When it comes to Ethereum's strongest competitor, many people will immediately think of Solana, which is the most popular project in crypto during L1 Summer in 2021. It is known for its low fees, high performance and realization of the vision that EOS failed to achieve. I had a deep dialogue with Tushar Jain, the founding partner of Multichain Capital in San Francisco, back in 2017. He mentioned that the solutions for Solana and EOS were very similar by both using the DPOS mechanism. They had strong faith in the Ethereum Killer thesis and had strongly invested in this area. By the latest update, their funds have generated a 3,000% IRR during the first three years, which is the top-performing fund globally. Back to the point, there has always been discussions about Solana in the Ethereum community and it’s regarded as SQLANA. It is an interesting name in which SQL is referred to as the database query language introduced by IBM while Solana relies heavily on the idea of Moore’s Law of Computation which is a term used to refer to the observation made by Gordon Moore in 1965 that the number of transistors in a dense integrated circuit (IC) doubles about every two years. Therefore, machines for the same price can have their performance doubled every 2 years. So the hardware configuration requirement for Solana is very high and its scalability is limited to the performance and iterations of hardware over time. On the other hand, Nelson’s Law of Internet Bandwidth is gaining adoption and the project like Celesita can make full use of the exponential improvement in network bandwidth by keeping computation fully off-chain.
We have seen that Solana's price increased rapidly from $2 in early 2021 to a peak of $259 in November for the same year, and its TVL peaked at $15 billion at the time. As of today, the Solana price is holding at $36, ranking 9th on CMC. According to Defi Llama’s data, the total value locked is currently at 2.5 billion, ranking fifth behind Ethereum, BSC, Tron, Avalanche. Meanwhile, we have seen a large number of applications developed on Solana in Defi, NFT and other fields. This is mainly due to the low fees (the Priority Fee Model will be introduced below) and the fast trading experience Solana has been renowned for .
Solana's engineering features are considered perfect (comparable to Cosmos) in the sense of its pioneering consensus mechanism of Proof of History (POH) which records all the historical transaction data so that you can quickly find every transaction that happened at a specific point and in chronological order. Compared to other POS based Layer1 alternative, where the transaction will only be confirmed after being broadcasted to the whole network, POS allows the validators to use the SHA256 encryption techniques called the sequential-hashing verifiable delay function (VDF) to track time and realizes the vision for timestamp localization. Let’s give an example of an automobile manufacturer . It requires the process of stamping, welding, painting and final assembly, etc., in order to produce a car. The automobile manufacturer produces the parts required for each step accordingly.. The introduction of POH allows the automobile manufacturer to produce various parts at the same time, which will then be used for stamping, welding, painting and final assembly POH has allowed parallel production and significantly reduced the communication and time cost among different parties.
Solana's features, such as lower block time and higher block height, allow it to process transactions in a cheaper and more efficient way.] However, the architecture design of solely pursuing high TPS is not ideal because transactions with no finality will be returned with not much value provided.Although the TPS on ETH 2.0 can reach 100, 000transactions /s, the finality requires 768s, which is a critical issue.. For projects like ETH1.0 and BSC, although the finality is within the range from 30 to 80s, the TPS is only between 220 transactions/s and 300 transactions/s. Solana solves this with a more prestigious method with TPS reaching 65,000and finality only within 13 seconds. Obviously, we believe that there are no perfect engineering designs, and any design has a trade off. Solana to some extent sacrifices decentralization for scalability through cheaper network fees and faster transaction speeds.
Currently, most of the validators are gaining significant revenue through the inflation, and the revenue is relatively ideal. In the present network, the total annual revenue for nodes is close to 0.7 billion, calculated through a 6.5% inflation rate and the current $10 billion market cap. (The inflation rate decreases at a rate of 15% year by year, starting with 8% last year and will terminate at 1.5%). As the Solana network grows (both users and market cap), this revenue will increase in spite of the decrease of inflation rate. Like on other networks, users will incur a transaction fee on Solana. ,which totals$22 million per year considering 50% of the fees are burned. However, there are problems with the existing solutions such as the one for Ethereum. The pricing model doesn't well follow the resource-efficient pricing principle, meaning that when the relationship between supply and demand of a product changes, the price of other products will also change. This is reflected in the fact that when there is an airdrop event, NFT minting event, or high annual yield products launched onEthereum, the fee for the whole network will rise which means the fees for other protocols built on Ethereum will be increased as well.In order to solve this problem, Solana has introduced the priority fee model (which is also currently being used by some modular blockchains). For example, when the demand for Opensea rises, the fees on that application will also increase. However, the fees on other applications, such as Sushiswap, remain at the same level as before. This model can help networks realize the resource-efficient pricing principle in economic theory.
