Reassessing Solana
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It’s been a small while since I’ve written up a deep dive.
I will start this by saying that I have never been a particularly big fan of Solana. I have been skeptical of the design tradeoffs being made in the past and the instability of the chain has coloured my opinion.
That being said, I’m a huge believer in constantly reassessing bias.
There have been a number of recent developments that have forced me to take pause and look again at Solana.
I’m not going to cover everything. I’d say this is a high-level look at what’s going on and I’ve definitely missed a ton of stuff happening.
What’s to come?
Solana update 1.10
Solana adoption
Solana DeFi
NFTs
Decentralisation
Solana and Ethereum philosophies
Neon
Saga Phone and SMS
Anatoly
Solana stores
Concluding thoughts ($SOL)
Solana update 1.10
We’ve all become accustomed to enjoying the memes when Solana goes down.
It’s happened many times. The chain has gone down four times in its history. There are obviously serious knock on effects when a blockchain halts and DeFi users in particular can end up in very difficult positions.
That being said, I do have respect for the resilience on show from the Solana devs. The blockchain halting must be tremendously stressful, but they keep on writing that code and have come up with solutions to improve stability. Solana’s 1.10 has helped performance significantly.
You can see the impact on performance here. TPS is consistently back above 2.4k and there have been no chain incidents since the update.
The v1.10 update added various stability and performance improvements to address the network congestion. The series introduced QUIC and Quality of Service (Qos) packets by stake weight and fee prioritization. You can read a great summary of these technical updates here.
The v1.10 series continues to roll out slowly, and the subsequent release series, v1.11, will focus on making QUIC default and optimizing the other features included in the v1.10 series.
In terms of the longer term vision, it’s summed up here pretty succinctly:
Solana adoption
Solana is the only non-EVM chain, which has seen meaningful adoption. That is some achievement when you take into account the network effects of the EVM.
Daily transactions have been steadily rising in 2022. This chart doesn’t include the voting transactions that are used for consensus.
Of course the number isn’t a fair comparison, as transactions on Solana are so cheap, but outside of the recent spike, daily transactions on Ethereum were trending downwards in 2022.
This is also partially because rollups are maturing and some of that transaction count has been moving to L2s. There is a steady uptrend on Arbitrum over the last nine months.
Daily active addresses are sitting just under 800k currently. The 7D moving average is actually the highest of any chain right now. Very impressive. Of course, unique addresses doesn’t necessarily mean unique users.
Because Solana is non-EVM it has, in theory, had a much harder job attracting money from other chains. It has currently taken a huge hit in TVL like every chain, mostly due to the price of SOL having moved down so much. The amount of SOL locked in DeFi did increase by 17.5% over the last quarter.
TVL in SOL terms has been steadily moving up over the last year.
The number of unique fee payers has also been steadily climbing.
The annualised total revenue based on the last 30 days is just over $17.72 million, which is obviously significantly less than Ethereum’s $1.37B.
This is where most people, me included, start to stratch our heads and ask how does this make sense?
The SOL price so far has been determined by future speculation that Solana will get a tremendous amount of adoption and then the cheap fees will rack up to something meaningful.
The introduction of fee markets is a major change for Solana and this should see an increase in fees generated. A user is able to attach an optional fee to their transaction to get it prioritized, with 50% of the fee going to the validator and 50% being burned.
Rather than creating a global fee market, where transactions compete globally to be included in the next block, like on Ethereum, Solana will have a local fee market which will result in spiking transaction fees solely for local states.
For example, a contested liquidation where bots outbid each other with higher fees should not significantly change fees for any other transaction like swaps or NFT purchases.
In reality, competition for blockspace will likely cause a net-increase fees globally.
This is a fantastic write-up on Solana in general, but also explains how Solana’s fee markets will work in much more detail:
This is also a great recent thread analysing fee markets on Solana:
Solana DeFi
I’m looking at a surface level here, but what looked like promising DeFi useage, actually turned out to be Stepn using Orca as their integrated DEX.
After Stepn moved away from Orca this happened:
Here is a recent pull from Dune:
We can see Stepn is still dominating daily DEX useage (presumably people are having to run marathons every day in order to make their money back).
