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What is Solana: How Does It Work

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15.12.2023
7min.
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What is Solana and How Does it Work

Solana is a coin with a unique history. If you follow the news of the crypto market, you have probably heard about it. And depending on at what point you learned about Solana, your opinion about it can be very different. The project has experienced a meteoric rise and a deafening fall but has remained an important participant in the blockchain market. What is Solana, how it works, what is Solana used for, and why is it loved and hated — these are the questions we are going to answer today.

Solana explained

Solana is a high-performance, open-source blockchain platform designed to support decentralized applications and projects. Solana platform is similar to Ethereum in the sense that it enables developers to build applications on top of its blockchain, but it distinguishes itself with a focus on providing fast, secure, and scalable infrastructure. Ethereum has problems with at least the first two points.

Key to Solana's design is its innovative Proof of History (PoH) consensus mechanism. Unlike traditional blockchain systems that require validators to communicate frequently to confirm transactions, PoH allows it to keep track of the order of transactions independently, providing a verifiable timestamp that helps improve efficiency and throughput.

How does Solana work

Imagine you're in a giant game of musical chairs with hundreds of people, and everyone needs to agree on the order of events — who sat down first, who was left standing, etc. The traditional blockchain method would be like asking everyone to stop and confirm each step together, which would be very time-consuming. Solana's approach, on the other hand, is like having a clock and video camera in the room that everyone can independently check to see when things happened.

This breakthrough in speed and efficiency allows Solana to process around 65,000 transactions per second, significantly more than many other Layer-1 blockchains. For example, Ethereum processes around 30 transactions per second, and Tron processes around 2000.

Discover official sources to learn more:

Who created Solana

Solana was created by Anatoly Yakovenko, who has a background in distributed systems and compression algorithms at Dropbox.

Solana’s platform and protocol were then developed by a software company called Solana Labs, co-founded by Yakovenko himself, Greg Fitzgerald, and Stephen Akridge. They brought on a team of highly experienced developers with backgrounds in companies like Qualcomm, Intel, Google, and Microsoft.

What makes Solana so special

The main thing making Solana special is the Proof of History (PoH) consensus. This is the primary component of the mechanism. PoH allows for greater scalability by creating a historical record proving that an event has occurred at a specific time. This is unlike other blockchains, where every node has to process every transaction, which can slow down transaction speed as the number of nodes increases.

What is Proof of History, and how does Solana work with it

Proof of History (PoH) is a consensus algorithm invented by Solana that introduces a new dimension to blockchain systems — time. It allows for greater scalability and efficiency compared to traditional consensus methods.

In a typical blockchain, determining the order of transactions is a significant part of the consensus process. This process often requires extensive communication between nodes, which can slow down the overall system. Proof of History seeks to address this by providing a cryptographically secure way to track the time and sequence of events without the need for constant communication between nodes.

Here's a brief overview of Solana’s work:

Creation of a historical record. The central element of PoH is a sequential record where every event that occurs is hashed, and the timestamp is cryptographically stamped on each hash. This record acts as a kind of "clock" for the system.

Hash functions and timestamps. A hash function takes an input and returns a fixed-size string of bytes. Solana's PoH uses a specific hash function to process transactions and state transitions. The output hash of one event becomes part of the input to the hash of the next event, creating a linked sequence. This sequence is then mixed with the current "timestamp," which is represented by the total number of hashes since the start of the chain.

Verifying the sequence. The sequence of hashes created by this process serves as proof of the time that has passed during the record's creation. Since altering any part of the sequence would require redoing all the subsequent hashes, the sequence effectively becomes an immutable record of history. Nodes can independently verify the sequence of events without trusting or coordinating with other nodes.

This method of keeping track of events allows Solana to process transactions much faster than traditional blockchains, achieving a high throughput of tens of thousands of transactions per second. However, it's worth noting that, like all technological innovations, PoH also has its own set of challenges and trade-offs, including the need for a reliable source of time for the initial "timestamp" and the potential for the system to be manipulated by a malicious majority of validators.

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What blockchain is Solana on?

