Understanding Solana

Ocular Ventures is an investment fund focused on crypto VC and HF fund investments with a discretionary pocket to invest directly in crypto projects. We are a group of crypto enthusiasts with venture capital and data science background.

We started this newsletter to share our knowledge of the latest blockchain technologies, including infrastructure protocols, DeFi, NFTs, and other dApps which are going to reinvent how things work in web2.0. We hope you will enjoy this newsletter and provide us with valuable feedback.

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Disclaimer: All write-ups in this substack channel are Ocular Ventures’ own opinions, and should not be misconstrued as investment advice or recommendations. Ocular Ventures does not hold positions in the projects discussed in this channel, unless otherwise stated. This content is intended for informational purposes only.

Introduction

Earlier today (on 27 Aug), Solana’s token price reached an all-time high of $83.44, extending its month-long surge to 197%. Solana’s market cap has hit $24 billion, making it the 10th largest cryptocurrency. We can imagine how excited the Solana community is right now.

(Data Source: CoinMarketCap. Price stated per day is based on close price, i.e. latest data in range – UTC time)

The rise in Solana’s price in the past month coincided with a series of news that showcased its growing popularity. First, Mango Markets, a decentralized exchange (DEX) on Solana, successfully raised $70 million in a token sale. Then, TikTok announced its partnership with Audius, a music streaming platform on Solana, to enable artists to port over their music to TikTok. So is Solana the “Ethereum Killer”? In this piece, we will attempt to explain what Solana is, where it is compared to other layer-1 protocols, and what makes the team at Ocular excited about it.

Background of Solana

Solana was founded in late-2017 by Anatoly Yakovenko and Eric Williams as another layer infrastructure protocol. Having observed the workings of Bitcoin and Ethereum, Anatoly and Eric wanted to create a blockchain infrastructure that delivers scalability at a low cost without sacrificing decentralization or censorship resistance. In the process, it seeks to solve the scalability trilemma, which refers to the inherent trade-offs that blockchains face (see image below). If you would like to learn more about Solana’s history, here is a great Acquired podcast with Anatoly.

(Source: Cointelegraph)

To achieve its intended objectives, Solana introduced a new timekeeping system known as Proof of History (PoH), which is used on top of the Proof of Stake (PoS) consensus mechanism. In essence, PoH is a synchronized clock that assigns a timestamp for each transaction and prevents participants from being able to decide the order of transactions that are recorded on the blockchain. To borrow an analogy by Anatoly, PoH transforms the blockchain into a scheduled game, where each participant has a certain amount of time to make their move. If a participant does not take their turn, it is passed on to another participant. Participants are unable to “buy back” their turns.

With the PoH system, alongside 7 other core innovations that Solana has come up with (more details can be found on Solana’s website), Solana has reduced the time and energy needed to build consensus and ensure synchronization in the blockchain. Anatoly himself discusses how Solana’s various innovations work together and acts as one of the most performant blockchains in the market. The key benefits that come with Solana’s features are:

1. Solana’s superiority over other layer-1 solutions in terms of speed, scalability and cost;
2. Rising adoption rates as seen with the growing community; and
3. Use cases that address a wide spectrum of audiences and their needs.

Superior Chain Performance

When comparing Solana with other layer-1 solutions such as ETH1.0, Binance Smart Chain (BSC), Polkadot and Terra, we see below that Solana is faster (i.e. average block time) and more affordable (i.e. average cost per transaction). Putting them together, Solana provides a more scalable solution (i.e. transactions per second), signaling a breakthrough in blockchain technology.

* We note that there are plans to roll out ETH 2.0 soon, and ETH 2.0 promises faster speeds alongside lower costs. As ETH 2.0 is still in its exploratory phase, we have excluded it from the table and used available data as of Aug 2021 for ease of comparison.  

Growing Adoption

The Solana ecosystem has been growing steadily over time, as evidenced by the rising number of validators and nodes on the platform and developers’ activities.

