What is Solana?

Solana (SOL) is a decentralized computing platform designed to execute smart contracts, similar to Ethereum. With innovative concepts such as the combination of Proof of Stake and Proof of History, the system can process up to 50,000 transactions per second at extremely low fees, making it a strong competitor to Ethereum.

What is Solana’s Goal?

All blockchains and comparable decentralized systems must address the optimal solution to a “trilemma” involving decentralization, security, and scalability. Typically, optimizing for two of these factors results in the trade-off of neglecting the third. For instance, Bitcoin and Ethereum exhibit strong decentralization and security, but their systems are relatively slow, and individual transactions can be costly. This means the networks are currently only limited in scalability.

The developers behind Solana claim to have achieved a balance among these three aspects more effectively than any other blockchain. The system can already handle over 50,000 transactions per second while maintaining a fully decentralized and secure platform. In the future, this limit could increase to several hundred thousand transactions per second, with new blocks created every 400 milliseconds. As such, Solana is well-suited as a foundation for decentralized applications (DApps) like decentralized exchanges (DEX).

The programming language for Solana’s smart contracts is Turing-complete, similar to that of Ethereum, enabling the execution of more complex logical programs in the future. Solana’s approach to transaction processing allows smart contracts to be executed in parallel. Even without final confirmation from the blockchain, Solana smart contracts can deliver cryptographically secure outputs, making the platform faster as temporary capacity constraints do not necessarily lead to delays in smart contract processing.

Facts About Solana

Solana is referred to as a high-speed blockchain due to its block times of 400 milliseconds and its ability to process over 50,000 transactions per second, utilizing a proprietary timestamp system known as Proof of History (PoH).

The core team behind Solana is highly distinguished, comprising former employees from Qualcomm, Apple, Dropbox, Intel, Microsoft, and more.

In 2019, Solana secured significant investments exceeding $25 million from major investors, including Multicoin Capital, Foundation Capital, Distributed Global, Blocktower Capital, NGC Capital, and Rockaway Ventures.

How Does Solana Work?

One challenge faced by all decentralized ledgers is the representation of temporal sequences within the booking system. For a bank with centralized infrastructure, it is relatively straightforward to determine which transaction occurred before another. In decentralized systems, this becomes more complex. In conflict scenarios, such as a double-spending attack, the network must autonomously decide which transaction holds higher priority. The blockchain, as introduced by Bitcoin, addresses this issue by bundling multiple transactions into a block. These blocks are then cryptographically linked, creating a chronological record of transaction history. However, this often comes at the expense of speed and scalability. Solana addresses this challenge by implementing a system known as Proof of History (PoH).

Eight Key Innovations of Solana

• Tower BFT – A PoH-optimized version of Practical Byzantine Fault Tolerance (PBFT).
• Turbine – A protocol for block propagation.
• Gulf Stream – A transaction forwarding protocol without a mempool.
• Sealevel – Parallel runtime for smart contracts.
• Pipelining – A transaction processing unit for validation optimization.
• Cloudbreak – A horizontally scaled account database.
• Archivers – Distributed ledger storage.
• Proof of History – A method to significantly reduce validation time in the Solana blockchain.
• Proof of History

Proof of History (PoH) is a technique designed to substantially reduce validation times within the Solana blockchain. Transactions are directly associated with a cryptographic hash, similar to how blocks are linked in a blockchain. A hash is a checksum derived from a given value. In the context of a blockchain, this includes the contents of the previous block, with its checksum incorporated into the subsequent block. In the Solana network, the hash of a previous transaction is directly included in a new transaction.

The Structure of Transactions in Solana

The way transactions build upon one another is somewhat analogous to the “Tangle,” an acyclic graph used by the cryptocurrency IOTA. However, unlike IOTA, the interconnected transactions in Solana are verified through a blockchain, which organizes and consolidates them for long-term verification. This blockchain entry is referred to as Proof of History, enhancing the system’s security. Solana’s hybrid approach optimizes the network’s available computing power, significantly reducing transaction costs, which typically range from $0.00001 to $0.00025 per transaction.

To determine which transactions are confirmed through Proof of History, a flooding algorithm known as “Gulf Stream” distributes the processes to all validators. The validators check the transactions for correctness and sign them if there are no issues. A selected validator, referred to as the “Leader,” collects the confirmed transactions and arranges them in the correct sequence. These blocks are then signed as quickly as possible and published via a protocol called “Turbine.” Unlike blocks in other blockchains, Solana blocks do not contain all signed transactions; they consist solely of the signature itself and a reference to the transactions made public through Gulf Stream.

