moment. That's compared to Ethereum's over 3,000 active projects, so there is still a TON of room to grow.
Current Market Capitalization
Speaking of room to grow, looking at the market capitalization of the token is extremely important. It gives you a frame of reference as compared to its closest competition, namely Bitcoin and Ethereum. According to Coin Market Cap, Solana currently sits at a market cap of about $55 billion. Bitcoin is still the king at a market cap of $904 billion and Ethereum sits second at $454 billion. That means Solana is 9x away from Ethereum and 18x away from Bitcoin, giving the coin plenty of runway should you think it's actually going to catch the top two. And based on everything I've laid out above, there are plenty of reasons to believe that it could.
However, it isn't all good news on the Solana front. There are a few downsides that provide pause before you take out a second mortgage on your house or visit the local laundromat-turned-Sicilian-poker-room for a loan.
Solana's Issues
Solana's Main Downside - Ethereum
Solana's chief competitive advantage versus the more popular cryptocurrencies above it is the speed/cost of transaction. Well, as I mentioned before, Ethereum looks set to rival Solana after the Ethereum 2.0 upgrade rolls out in 2022 (allegedly).
In addition to a full proof of stake transition, Ethereum 2.0 is also introducing the concept of "sharding," or splitting a transaction across multiple machines. This not only allows faster, more scalable transaction volumes, but makes the whole process more secure as there are more verifiers per transaction.
Finally, this upgrade makes Ethereum more environmentally friendly. The lack of massive mining power for both Ethereum and Solana make them both infinitely better than Bitcoin in this regard, so it's not really worth talking about here.
Solana's Stability Problem
In September of 2021, Solana experienced what Yakovenko called "intermittent instability." You don't hear American Express issuing those statements too often. Stability is key in a transactional network, and Solana failed the test when it was at peak popularity on the biggest stage. This issue should hopefully be resolved as more engineers, validators and staking pools are added to the network assuming the network gets more popular, but it's still a little worrying.
The Bottom Line
Solana's technology is honestly remarkable. The speed of the network, the bandwidth to be able to handle all of those transactions and the incredibly low cost of transaction could genuinely make this a contender to Ethereum in the future. Do I think it'll overtake Ethereum after the 2.0 upgrade is rolled out? No, I don't, mainly because Ethereum already has the first-mover advantage baked in. However, I do think that Solana could be a legitimate contender to overtake Bitcoin in a few years as cryptocurrency transactions become more commonplace and the shortcoming of Bitcoin are put on display. Solana is one to watch and a for sure contender in this space.
This article is for entertainment purposes only and does not constitute financial advice. For individual situations, please contact an investment professional as each situation is different. The author has long positions in Bitcoin and Ethereum, but does not hold a financial stake in Solana and does not plan on opening on in the next 72 hours.
