09.12.2021

SOL cryptocurrency: how does the Solana blockchain work and what are its prospects?

In 2021, the price of the SOL cryptocurrency of the Solana blockchain platform has grown in price 45 times. At the same time, only in the last month, the cost of SOL increased 2.6 times, and on August 17, it even reached its all-time high at $ 74 per coin.

As a result, the Solana project entered the top 10 in terms of capitalization on CoinMarketCap.

Against the background of this rally, we decided to understand the reasons for the growth in the value of the SOL token, and also learned what the features of Solana are and what are the prospects for the development of this project.

What makes Solana unique and how is the project evolving?

Solana is an open source high-speed blockchain platform for running decentralized applications (dApps) and smart contracts, one of the main competitors of Ethereum.

Solana’s key competitive advantage is high scalability and low fees. During the tests, it was found that the network bandwidth is from 50,000 to 191,000 transactions per second, the block generation time is from 400 ms, and the average transaction fee is $ 0.00025. In the future, the developers promise to achieve a speed of over 700,000 transactions per second. For comparison, in Ethereum, the throughput is 30 transactions per second, and the block generation time is 12.5 seconds.

Already now, anyone can be convinced of the high speed of Solana by playing a special game.

Work on Solana began in 2017. Then the former developer of Qualcomm Corporation and Dropbox, Anatoly Yakovenko, first published the white paper of the Solana project. In the document, he described the Proof-of-History consensus algorithm he developed, which will be discussed below.

Soon, Yakovenko, along with his former colleague from Qualcomm Greg Fitzgerald, now the chief technology officer of Solana, and Ph.D. Eric Williams opened the company Solana Labs, which was engaged in the development of the project.

The project got its name in honor of the Solana Beach near San Diego, which Yakovenko often went to. The project team is based in San Francisco, California. It includes former employees of Qualcomm, Google, Apple, Microsoft and Dropbox.

In April 2018, the developers launched the first version of the Solana testnet. At the same time, Solana Labs held a seed round of investments, and in July 2019 raised more than $ 20 million from venture capitalists in a series A round.

The Solana developers launched a beta version of the testnet with basic transactional and smart contract functionality in March 2020. In the same month, the Solana team conducted an initial SOL coin offering (ICO), during which they raised $ 1.76 million.

In June 2020, a non-profit organization Solana Foundation was created, which was engaged in the development of the project ecosystem and its popularization, as well as attracting third-party developers.

A year later, in June 2021, Solana Labs raised another $ 314.15 million in a private round of the coin sale. The round was led by Andreessen Horowitz and Polychain Capital.

The Solana platform is still in beta today, but this does not interfere with the fact that it has already launched over 350 projects. The largest of the DeFi projects: the automated market maker Raydium, the Serum decentralized exchange owned by the youngest crypto billionaire Sam Bankman-Fried, and the aggregator Solfarm.

Also, Solana runs such dApps as the O3Swap cross-chain aggregator, the SolStarter Launchpad platform for Solana projects, the Arweave decentralized data storage protocol, and the Oxygen broker protocol.

Since March 2020, Solana has partnered with blockchain oracle Chainlink to develop a super-fast and low-cost oracle. And in September, the USDT stablecoin was launched on the Solana blockchain. In October, a cross-chain bridge was developed between Solana and Ethereum, allowing assets to be transferred from one blockchain to another. At the same time, in partnership with Circle, the issuer of USDC, USDC was launched on the Solana blockchain.

How does the Solana blockchain work?

Solana’s ultimate goal is to solve the scaling trilemma: create a decentralized network that is fast, scalable, and secure at the same time.

The Solana blockchain has 8 major innovations that differentiate it from other networks.

1. Proof-of-History.  Solana uses a combination of two consensus algorithms: Proof-of-Stake (PoS) and Proof-of-History (PoH) developed specifically for Solana. In the latter, different nodes operate in parallel and independently of each other, but at the same time synchronize with each other to ensure security. This allows the network to support thousands of nodes at the same time, scaling its bandwidth proportionally. Unlike other similar projects, such as Polkadot, Solana has only a single blockchain without adding child blockchains (sidechains or parachains).

