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Crypto Banter8 months
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Clogged networks and exorbitant transaction fees as high as a daily wage have caused mass migration across chains as crypto users seek a viable solution. Until now, all migration options lacked something, whether it is speed, decentralization, and in some cases even a working product.

Solana – Research Report

Clogged networks and exorbitant transaction fees as high as a daily wage have caused mass migration across chains as crypto users seek a viable solution. Until now, all migration options lacked something, whether it is speed, decentralization, and in some cases even a working product.

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Solana – Research Report

Solana has created unique technology that allows for over 50,000 transactions per second (TPS) and costs of less than a penny per transaction, all while keeping the network secure and decentralized. Combined with large influential backers, it is our thesis that Solana adoption is about to explode.

GIVEN THAT SOLANA IS NOW ALSO ENTERING A PERIOD OF SOCIAL TRACTION, WE RECOMMEND BUYING THE $SOL TOKEN AS IT IS A FUNDAMENTAL MUST-HAVE FOR EVERY PORTFOLIO

Introduction

With the rapid rise of decentralized finance (DeFi) and non-fungible tokens (NFTs), smart contract blockchains such as Ethereum and Binance Smart Chain (BSC) have seen explosive growth in the number of users, transactions, funding and decentralized application (dApp) development. With over $100 billion now locked in DeFi and $2 billion in NFT sales in the first quarter of 2021 alone, even prominent public figures such as Elon Musk, Mark Cuban and Gary Vaynerchuk (aka Gary Vee) are vocal in their enthusiasm.

Elon musk tweet

Image 1: Elon Musk’s tweet on DeFi on 25 April 2021 (source https://twitter.com/elonmusk/status/1375031060753346564)

The problem

The increase in adoption has exposed the cracks in Ethereum, the largest of the smart contract blockchains. High gas fees and slow transaction times (15 transactions per second) plague the network, which is currently undergoing an upgrade that may take several years to complete. Blockchain adoption and development is showing little patience as developers are opting to migrate to faster, cheaper options.

Stemming from the above, BSC has seen rapid adoption over the past three months. The fees on BSC are only a couple of cents and the transactions per second have risen from about 17 to more than 100.

daily active addresses

Image 2: Logarithmic growth of daily active addresses: BSC has overtaken Ethereum 1 (Data source: bscscan.com and etherscan.io)

WITH THIS IN MIND, SHOULDN’T BSC BE LISTED UNDER THE SOLUTION?

While it is a good short-term solution, BSC gives up a lot of Ethereum’s security and decentralization in exchange for fast speed and low costs.

Scalability Trilemma

Image 3: The trilemma (Source: Twitter user @Econoar)

The solution

Solana allows for 50,000 transactions per second (TPS), which cost less than a penny per transaction and it does this in a decentralized and secure environment.

The cost of a Solana transaction is around 1/50th of a cent. This means that for $200, the network processes 1m transactions. The equivalent on Ethereum would cost over $50m.

How do they do it?

The biggest cause of delay in current blockchains is agreeing on the ‘time’ of the network and when the transactions took place.

Since most blockchains do not have a ‘clock’, a large part of the validation process is in agreeing on what happened first. Nodes have to communicate with each other constantly to check the time of the chain and confirm the state of the network.

In reaction to this, Solana created a unique technology called Proof of History. In this Proof of Stake consensus mechanism, validators rely on a decentralized built-in clock, so that nodes no longer have to communicate with each other constantly to check the time of the network.

Each node knows when it is allowed to produce a block by the time, rather than knowing it by communicating with the rest of the nodes. This allows nodes to start processing transactions before it is their turn to produce their block.

The Solana clock ticks every 400 milliseconds, so blocks are processed every 400 milliseconds. This makes the blockchain extremely fast.

Image 4: Every 400 milliseconds (!) transactions are collected and a block is produced, each being labelled with a hash and the ‘time’ on the chain. (https://www.youtube.com/watch?v=rywOYfGu4EA)

Project fundamentals

Solana has been building since 2017 and has recently been getting more attention in the space. We have listed some of the reasons why Solana is fundamentally strong.

Unique technology

Besides being the first chain with time built into its validator nodes, Solana has some technical features that make it stand out from the rest.

1. Sealevel identifies non-overlapping transactions taking place and allows them to be completed simultaneously rather than independently.

2. Turbine allows its blocks to be divided up into smaller pieces before being distributed on the network, rather than sending the whole packet to each validator node.

Unique Applications

The 50,000 TPS and incredibly cheap transactions do not only make the existing use cases better, but they also create new possibilities. One example of this is Serum, a FTX-backed decentralized exchange (DEX). Unlike Ethereum DEXs, which rely strongly on automated market maker (AMM) technology, Serum deploys a DEX with limit order books. Because the order books can continuously be updated with little cost, it gives users the beloved centralized exchange (CEX) order book experience, but decentralized.

serum cex

Image 5: Serum’s DEX interface that looks just like a CEX. All made possible by Solana’s unique tech. (Source: https://www.facebook.com/SerumDex/)

Serum is a DEX with an order book that makes it feel like a centralized exchange. This is only possible because Solana allows for extremely cheap transactions, which allow for the creation of an order book.

Solana adoption

THERE ARE ALREADY OVER 250 PROJECTS BUILDING, OVER 750 NODES ACTIVELY SECURING THE NETWORK AND OVER 520,000 UNIQUE SOLANA ADDRESSES.

Although not a lot compared to Ethereum or BSC, it should be noted that userbases grow exponentially, so once it starts getting a network effect it should pick up pace rapidly.