• Validators and nodes. The number of validators on Solana has increased by 54% in the past few months (see chart below). In Jun 2021, Solana also launched the Solana Season Hackathon and there were over 13,000 registrants, with more than 350 projects submitted.

• Developers’ activities. The average number of GitHub commits per week has doubled from 50 in Aug 2020 to 100 in Aug 2021. Solana is a project with one of the most active developers.

• (Data Source: Coin98 Analytics)

In terms of mainstream appeal, the private markets have been investing heavily in Solana. In Jun 2021, Solana completed a $314 million private token sale, making it the fourth-largest fundraising in cryptocurrency history outside of initial coin offerings (ICOs). Separately, five strategic investments funds have set aside a total of $100 million to promote the growth and development of Solana projects within the Chinese region. The funds will also enable the projects to scale and expand to new markets, solidifying Solana’s global reach.

Many individuals are also plugged into the Solana ecosystem. There are about 85,000 members on Telegram, 45,000 followers on Discord and 338,000 followers on Twitter. On Twitter, the number of daily tweets sent out about Solana has been on the rise since the start of 2021. The tone of the tweets has also become increasingly positive.

(Source: The Tie)

Use Cases

There are currently over 400 projects on Solana that span multiple sectors, including decentralized finance (DeFi) and non-fungible tokens (NFTs).

(Source: Coin98 Analytics)

• DeFi. The total value locked (TVL) in Solana’s DeFi ecosystem is around $2.6 billion at the time of writing, a 101% increase from the previous month. The top five DeFi apps on Solana by TVL range from DEX and automated market makers (AMM) to insurance.

• (Source: SolanaProject)
• NFTs. With over 28 (and growing) NFT projects built on Solana, there is a project for everyone. Some projects serve as games for users to play and win unique NFTs (e.g. SOLife and Scallop), while others help to generate new NFT avatars (e.g. Solarians, Sollamas and SolanaMonkeyBusiness). Some projects cater specifically to art pieces (e.g. FRAKT and FROG) or music (e.g. SOLATI and Lollapalooza), while others bridge the gap between all digital and physical NFT assets (e.g. NFT XZBT) or serve as generic marketplaces (e.g. Solanart and Metaplex).

• (Figure 1: Rainbow Wave #9907 – NFT generated by FRAKT; 0.10% rarity)

• (Figure 2: Solarian #93 – NFT generated by Solarians; 1.79% average rarity)
• While the total number of NFT projects on Solana still pales in comparison to Ethereum and BSC (as seen below), it is slowly gaining traction. On 15 Aug, a project called Degenerate Ape Academy was launched on Solana, and its collection of 10,000 unique pictures of cartoon apes was sold out in 8 minutes. The overall trading volume reached almost 96,000 SOL (or $5.9 million) on that day. While the launch was not entirely smooth sailing due to the overwhelming response, this highlights the popularity of NFTs and Solana’s increasingly prominent role in facilitating NFT transactions.

• (Source: Coin98 Analytics)

Tokenomics

Solana’s native gas token is SOL. Currently, there is a circulating supply of 290.8 million SOL, with a total supply of 502.7 million SOL. About 38% of the tokens are for sale, while the rest is distributed amongst the team, foundation and community.

In Solana economics, the main participants are validation-clients. These participants receive protocol-based rewards for contributing to the network and performing state validation. To fairly compensate early validators, Solana has implemented an inflation schedule that offers diminishing rewards as the chain matures. The key parameters are an initial inflation rate of 8%, a dis-inflation rate of 15% and a long-term inflation rate of 1.5% (as depicted below). Solana hopes that this model will provide ample incentive to validators while keeping the token supply in check.

(Source: Solana Documentation)

Future Plans

Looking ahead, Solana will be making further enhancements to its ecosystem to retain its competitive advantage and ensure complementarity with other layer-1 solutions.