Formally, Proof-of-History is not a consensus algorithm, but a blockchain synchronization algorithm that allows nodes to agree on the temporal order of events in the chain without exchanging data with each other.

It is worth noting that node synchronization is one of the main problems of decentralized networks. To confirm operations, the nodes must write a block with them to the blockchain. To do this, they exchange data, validate transactions and synchronize (reach consensus). The catch is that it takes a long time, and as a result network bandwidth suffers. For example, the maximum speed of Bitcoin is 7-10 operations per second. Proof-of-History allows nodes to sync much faster.

At the same time, blockchains have built-in clocks that allow you to set a timestamp – the timestamp of a block record (date and time). But they are inaccurate – there is no central clock to refer to. As a result, the nodes may not sync correctly and the new block will appear earlier than the previous one.

In centralized systems, the entire system uses a single internal clock. For example, in Google, databases are synchronized using atomic clocks, in Yandex – using a central NTP server. But in Proof-of-History, time is measured in hashes.

So, if in other blockchains consensus is reached by agreement of miners or validators, then each validator in Solana has its own clock. Proof-of-History is a decentralized clock that synchronizes time across all nodes. The use of Proof-of-History proves that the transaction occurred at a specific moment. At the same time, the blockchain nodes work according to a single schedule (Leader Schedule).

Here’s how the synchronization between nodes in Proof-of-History works:

  • The validator becomes the leader according to the Leader Schedule. He will be it within a strictly allotted time – 1,000 hashes (4 blocks or 1.6 seconds);
  • Gulf Stream and Turbine solutions (which will be discussed below) split transactions into parts (batch);
  • The leader validator verifies and confirms transactions and passes parts of the data (parts of transactions – batch) to two random validators;
  • The two validators validate their portions of the transactions using digital timestamps as a reference, merge the transactions and pass them on to the rest of the validators;
  • Then another validator becomes the leader. It will give them the next 1,000 hashes.

This scheme allows to reduce the block mining time to just 400ms and eliminates the risk of orphan blocks (blocks mined but not included, for which the validator is not rewarded). A similar mechanism is used in Google and Intel database solutions. But Yakovenko found a way to apply it to decentralized systems. It is assumed that in the future, Proof-of-History will also be able to use centralized systems.

2. Tower BFT.  This is a Proof-of-History-optimized version of practical Byzantine fault tolerance (pBFT), a variant of the Proof-of-Stake (PoS) consensus algorithm. Therefore, Solana formally works on PoS, but relies on a “decentralized clock” Proof-of-History. This allows you to reach consensus without wasting time and resources on calculating the timestamps of previous operations and exchanging messages between all validators.

3. Gulf Stream Protocol.  This is a protocol that forwards transactions to the next leading validators even before the completion of the previous set of transactions, without transferring them to a mempool (a list of transactions awaiting confirmation). As a result, future leaders can start collecting transactions before they start producing blocks. This increases the speed of work, and also reduces the size of the mempool and the blockchain itself.

4. Turbine protocol  – breaks information about operations into several parts.

5. Sealevel algorithm – allows parallel execution of several smart contracts.

6. Pipelining  – acceleration of transaction verification at the GPU core level. This allows you to quickly check transaction information across all nodes in the network.

7. Cloudbreak Account Database  – optimizes memory usage on validator devices without allowing data to take up too much space.

8. Archivers – distributed storage.  Validators upload data to a special network of nodes – the so-called Archivers. Archivers do not participate in reaching consensus, since each of them stores part of the data (batch), and not all of it. From time to time, archivers must prove that they are still keeping their data. This system is similar to the one used by Filecoin. For archivers, simple devices such as laptops or PCs are enough.

SOL cryptocurrency

SOL is the internal cryptocurrency of the project. It is used to pay transaction fees on the Solana blockchain and smart contract transactions. It is also planned to use SOL to vote on project changes in the future.

SOL is a popular staking coin. Unlike other PoS cryptocurrencies, you do not need to block the minimum stake to be a validator on the Solana blockchain. But the more coins in the stake, the greater the profitability, and also the higher the chances of becoming a validator-leader. Also, coins can be provided to one of the 1,342 validators – then the yield will be higher. You can stake through a native or third-party crypto wallet, for example, Ledger.