In Solana, transactions and blocks are propagated and processed separately, allowing for the potential creation of a new block every 40 milliseconds. The bottleneck in this process is the computing capacity available to the Leader. Transactions can include payments in Solana’s native cryptocurrency, SOL, or executions of smart contracts.

Leader Rotation

In Solana, the role of the Leader is regularly passed from one validator to another. A validator becomes the Leader when elected by the majority of validators, based on established rules. The quantity of network coins staked by validators is particularly significant in this process (more details on the Solana Coin (SOL) and staking will follow).

To prevent the accidental splitting of the blockchain, a “Leader Schedule” is established through voting, allowing enough time for all network nodes to be informed of the results. If a Leader behaves maliciously—such as signing erroneous transactions or failing entirely—they can be removed by the other validators. Additionally, a portion of their staked Solana coins (SOL) may be destroyed as a penalty, a process referred to as “Slashing.” Responsibility is then automatically transferred to the next validator in the schedule.

The Solana Coin: SOL

SOL is the name of the native coin of the Solana blockchain. Initially, approximately 489 million Solana coins were circulated. However, Solana is designed to be inflationary, meaning the total supply will increase over time.

The Structure of Transactions in Solana

The way transactions build upon each other is somewhat similar to the “Tangle,” an acyclic graph used by the cryptocurrency IOTA. However, unlike IOTA, the interconnected transactions in Solana are subsequently verified through a blockchain, which organizes and consolidates them for long-term verification. This blockchain entry is known as Proof of History, enhancing the security of the system. Solana’s hybrid approach maximizes the network’s available computing power, significantly reducing transaction costs, which typically range from $0.00001 to $0.00025 per transaction.

To determine which transactions are confirmed through Proof of History, a flooding algorithm called “Gulf Stream” transmits the processes to all validators. The validators check the transactions for accuracy and sign them if there are no issues. A selected validator, referred to as the “Leader,” collects the confirmed transactions and arranges them in the correct order. These blocks are then signed as quickly as possible and published via a protocol called “Turbine.” Unlike blocks in other blockchains, Solana blocks do not contain all signed transactions; they consist solely of the signature itself and a reference to the transactions made public through Gulf Stream.

In Solana, transactions and blocks are propagated and processed separately, enabling the potential creation of a new block every 40 milliseconds. The bottleneck in this process is the computing capacity available to the Leader. Transactions can include payments in Solana’s native cryptocurrency, SOL, or executions of smart contracts.

Leader Rotation

In Solana, the role of the Leader is regularly passed from one validator to another. A validator becomes the Leader when elected by the majority of validators, based on established rules. The quantity of network coins staked by validators is particularly significant for this process (more details on the Solana Coin (SOL) and staking will follow).

To prevent the accidental splitting of the blockchain, a “Leader Schedule” is established through voting, allowing sufficient time for all network nodes to be informed of the results. If a Leader behaves maliciously—such as signing erroneous transactions or failing entirely—they can be removed by the other validators. Additionally, a portion of their staked Solana coins (SOL) may be destroyed as a penalty, a process referred to as “Slashing.” Responsibility is then automatically transferred to the next validator in the schedule.

The Solana Coin: SOL

SOL is the name of the native coin of the Solana blockchain. Initially, approximately 489 million Solana coins were circulated. However, Solana is designed to be inflationary, meaning the total supply will increase over time.

In theory, such predictable, stable inflation rates can lead to a balance between inflation, the value of the coins, and the units destroyed. In practice, however, the situation for cryptocurrencies can be quite different. Speculative bubbles can result in rapidly rising prices followed by significant declines. Additionally, the long-term viability of a platform’s technical offerings is crucial for the price development of the coin.

Staking rewards are distributed at the end of each epoch, a period during which a validator serves as the Leader and issues the blocks of the blockchain. The total amount of reward coins distributed is predetermined by the system and paid out to all staking accounts at the end of the epoch. Consequently, the interest rate may fluctuate slightly, but these differences typically have minimal impact on the total payout amounts.

Accessing Staked Solana Coins

Staked Solana coins can be accessed at any time, although there are important considerations to keep in mind regarding the associated risks (discussed in the following section on Risks of Staking). There is no lock-in period for the coins. Instead, Solana employs a mechanism to “warm up” and “cool down” staked coins. A coin that is transitioned into staking must remain staked for a certain period to generate interest. This “warm-up phase” occurs gradually, with the interest rate increasing over a variable timeframe. The duration of the warm-up phase depends on how many other Solana coins are already staked; the more coins that are staked, the longer the duration. Conversely, there is a “cooldown phase” for coins that are removed from staking, during which a diminishing reward is still paid out.