But, if we ignore Stepn, we get a number of around 30k DEX users on Solana. For comparison here are the average number of DEX users on Polygon and Ethereum.
Solana’s number is higher than I would have guessed if I had just taken a wild stab. Especially as Solana DeFi has had serious challenges and problems over the last six months. From mainnet downtime, oracle failures to a DeFi platform threatening to take control of a major whale’s account to stop a bad debt situation.
Pyth continues to be the most widely used oracle on Solana and the most used program in general. Chainlink is now available for developers to use, but there doesn’t seem to have been much of a shift yet. I would welcome any commentary on why this might be the case, as Pyth has shown itself to be unreliable.
NFTs
This is the category where Solana really shines and is posting some very impressive numbers.
Despite OpenSea launching support for SOL NFTs they have taken away no marketshare from Magic Eden.
This is about a month old now, but it shows how the Solana NFT market has managed to rival Ethereum, at least in daily number of unique buyers. The highest value NFTs still remain on Ethereum.
June saw the biggest month for daily minted NFTs on Solana and July has been strong too.
The top 10 NFT collection by total floor value is still relatively cheap versus the top 10 on ETH. I’m still unsure how innovative some of these collections actually are.
Decentralisation
This is where most people think Solana falls down. Expensive hardware and the amount of SOL staked which is needed to be profitable makes it quite a large barrier for anyone wanting to become a validator.
However, the validator number has been growing very steadily.
The above is a great deep dive and well worth reading, but the TLDR is:
Solana has the most active validators of almost any Proof of Stake blockchain. Ethereum has 8,417 nodes and 409k validators, but some node operators will run many validators, so there’s uncertainty as to how many node operators there are…
Almost half of Solana’s validators are located in the US and Germany, which isn’t great (geographic concentration of nodes is a problem for most chains).
Solana validators can begin staking with 1 SOL token, but a validator must constantly participate in voting transactions, with transaction fees costing about 1.1 SOL per day.
For a validator to break even at a 10% commission, they need either 45k of SOL staked by 3rd parties (~$2m), or 5k of SOL self-staked.
In order to help validators achieve profitability, the Solana Foundation has created the delegation program, whereby 80% of the Foundation’s treasury (100m SOL) is staked to validators.
Right now Solana has the highest Nakamoto coefficient in the industry.
Solana and Ethereum have different philosophies
Solana’s philosophy of move fast and sometimes break things is in contrast to Ethereum’s mantra of slow and steady wins the race.
Generally speaking, I am in the camp of “decentralisation is important”, which is the the core principle of Ethereum that will never be compromised.
But, we all know this approach has had its drawbacks and has hindered regular users and the mass adoption of the chain.
Nathan wrote this interesting perspective on why Solana is genuine competition.
The TLDR is that everything happening on Solana is focused on making everything easy for regular users, like your grandma. Whilst arguably Ethereum devs have not prioritised focusing on the regular user.
Regular users = mass adoption
I’m not criticising Ethereum here, but it would be ignorant to not recognise what Solana is doing well and learn from it.
I wrote this paragraph a while ago and am just going to make the observation that this tweet suggests a shift in Ethereum dev attitude:
The clear focus on UI and easy onboarding for users (Phantom wallet) has also been a notable difference between Solana and ETH.
Neon
I expected this to roll out some time ago and am still unsure when it will launch.
Neon EVM, now called Neon, is an Ethereum Virtual Machine on Solana, which brings the benefits of Solana to Ethereum smart contracts. More technically, Neon is a smart contract created using Rust on the Solana network that allows “Ethereum-like transactions” to be processed on Solana with Ethereum rulesets.
Neon allows some of the best features and advantages facilitated by Solana’s technology stack and markets to be brought over to the Ethereum ecosystem. For example, Neon allows Ethereum assets, transactions, and smart contracts to be executed in parallel, capitalising upon Solana’s parallelisation technologies such as Sealevel.
