What is Solana?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Solana is a blockchain that some people think could topple Ethereum, the second-largest cryptocurrency by market cap and the largest one that supports smart contracts. It pitches itself as faster, cheaper, and more future-proof than Ethereum 1.0.

Solana, like all blockchains, has a native currency. Solana’s, like most other cryptocurrencies, takes the same name as its blockchain and is called SOL for short. It is quickly growing and its market cap stands at $24 billion as of this writing, making it the 10th largest cryptocurrency by market capitalization.

Understanding why Solana is so important requires a cursory understanding of the technology behind it. Smart contracts, one of Solana’s biggest features, are self-enforcing bits of computer code that run on blockchains. Blockchains are decentralized ledgers—virtual accounting books that show who owns what—maintained by anonymous networks.

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Smart contracts execute blockchain trades automatically when certain conditions are met. These “If X then Y” conversations can be as diverse as “If the Jets win the game, I’ll pay you $1,000 in crypto” and “If it’s over 50 degrees Celsius today, I’ll pay you “$1,000 in crypto” (OK, not that diverse; smart contracts all revolve around crypto).

Smart contracts are very popular but Ethereum, the biggest smart contract platform that also introduced the concept to blockchains, has become slow since it launched in 2015 and plans to speed it up are slow coming.

Solana, which launched its coin in the spring of 2020, claims to have solved all of Ethereum’s problems and then some. Transactions are cheap and fast, the network appears capable, it’s environmentally friendly and has a healthy community of developers building tools for it.

All the excitement around Solana has been great for its price, which has increased from under a dollar when it launched on April 11, 2020, to highs of $78 on August 20, 2021. It remains to be seen whether Solana will sustain its upward trajectory and become the dominant blockchain, and the competition will play out over the next five years or so.

A major upgrade to Ethereum is on the way and its existing developer-base could remain loyal, unswayed by the perceived advantages of Solana, and the momentum around Solana could fizzle out.

Or other rivals, such as Polkadot or Cardano, could pick up steam and leave Solana in the dust. Of course, the entire crypto market could always buckle and everybody could lose, or the market could support multiple victors as blockchains become more interoperable.

How Solana works

Solana was created by Qualcomm engineer and former Dropbox employee Anatoly Yakovenko. He started working on the project that would later become Solana in 2017. Yakovenko worked with Qualcomm colleague Greg Fitzgerald to start Solana Labs, poaching several more ex-Qualcomm employees in the process.

Solana Labs did well during the Initial Coin Offering boom of 2017, which let crypto projects fundraise millions (and in some cases billions) of dollars for blockchains they hadn’t yet built. Solana raised $25 million during public and private funding rounds.

Yakovenko’s innovation was something called proof-of-history, an implementation of a variant of something called Practical Byzantine Fault Tolerance.

The idea behind proof-of-history is that blockchain ledgers use cryptographic timestamps to work out what event had to precede another. Each node—a computer that helps verify transactions—gets a cryptographic clock that allows the network to agree on time and order events. For instance, the nodes could work out that you couldn’t give your friend any money because your employer hadn’t paid you first.

Through something called Tower Consensus, these nodes don’t have to constantly communicate with each other, preventing the network from becoming congested, which would reduce the amount of processing power the Solana network would have to verify transactions.

Proof-of-history bolts right onto Solana’s wider proof-of-stake structure. This consensus mechanism is the same one to which Ethereum is transitioning.

Proof-of-stake works by letting people who stake coins—lock them up on the network—validate transactions. The idea is that these people have the greatest stake in the integrity of the network and thus are incentivised to ensure things run smoothly. For locking up coins, stakers are rewarded with SOL, the blockchain’s native token.

Proof-of-stake, it should be noted, is entirely different to proof-of-work, the transaction network that powers the Bitcoin blockchain—the largest and oldest blockchain network.

Proof-of-work validates transactions by having miners (computers) race to solve complicated math puzzles. The process is very computationally intensive as the network has, due to its size, made it very difficult to earn Bitcoin like this. All those computers need energy, and much of the electricity that miners harness comes from fossil fuels. Many consider proof-of-stake far more sustainable because it rewards the richest, not the most wasteful.