Many people think that Solana is very centralized, but I don't agree entirely with this point. We previously wrote an article about the debate between the founders of Solana and Celestia. As a POS chain, Solana is maintained by validators who contribute to the security of the network by staking SOL (governance token of Solana), Valiadotor will be incentivised for the current annualized 6.5% inflation rewards, transaction fees, MEV and others. However, we mentioned the hardware cost and overall overhead for the validators is quite high. By Anatoly Yakovenko, the configuration of one Solana Validators can run hundred of nodes on Eth2.0 . We can find that Solana's top validators like #1 Everstake, #2 Chorus One, #3 Staking Facilities and #4 Figment also works for other chains (Cosmos, ETH, etc.), which verifies Anatoly's statement. The hardware cost is currently at $800/month. In addition, it is required to pay 3 SOL per epoch (2-3 days) to have the voting rights. So since there is 6.5% inflation rate, the validators will need to own just 10,000 SOL ($360,000 today) to break even, with all the math done. If they instead take SOL from delegators, it will be 100,000 SOL ($3,600,000 today) if we assume the 10% commission. Hence, the high barrier of entrance discourages many retail investors and helps to explain why we can see the appearance of crypto whales such, as A16z, Kraken and Jump Crypto etc, in the Solana’s top 20 validators list, with a total staking share of 33%.
However, there is no direct relationship between decentralization and the number of validators running on the network What is true decentralization, such as the distribution of staking/hash algorithms, the distribution of tokens, the number of clients, the number of validators involved in the consensus, and the number of nodes and miners that can influence 33% of POS or 51% of POW? For instance, although the current number of Cosmos validators has increased from 150 to 175, it does not indicate this is a more decentralized approach. They hope to achieve decentralization of voting power/governance, which can be solved via some existing solutions For example, Polkadot has limited the number of tokens each node can stake, and ETH 2.0 also limits the number of each node can stake to 32. The solution aims to limit the influence each node can have on the network. However,this solution brings new problems where whales can spread their positions over multiple nodes, so the problem is still unsolved essentially. What’s the Cosmos strategy? They solve it through governance by distributing the funds from the Community Pool to different long-tail nodes where they are relatively new nodes with low amount of staked but provide a good product or service and clear development pathIt basically incentivises the validators to contribute better to the ecosystem by providing the initial funds. Then how does Solana try to achieve this? Here we will introduce the NO.1 liquid staking protocol on Solana, Marinade, which helps to diversity voting right/staking rewards on the ecosystem.Liquidity Staking Protocol on Solana
Currently, 32% of the total staked funds on ETH 2.0 are from liquidity staking protocols. Lido Finance, which is one of largest liquidity protocols , accounting for 28% of the total staked on ETH2.0, The current market cap Lido Finance accounts for 3% of Ethereum. And as mentioned previously, Solana presently generates over $200 million per year to stakers, but only 3% of the delegators choose to stake through liquidity staking protocols rather than local staking. Why does this happen? It has to do with the architecture of the two chains. Ethereum must have 32 (exactly 32 without more or less) tokens to be a validator, so what if you only have 2 ETH? You have to stake in these liquidity protocols because Ethereum doesn't support Delegated Proof of Stake, and you can't stake locally without 32ETH. Therefore, substantial retail investors flow to Lido, and Lido has captured a significant number of shares of this liquidity staking market (accounting for more than 85%). While if you are the delegators in Solana, you can delegates directly into a node of your choice (these nodes support Delegated Proof of Stake) no matter how many SOL you hold. Compared to direct staking on a node, staking on liquidity protocols actually carries the following third-party risks (applies to liquidity staking protocols on all chains):
This is the risk is fairly self-explanatory. Depositing SOL into the smart contract adds a non-zero risk of the smart contract bug that native staking protocol might have.The cent unstaking error with Marinade led to the unstaking nearly all the SOL delegated to them at epoch 284, and a series of cascade failures in the automated scoring mechanism happened cause a emergency unstake of 6 million SOL at the point. Although there are no funds at risk, the users can’t avoid the risk of depositing funds into the staking contract platforms. The largest liquidity protocol on Solana is Marinade, which recently had a problem with a series of cascading failures in the block height of 284 on the smart scoring mechanism. The caused a emergency unstake of 6million SOLof Marinade stake. Although there are no funds at risk after the team use their own off-chain scording cdee and retake the 450 validator according to the delegation formula during epoch285. The total missed rewards amount to 2,500 SOL.2) Tax liabitlities Some jurisdictions have identified depositing SOL to the stake pool with another staked version token in return for a taxable transaction. Because of these regulatory uncertainties, many investors choose to stake locally rather than through stake pools. “The Decentralizer", a new product recently implementedby Marinade aims to address the two issues. It is a public good that creates no revenue for the Marinade DAO but allows users to delegate their stake to numerous validators without giving up custody of their SOL. Users (and the network) will be able to get the benefit of diversification/decentralization but will not be able to get the DeFi benefits of the liquid token mSOL.