Solana is a high-speed Layer-1 blockchain. This means that it uses its own blockchain called simply “Solana”, and has its own native token, also called Solana (SOL). However, SOL is also available on some other chains.

Solana Proof-of-Stake

Besides Proof of History (PoH), Solana also incorporates a mechanism known as Proof of Stake (PoS). This may be confusing: “Is Solana Proof-of-Stake or Proof-of-History” but it works properly.

While PoH provides a way to keep track of time and order of events, PoS is used as the underlying consensus algorithm to secure the network and validate the transactions and the order of blocks decided by PoH.

In Solana’s Proof of Stake system, validators, sometimes referred to as nodes, participate in the process of validating blocks of transactions and maintaining the network's security. They do this by staking their own tokens as collateral. The more tokens a validator stakes, the higher their chance of being chosen to create the next block and earn rewards.

Solana vs. Ethereum

Ethereum and Solana are both blockchain platforms that offer smart contract functionality and decentralized applications (dApps). They are very similar in their nature and philosophy but very different technologically. In early 2020, Solana was called the “Ethereum killer”, but today, the crypto community is not as optimistic as before. Why? We will talk about this later in this article. Now, let’s compare the two blockchains.

Ethereum is the second-largest cryptocurrency by market capitalization after Bitcoin. It originally used a proof-of-work (PoW) consensus mechanism that requires miners to solve complex mathematical problems to validate transactions. Today, it uses proof-of-stake (PoS).

Solana platform uses a proof-of-stake (PoS) and proof-of-history (PoH) at the same time. It is designed to be more scalable than Ethereum and can process transactions faster and cheaper than Ethereum. However, it is less secure than Ethereum due to its less decentralized network.

Let’s talk numbers. Ethereum’s transaction speed is around 15 transactions per second (tps), while Solana can process up to 36,000 tps. However, Ethereum is more adapted and stable, and Solana faced several outages lasting for hours (sometimes more than 10 hours).

In terms of popularity, the Ethereum coin has a larger market capitalization than SOL. Ethereum currently stands at a market cap of $222B, while Solana is at $7.9B. If you look at the SOL chart, you will see that not only has the coin not “caught up with ETH yet”, but its capitalization has also fallen heavily in 2022. From April 2022 to April 2023, SOL lost more than 80% (from $44.5 billion to just $8.5 billion). For comparison, Ethereum fell from $360 billion to $220 billion over the same period, that is, by less than 40%.

Why has SOL's market cap fallen so much? The most interesting part begins here.

History of Solana

Once upon a time, there was a cryptocurrency called Solana, or $SOL. At the height of its fame, Solana had thousands of developers working with it, and it was supported by industry leaders, including the CEO of the largest crypto exchange.

However, the early days were challenging. Like any new technology in a complex field, Solana had to fight for recognition and acceptance. Despite the groundbreaking technology, it remained in the shadow of more established blockchains like Ethereum and Bitcoin.

And then, the NFT fever started, and this was Solana's moment to shine. The blockchain's speed and scalability were its golden tickets. As the demand for DeFi applications and NFTs grew, the limitations of existing blockchains became apparent, and developers started looking for alternatives. And there it was, Solana, offering a solution to these scalability issues, gained popularity quickly and became one of the top coins on the market.

But in fact, it all started with the lie. The Solana team claimed that the total circulating supply of $SOL was 8.2 million SOL in April 2020 (one month after the launch). However, an independent third party discovered a wallet holding an additional 13 million tokens. It turned out that 11.3 million of these tokens were lent to a "market maker", which was later revealed to be Alameda Research & FTX, represented by Sam and Caroline.

By the way, Sam Bankman-Fried is the crypto exchange CEO mentioned above. When it all started, he had a reputation as a genius in the world of finance and blockchain, and the FTX exchange quickly gained popularity. The support of such a big figure and platform was very important to Solana, and Sam Bankman-Fried was even mentioned among the team. However, in 2022 it turned out that FTX was a scam, and Sam was arrested. The blast wave from the FTX destruction also affected Solana, which was standing so close. But this case was not the only deception. Confidence in the project was declining, as well as the price and capitalization of SOL.