Anatoly shared that the next phase of Solana’s development is to onboard a billion users. Solana will tap on the recent capital injection to launch an incubation studio to accelerate the development of decentralized applications and platforms building on Solana, alongside a venture investing arm and trading desk dedicated to the Solana ecosystem. The hope is that one day, there will be a cohort of users who can self-customize platforms to connect and transact with each other, without the need for an intermediary. Solana is making good progress on this front – based on its GitHub repo, the community has completed about 60% of its future milestones.

As Solana’s vision has always been to be a blockchain for all, it is worth noting that Solana does not see itself competing with Ethereum. Instead, it seeks to be a complementary system that brings people together and spurs the entire blockchain ecosystem to iterate its products for greater mass adoption. To this end, Solana has started work on a multi-chain system where it looks to build bridges with alternative layer-1 solutions. Through a program called Wormhole, users can now seamlessly transfer their assets and information from Solana to Ethereum, Terra and BSC (and vice-versa). Wormhole provides a decentralized communication channel that will encourage greater interactions between users of various blockchains and expose Solana to a wider target audience.

Risks and Threats

While there are reasons to be optimistic about Solana’s growth, Solana may also face risks and threats from both internal and external sources.

• Scalability of technology. As Solana is a relatively new protocol running on beta, there may be question marks over the rigor of the technology and its ability to scale. In Dec 2020, the Solana network experienced an outage for about six hours due to a newly discovered bug in the system that prevented it from handling duplicated blocks from the same slot (more details here). While a partial solution was eventually deployed to patch the bug, it highlights that Solana is still a work-in-progress. The network may experience further hiccups along the way as it is being refined and upgraded.
• Differences in opinion. As the Solana ecosystem grows, there is also a risk that differences may arise within the community, leading to internal factions. This was seen with the Bitcoin hard fork in 2017 (which resulted in the creation of Bitcoin Cash), and if Solana were to experience a similar situation, it might derail their plans to scale.
• Regulations. Governments and institutions may resist or even clamp down on blockchains for law enforcement reasons. After all, a 2019 paper estimated that 46% of Bitcoin transactions between Jan 2009 and Apr 2017 were for illegal activities. In 2021, Hong Kong and Singapore have also experienced record levels of cryptocurrency crime, resulting in significant monetary losses.
• New technology. More scalable layer-1 solutions (existing or new), especially the introduction of ETH2.0, may dilute Solana’s value propositions. Though we believe the future will be a co-existence of multiple layer-1 protocols, there is a risk that the majority of developers will build applications on the most scalable chain(s) and accelerate innovation of those chains relative to the less scalable ones.
• Network effect of incumbents. Ethereum and BSC currently have a larger community than Solana in terms of market cap, TVL, number of projects and number of nodes. This, in turn, may provide Ethereum and BSC with network effects, where existing users are likely to stick with the blockchains and new users may be attracted to them given their adoption rates.

Conclusion

Here at Ocular, we will continue to keep a close watch on the above risks and threats. Some of the challenges mentioned are not unique to Solana. The entire blockchain ecosystem will have to come together to put in place the appropriate governance and incentive structures to manage any fears and concerns.

While we know from history that the best technology may not always prevail, we are of the view that Solana has created a superior and defensible infrastructure layer that will encourage others to join the ecosystem based on its merits. Aave, the largest DeFi application by TVL that is currently running on Ethereum, recently shared that it will consider launching on Solana as part of its multi-chain strategy. Power Ledger has also announced that it will be migrating from Ethereum to a Solana-based blockchain.

Furthermore, Solana has established a resilient community that seems determined to develop Solana and ensure that it is featured prominently across various sectors. Existing projects like Serum have shared their roadmaps for growth and many new projects like DeFi Land and Solstarter are slated to launch on Solana soon.

Despite the recent spectacular run, we remain bullish about Solana’s long-term prospects. Solana has made good progress in setting up its ecosystem but has yet to reach the heights of Ethereum or BSC in terms of adoption, indicating significant upside potential. There are potential pitfalls that Solana will have to navigate around, but we believe that Solana is a rising start in the ever-evolving blockchain ecosystem and we are excited to be part of this journey.

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