This innovation, and more, translates to about 50,000 transactions per second on Solana and average fees of $0.00025 per transaction. This is far higher than Ethereum, which chugs along at 14 transactions per second and transaction fees of upward of $20 at times of medium network congestion.

Solana’s rise

This concept has since helped Solana Labs raise hundreds of millions of dollars. In June, 2021, it secured $314 million in funding in a round led by Polychain Capital, a venture capital fund led by Coinbase’s first employee, and Andreessen Horowitz, an influential Silicon Valley VC firm.

And lots of projects have already built tools on top of Solana, and plenty of money has already been locked into those projects. According to Solanaproject.com, $2 billion has been locked up on 180 decentralized finance projects so far, about half of which are on two decentralized exchanges: Raydium and SerumDex.

Still, this is but a small chunk of the overall amount locked in decentralized finance protocols (a term that refers to a growing number of non-custodial financial tools, mostly lending protocols on Ethereum), which stands at $83 billion as of August 17, 2021.

One of Solana’s biggest supporters is Sam Bankman-Fried, the 29-year-old billionaire who founded crypto exchange FTX. FTX launched SerumDEX on Solana rather than the more popular Ethereum blockchain, and has followed up with a Solana-based tokenized stock service on the main FTX site via Switzerland-based Digital Assets AG.

Bankman-Fried told The Block that Ethereum just wasn’t working: "Any products that we tried to build or that even that we tried to scope out—we originally were just definitely going to build on Ethereum because that’s where everything was—product after product got into the same death knell which was 10 transactions a second for the network was just not enough.”

How to buy Solana

You can buy Solana just like any other cryptocurrency. The most popular way to buy cryptocurrencies are on cryptocurrency exchanges. If you’re buying from a decentralized exchange, like Serum, you’ll need to buy it for another token that supports Solana, like a Solana-compatible version of USDC (or through a bridge that supports conversions of USDC between blockchains), or, far easier, by buying it on a centralized cryptocurrency exchange, like Binance or Coinbase.

To do so, you’ll have to sign up for an account with one of those exchanges and buy Solana. The most popular market is for trading Solana for USDT (Tether, another US dollar stablecoin) on Binance, and the second most popular is to buy it outright for US dollars on Coinbase.

Exchanges will charge you fees to process these trades and, even though the average Solana transaction amounts to less than a penny, exchanges sometimes charge additional fees for withdrawals. As of this writing, it costs 0.01 Solana to withdraw on Binance, or about $0.89 USD.

You’ll have to ensure that the wallet to which you withdraw your Solana supports your transaction. If it doesn’t, you’ll lose your money and there’s no way of claiming it back. Solana Labs recommends Phantom, SolFlare, Sollet, and MathWallet as web-based wallets and Exodus, Trust Wallet, Coin98, and Zelcore as app-based mobile wallets.

You can also earn Solana by “staking” your existing holdings through its proof-of-stake system. In the process, you’ll help secure the network. Solana runs on a delegated proof-of-stake system, whereby you delegate your Solana to a validator—the person who actually validates transactions on Solana—for a period of time. You’ll earn a cut of the proceeds earned by a validator, known as a commission. You could lose tokens if your validator is malicious, the value of your tokens could decrease while locked up, or if the staking service you use to delegate funds to the validator folds or steals your money.

There are lots of different ways to stake your SOL tokens. Supported wallets include SolFlare (in conjunction with a Ledger Nano hardware wallet or a keystore file), through a command-line interface, through Exodus wallet or through crypto exchanges Binance or FTX. On FTX, you’ll earn 6% in annualized staking rewards. There’s a delay of a week to unstake SOL, and you’ll have to pay a fee to unstake immediately.

As of this writing, you can earn 9.2% APY to lock up SOL for a month on Binance, 9.9% for 60 days and 11.5% for 90 days. Binance staking products frequently sell out.

Last Updated September 7, 2021

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