The exceptionally high caliber of projects building on Solana should also give adoption a huge boost. In addition to Serum, which we have already discussed, there are a bunch of promising projects we are looking at such as:

MAPS.ME

Maps.me is an existing mobile application with 140 million (!) users around the world. It is used as a mapping and routing service, but with the next big update it will start offering DeFi services inside of its app. Maps 2.0 will be entirely built on the Solana blockchain and has already partnered with Sam Bankman-Fried (CEO of FTX) to use Serum for its DeFi services. This has the potential to immediately onboard 140 million people to the Solana ecosystem.

STAR ATLAS

Blockchain gaming is a much-discussed development to onboard the masses. No existing chain has been a capable platform for it, except for Solana. The team behind Star Atlas is building a massive online sci-fi game with a built-in NFT marketplace. The release of Star Atlas could further increase the adoption to the Solana chain, as gamers and crypto users around the world come in to try out this innovative game.

AUDIUS

Audius is an audio streaming platform for music and podcasts that directly connects the listeners to the creators, allowing for direct distribution without the fees of middlemen. Audius has rapidly grown to 1 million+ monthly listeners and needed a chain that could handle this throughput. Solana was the only viable solution, and the project quickly started the migration.

VARIOUS INTEGRATIONS

Tether, USDC and Terra have started doing transactions on the Solana chain. Furthermore, top oracles such as Chainlink and Band Protocol have already been working on being integrable into the Solana chain. These big projects choosing to integrate with Solana show confidence that Solana is here to stay.

They also show that in Solana there is finally a chain that can handle dApps that have the potential to grow to hundreds of millions of users.

Solana Ecosystem

Image 6: Solana is booming: these are the projects already in the ecosystem.

(Source: https://twitter.com/solanians_/status/1388434639690211331)

The team

Solana was founded by a strong team with backgrounds in working for Qualcomm, Google, Microsoft, Dropbox and Apple. Some of its most prominent team members are:

Anatoly Yakovenko: Anatoly is the founder and CEO of Solana. For over a decade he was a lead developer at Qualcomm, one of the biggest software developers in the world. He also spent some time as a lead developer at Dropbox before moving on to start Solana.

Greg Fitzgerald: Greg is the co-founder, principal architect and is active as the CTO of Solana. He has also spent over a decade working at Qualcomm before starting Solana.

Alan Yu: Alan is another co-founder of Solana and functions as the head of strategy. He worked at the Google Sales & Marketing department for 10 years. Furthermore, Alan has been active in crypto for many years, giving him an edge by connecting his marketing experience to his crypto experience.

PROMINENT BACKERS AND SUPPORTERS

Sam Bankman-Fried, founder and CEO of FTX, is a big supporter of Solana and has committed to the Solana chain for his decentralized exchange Serum.

Image 7: Screenshot taken from a thread of tweets by Sam Bankman-fried on DeFi and Serum (source https://twitter.com/SBF_Alameda/status/1287661237870837760)

There are also various venture capital funds that have invested in Solana

Rockaway Blockchain Fund, the blockchain/crypto department of one of Europe’s largest venture capital (VC) funds, Rockaway Capital, and Reciprocal Ventures were two of the VC funds that believed in Solana early on and partook in its seed investment rounds.

Over time, more and more funds have started building Solana positions. Right now, almost all of the top VC funds – such as Multicoin Capital, Alameda Research and Hashed – hold a significant amount of Solana.

The token

The SOL token is the currency of the Solana chain, similar to how ETH is the currency of the Ethereum chain. The SOL token is used for:

Paying for transactions and contract interactions

Similar to ETH and BNB, you need SOL to send tokens on the network as well as to interact with the ecosystem’s dApps.

Staking

Node validators have to stake SOL for the right to be a node. The more SOL a node stakes, the larger is the chance that the node will be chosen to create the next block. Similar to the previously discussed Thorchain, nodes’ stakes are slashed if they do not behave accordingly. This is to ensure that it is always in the node’s best interest to act in the best interest of the Solana ecosystem itself. Individuals can ‘back’ a certain node by staking towards it and will receive staking rewards for doing so.

Governance

To fully decentralize the network in the future, there will be built-in governance voting for which you will need SOL tokens.

Over 50% of the total supply is allocated to early investors, team members and advisors. As can be seen below, a massive part of this was unlocked at the beginning of the year. Price barely reacted to this, which suggests that these whales are continuing to hold.

Image 8: SOL token release schedule (source https://research.binance.com/en/projects/solana)

Why now?

SOLANA HAS UNPARALLELED TECHNOLOGY AND FUNDAMENTALS. WE ARE NOW ENTERING A PERIOD OF ADOPTION AND SOCIAL TRACTION. HAVING SEEN THIS CYCLE BEFORE, WE BELIEVE THAT DEVELOPMENT, ADOPTION AND THE PRICE OF SOLANA ARE ABOUT TO EXPLODE.

Should you be buying?

We believe Solana under a US$20 billion market cap is a buy, as we expect the market cap to go to at least $40 billion over the next weeks to months. Solana can be compared to Cardano in many ways; therefore we believe that if your thesis is that the market will continue to run, then at the current market cap of US$11.5 billion, you should be accumulating aggressively.

Risks

There are some risks involved with Solana that you should be aware of before buying.

A lot of early investors still hold a majority of the supply. This comes with the risk of an immense dump on the market if these holders eventually decide to take their profits.

Furthermore, the project is still in mainnet beta, which means the project is still quite early and might be more prone to exploits than a more time-tested chain. In addition to this, on the current mainnet beta the TPS metric is ‘only’ about 1,000, as compared to the promise of 50,000. While it is promised to go up when the full mainnet launches and the number of nodes go up, this remains to be seen.

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