Now the average staking yield is about 6% per annum. The rate can be higher if you stake coins through the exchange. For example, the profitability of SOL staking on Binance depends on the freeze period and the size of the stake, and ranges from 24.5% to 43.8% per annum.

SOL trading started in April last year. During this time, the price of the coin has grown 88 times – from $ 0.77 to $ 72. Now the cryptocurrency is in the top 10 digital assets in terms of capitalization – $ 21.2 billion.

Last year, the coin was not in great demand among investors – its price ranged from $ 0.5 to $ 4.8. The growth was boosted by the news that the popular crypto derivatives exchange FTX has launched the Serum decentralized exchange on the Solana blockchain.

As a result, from the beginning of the year, a rapid SOL rally began – from January to May, the coin’s price grew from $ 1.84 to $ 55.9. After May 18, following the fall of bitcoin and the entire crypto market, the asset fell by half in just a few days, after which two months unsuccessfully tried to go beyond the $ 40 mark.

A new rally began on July 20 after reaching a local low of $ 23.49 – also along with the growth of bitcoin and the entire market. Over the past month, the coin has grown 2.6 times – from $ 25.77 to $ 72.74.

Reasons for the current SOL rally

The current rally started with the overall growth of the crypto market. Also, the rise in SOL quotes was facilitated by the fact that by mid-August the growth of other popular cryptocurrencies had slowed down, and investors switched to large, but undervalued projects, which lagged behind the leaders in terms of growth rates. So, along with SOL, XRP, ADA and DOGE have been growing well in recent weeks.

The SOL rally also has objective factors:

  • At the end of July, Solana Labs sponsored the Lollapalooza Music Festival;
  • On August 4, the Star Atlas metaverse launched the Galatic Marketplace, an NFT marketplace on the Solana blockchain;
  • On August 9, Wormhole (translated as “Wormhole”) was launched – a decentralized protocol bridge between Solana and other leading DeFi projects, including Terra, Ethereum and Binance Smart Chain;
  • On August 12, Mango Markets, a spot markets, lending and perpetual futures platform built on top of Solana, raised $ 70.46 million in a token sale. Mango Markets receives liquidity from its own pools and the Serum decentralized exchange, also powered by Solana;
  • On August 15, a new NFT project, Degenerate Ape Academy, was launched on the Solana blockchain. A collection of 10,000 unique cartoon monkeys sold out in just eight minutes on the Solanart marketplace. Now monkeys are only available on the secondary market, for example, on the OpenSea NFT marketplace. The highest price per character already exceeds SOL 100,000 – over $ 6.8 million at current prices.

Degenerate Ape Examples on OpenSea

Solana Perspective

Solana is a promising project that attracts the attention of both partner companies and investors. Solana is suitable for resource-intensive systems and applications focused on a large number of users and transactions: exchanges, marketplaces, file storages.

The alpha version of the network has not yet been launched, but the project is already in the top 10 in terms of capitalization – this is an excellent indicator.

Solana doesn’t have a clear roadmap right now. In March, Anatoly Yakovenko noted in an interview that almost everything that could go wrong with the development of the project went wrong. The project team has an ambitious goal of attracting 1 billion users and is confident that Solana can handle this workload.

Among the immediate technical goals is to reduce the block generation time to just 80ms, and the trading timeframe (the timeline for displaying stock quotes) on the DEX is only 1ms (for comparison, the smallest Binance trading timeframe is 1 minute). Yakovenko also noted that when DEXs become more efficient than centralized exchanges, the latter will switch to using a decentralized blockchain, which provides this higher efficiency.

But having the most innovative technologies is not everything in the crypto sector. Solana’s cloudless future is far from guaranteed. Even with all its advantages, the project is unlikely to move Ethereum from the throne of the king of tokenization. Moreover, competitors, for example, Algorand, Cardano or Polkadot, are stepping on his heels and have already launched mainnets.

Time will tell whether Solana will be able to solve the scalability trilemma and attract the sought-after billion users to its ecosystem.

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