A few benefits Neon brings to Solana:
Smart contract interoperability between two of the biggest layer 1s
Allows developers to port existing ETH dApps over to Solana, should they want to
Brings non-compatible coding languages to Solana
No reconfiguration or alterations required to deploy smart contracts
Increased network effects
Saga Phone and SMS
This was a surprise for everyone judging by the reaction on CT. Naturally, we had the full spectrum of reactions. Yes, developing a phone seems kind of mad when the chain still has problems to solve, but if Solana genuinely seeks mass adoption it could be the move that sparks the revolution. It fits in with Solana’s approach of taking a different path to any other L1.
It’s worth reading the whole thread, but here’s the TLDR:
Another good take from Pickle. The r/r could be immense here. Making web3 work on mobile is the holy grail and it’s the surest path to adoption.
Java devs enter the room.
Here’s what Anatoly said about SMS on the most recent Unchained podcast where he featured:
“I think what the space needs is Apple and Google to really open up to crypto. That will really accelerate everything. And the only way that is going to happen is if someone builds an alternative model and shows it will work.”
A few more quotes:
We don’t want this to be like the previous crypto phones. There’s a fundamental difference with sticking the signing infrastructure inside the high level trusted elements so the operating system Android cannot steal your keys. We need to create an environment where Phantom doesn’t know your seed phrase.
“All the stuff people dream about with crypto and programmable money is now possible because the software that you are interacting with never has access to the seed phrase. That level of security is necessary.
Even if we fail commercially, but we change how Google and Apple treat web3 then that is a win.”
It’s obvious that the odds are still stacked against Solana pulling this off. However, I salute the bravery and effort in taking on this challenge and the beneficial effect it could have for the whole of web3.
Anatoly
If a crypto founder inspires a cult it usually means the chart is about to flip upside down.
Anatoly seems to inspire respect, but a cult hasn’t organised around him (I think).
The first time I really listened to Anatoly I thought he came across very measured, humble and laser focused.
I have never seen him react negatively to a single piece of FUD, despite a fairly constant stream of Twitter attacks. I have seen many examples of him reacting rationally and logically to criticism. I haven’t gone through the history of everything he as ever written, but this is just my impression from following him casually on Twitter. It’s a good sign, as we all know crypto founders with hubris have not done well in the last year.
Here is an example of him responding to some recent criticism:
Solana IRL Store
In another unconventional move, Solana will have a store in New York.
I have seen a lot of derision about this move online, but I think many are missing the point. Not only will Solana be selling a phone, but a physical presence can be massively important for adoption. Normies live in the physical world after all.
Concluding thoughts
I think Solana might be the most contentious blockchain out there today. It really seems to divide opinion, mostly because the chain has halted multiple times and those in the Ethereum camp don’t believe the chain will scale. I previously couldn’t see past their technical problems and figured Solana was just broken.
However, having dug through the data there is just too much happening on Solana to ignore it.
Solana still has plenty of hurdles to overcome in regards to scaling, but this is no different to every other L1.
Anatoly has said Solana’s goal is to improve Solana with each update. They are trying to solve problems that no other L1 is facing right now with the amount of activity happening on their chain. I agree with Polyna, I think Solana can adopt the tech they need overtime in order to keep scaling. But who knows, no blockchain has successfully scaled thus far and that’s why so many people are betting on a few L1s.
Can Solana compete with Ethereum? Well, I think there is already a lot of evidence that it can. Personally, I think there is no reason they both won’t survive and thrive in the future.
The question for investors is whether they value a blockchain and token led by a strong, well funded development foundation or whether they prefer more decentralized leadership with more even token distribution.
I also don’t know when the revenue generated by the network will start to catch up with the SOL market cap. I still think Solana will need tremendous adoption to start generating the revenue required for long term security and this is where I remain skeptical.
But, if you are looking for an alternative L1 bet alongside ETH in your portfolio, then I think Solana makes sense, as it is taking a different path to Ethereum. It’s still 84% off its ATH right now and that puts it in DCA territory for me.
The macro backdrop remains tough, but Solana has maintained a lot of the momentum that it built during the last bullrun and I think there is a high probability that it will do well in the future once market conditions improve.
Plus, it can’t hurt to have Sam in your corner in the long run.
And that’s your alpha.
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.
Thanks for this. I believe in SOL. It is good to see a critique explaining it's flaws and problems while acknowledging SOL's potential. Keep up the good work!
great stuff!