Risks of Staking

Staking in Solana is not without risks. As described in the Leader Rotation section, a Leader can be removed by other validators. In such cases, a portion of the SOL staked by the Leader may be slashed. This slashing also affects coins assigned to the Leader through delegation. During the warm-up and cooldown phases, slashing can still pose a risk to the staked SOL coins. Thus, coins that have been removed from staking are only temporarily available for free use. Although they can be transferred to other accounts, recipients will see that the coins are still in cooldown and therefore potentially at risk. To avoid the loss of their coins, investors should delegate their stakes carefully and only to trusted validators.

Solana Compared to Ethereum

Solana primarily competes with Ethereum. Both networks aim to provide an optimized, decentralized platform for executing smart contracts, adhering to the following fundamental requirements:

Decentralization: Both blockchains are validated and maintained by a network of independent nodes.

Open Source: The software is open source, allowing anyone to modify and improve the source code freely.

Permissionless Access: The blockchain can be accessed by anyone, anywhere in the world, for transferring funds or executing smart contracts.

Solana vs. Ethereum: Blockchain and Transactions

The main technical difference between the two platforms lies in how they process transactions. In the Ethereum network, the blockchain itself serves as the primary driver for processing transactions and computational operations. If something is not recorded on the Ethereum blockchain, it is considered not to have occurred according to the system’s logic. This can lead to congestion, particularly when a decentralized application (DApp) becomes very popular. For example, during the winter of 2017/2018, the virtual collectible game “CryptoKitties” became so popular that the Ethereum blockchain was overloaded for weeks, resulting in exorbitant transaction fees.

In contrast, the Solana network executes transactions independently of the blockchain initially. The blockchain confirmation primarily ensures the long-term processing and ordering of these transactions. Unlike Ethereum, Solana does not have a mempool (a temporary storage area for unprocessed transactions), maximizing the utilization of available computing resources. This approach generates significantly less overhead than Ethereum while maintaining network security.

Transaction Validity and Scalability in Solana

Transactions are considered valid as long as they correctly reference a preceding transaction. Additionally, the Proof-of-History system facilitates scalability in Solana, making it significantly easier compared to Ethereum in the medium term. Unlike Ethereum, Solana does not rely on Layer-2 networks or sharding (the partitioning of the blockchain) to meet current demands. This allows Solana to maintain a flat technological infrastructure and regulatory system, even under heavy usage. In contrast, Ethereum’s complexity increases as it addresses scaling limitations through new technologies.

Advantages of Ethereum: First-Mover and Network Effects

However, the practical implications of this difference are uncertain. Ethereum enjoys the first-mover advantage as the largest decentralized smart contract platform and the second most important cryptocurrency globally, following Bitcoin. Developers are accustomed to building on the Ethereum platform, which has a market capitalization of around $200 billion (as of June 2021), compared to just $7 billion for Solana. Furthermore, the platform is associated with significant amounts of locked and invested foreign currencies of indeterminate value.

Since late 2020, Ethereum has been transitioning from the energy-intensive and costly Proof-of-Work system to a more cost-effective Proof-of-Stake model. As a result, the Ethereum blockchain can already process over one million transactions per second. The implementation of sharding, announced for 2022, could further enhance efficiency. Although transactions are more expensive on Ethereum than on Solana, the difference is not substantial enough to drive average users to switch platforms. The challenges of competing against established ecosystems in the digital space are exemplified by the dominance of operating systems like Windows and social networks operated by Facebook.

Future Prospects for Solana

What are the future prospects for Solana? The Solana blockchain offers numerous technical innovations that set it apart from other chains. Its scalability and low transaction costs make it particularly attractive. The Turing-complete scripting language used for developing smart contracts on the Solana blockchain is competitive with that of Ethereum.

Whether Solana can succeed will depend on whether the network can find a niche where the balance of scalability, security, and decentralization is sufficiently important. Potential areas for growth include decentralized exchanges and other financial services in the DeFi sector.

With its performance capabilities, the Solana network is well-suited for high-frequency trading. It may even enable high-speed trading practices similar to those in conventional stock and foreign exchange markets, provided that the system’s security is proven under heavy load.

Conclusion

Solana presents a compelling technical platform, though it has entered the market relatively late. Competing against established alternatives will be challenging. Ethereum and similar platforms benefit from being first movers in the market. Nevertheless, SOL has become one of the top 20 cryptocurrencies globally by market capitalization. It is quite possible that the platform will find ways to establish itself in specific niches against competition. For those looking to diversify their cryptocurrency portfolio, Solana and the Solana Coin should be closely monitored. Moreover, the staking mechanism currently generates significant returns on the coin.

In another article from Lenous Protocol, we will provide comprehensive explanations about “Solana and Meme Coins Surge in 2024“. Stay tuned with Lenous for the latest technologies in the blockchain and cryptocurrency space.

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