In 2021, the second lie, which could be called the "biggest DeFi coin," unfolded. At the time, the main Solana protocol was the Saber Protocol, and with the rising popularity of decentralized finance (DeFi), the Total Value Locked (TVL) became a crucial metric for investors. Exploiting this, the Macalinao brothers, allegedly orchestrators of the deception, created 11 fake identities of independent developers working on various projects. Their interconnected web of protocols led to billions of dollars being double-counted as TVL on Solana, accounting for a staggering 70% of SOL's TVL at its peak.

This grand deception was further fueled by brilliant marketing, hyped by the cryptocurrency community, and supported by venture capitalists. The result? SOL's price skyrocketed to over $250 in November 2021, drawing attention from investors worldwide.

But the lies didn't stop at TVL. Solana also inflated other key metrics, such as Transactions Per Second (TPS), Transaction Counts, and Developer Activity. Similar to how some traditional companies manipulate financial metrics, the platform used adjusted TPS metrics, where the real TPS was shown in pink, while the rest were validator votes. Transaction counts were similarly inflated, including validator votes in the count.

However, the truth eventually caught up. By the summer of 2022, the DeFi world became aware of the deceit. The house of cards started to crumble, and Solana's once-pristine reputation was tarnished. The lie exposed Solana's true character, leaving many disillusioned. A thread by @Justin_Bons on Twitter shed light on this deception.

The fall of Solana continued with another issue — the misrepresentation of developer activity. The team claimed to have 2053 total active developers on projects with integration, with 1654 focusing exclusively on Solana and 120 full-time active developers. However, the revised data showed that Solana had only 72 active developers.

Furthermore, Solana's vibrant NFT scene suffered a blow. At the end of 2022, the two largest NFT collections migrated to other blockchains like MATIC and ETH. This departure carries significance, underscoring the challenges.

So this is how Solana came to where it is now. Blockchain had the potential to become an equivalent alternative to Ethereum or even to supplant it, but the permanent lies and connections with FTX have taken their toll.

Now, the story shifts to the present. Solana's rise and fall serve as a cautionary tale about the dangers of lies, inflated metrics, and the consequences they bring. As the cryptocurrency landscape evolves, it is essential to separate truth from deception, scrutinize the claims, and question the numbers. Only then we can find our way forward in this ever-changing world of cryptocurrencies.

Is Solana worth it: the benefits and downsides of Solana

So what do we have for 2023? What is Solana now?

Solana is still a popular and powerful blockchain network. What is Solana used for? It is still used today for the transfer of cryptocurrencies and, in particular, NFTs. Today it is the second most popular blockchain for NFTs after Ethereum. The technical side keeps strength, and the team continues to improve this network.

As for the downsides, this is primarily the ruined reputation of the company. The project was caught lying, and even if Solana becomes completely honest and transparent, the reputational stain will continue to prevent the project from developing. In addition, Solana has experienced a number of outages and congestion issues, which have led to frustration among users and investors. For example, in February 2023, the network went down for almost 20 hours following a network upgrade.

Investing in Solana in 2024

Despite the strong price drop over the past year, at the time of writing this review, SOL is still in the TOP-10 cryptocurrencies by capitalization. Whether or not to invest in this coin depends on whether you believe in its future in the long term. If so, this could be a great "buy deep" deal. If not, then no.

Data as for December 2023

  • How many Solana coins are there: 564,874,263 SOL
  • Circulating supply: 427,635,831 SOL
  • Market cap: $33,2B
  • All-time high: $260 (November 6, 2021)
  • All-time low: $0.5 (May 11, 2020)
  • Current price: $77.77

Track SOL on Coinmarketcap. Trade SOL on WhiteSwap.

Conclusion

Solana… What is it? Like a young pop star, it quickly soared to the top of Olympus and fell just as quickly in a few years. In 2020, it was called the “Ethereum killer”, and today the project has already managed to lose a significant share of investments, team, and reputation. However, the Solana blockchain is still good and is still widely used (especially in the NFT space). So the story doesn't end there. The project can still surprise us!

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