Furthermore, other than the risk, the more important thing is the advantage. From the user's point of view, the liquidity staking protocols distribute the power/staking right to different nodes for diversification and decentralization. It no longer undertakes the risk of single point of failureAlso, from the network point of view, liquid Staking further decentralizes the network by diversifying the user's assets across various nodes and improving the . Nakamoto Coefficient (the number of attackers who can collude to destroy the network). It also improves the capital efficiency by leveraging the underlying financial primitive to build more financial activities on top.Marinade and Lido on Solana currently make up over 86% of the market sharewhile other protocols with different strategies are working so hard to catch up with them. Let's dive deeply into the protocols.
Marinade follows a strategy outlined from the Solana Foundation to “spread the stake among the long tail of high-performance, low-commission, non-concentrated validators”.This results in Marinade not delegating to the largest validators and instead to many small to medium ones, directly improving distribution of stake in the ecosystem. They support small validators, delegate using a formula and vary stake with different weights. In addition, Marinade allows active stakes to be transferred to them for mSOL, and if a user delegates an active stake account from a validator in the minimum security group (largest validators that can halt network), Marinade will slowly un-delegate to other validators over a few epoch’s, depending on the size staked. Lido, in contrast, delegates to mostly well-known, large professional partners that have been vetted through a rigorous application process, the majority of which overlap with their Ethereum partners. Lido validates this stake equally across all of their validators (~150k SOL to each currently).
As the first main liquid staking token launched (and native to Solana), mSOL (Marinade) has the most DeFi integrations in the ecosystem, being onboarded to every major lending & AMM platform, plus option vaults, derivative platforms. Lido is in a similar spot to Marinade, albeit with a few less integrations so far. Moving forward, one would expect Lido’s stSOL to continue being onboarded at a pace similar to Marinade’s mSOL due to its reputation across crypto, huge sucess on Ethereum and having key Solana partners like Alameda Research and Jump Crypto as investors. One notable protocol to highlight for Lido is its vision for multichain. Anchor, a protocol on Terra (already die) has already onboarded Lido for bLUNA and bETH, and stLUNA is used in the Terra ecosystem on protocols like Astroport and Mars. Recently, a proposal has been made to onboard bSOL to Anchor which will use Lido to bridge SOL from Solana to Terra through the Portal/Wormhole bridge, a Jump Crypto incubation. Although the recent collapse of Terra has been the hardest time for the community, we have seen the anti-fragile nature of the crypto without having other protocols /ecosystems strongly affected, so does Lido. So the integrations and plans l like this highlight that while Marinade may be the most liquid and first to integrate on Solana, Lido’s multi-chain strategy opens up more possibilities due to their relations with other chains.
Another fast growing liquidity staking alternative worth mentioning is Jpool. JPool’s approach is to delegate to the lowest fee/highest APY validators with a few conditions (must be outside top 20, must have website/logo, must be active for at least 10 epoch’s). This aggressive strategy has led to JPool having the highest APY of all the stake pools. While JPool has the highest rewards, they have not been integrated into the ecosystem as of yet.
Socean is the 4th largest stake pool and considered as the second tier along with JPool. They have recently cut their deposit and withdraw fees, as an attempt to gain more demand market share.They are not paying for liquidity but rather take the OlympusDAO approach via protocol controlled value (PCV) It has created the separate product “Socean Stream” for the ecosystem to use。 Streams allows ecosystem partners to sell locked/vesting tokens to raise capital. UXD used streams to acquire SBR to incentivize their Saber pool, and Port Finance used it to purchase protocol owned liquidity. Atlas DEX used streams to have their airdrop unlock linearly over 6 months etc. DAOpool is the most unique stake as it was created by the DAO formed for the NFT project called MonkeDAO. It only delegates and supports other NFT project run validators, and it is split between 8 validators and is on the way to explore more validators. DAOpool has been well known for its aggressive strategy in the Sober/Sunny war, ranking NO.3 just behind Marinade and Lido. DAOPool has started focusing outside of Saber as they look to expand, recently testing out Raydium and in discussions with Mango to become collateral in the second half of the year.
The eSOL,developed by the largest validator on Solana, Everstake, currently supports nodes with ranking after 25th and commision rate below 7%. The eSOL charges above-average management fees, aimed to fund more projects in the ecosystem.
We would like to mention that Crescent recently went live on the Cosmos ecosystem with exclusive focus on things like liquid staking and liquid trading. They have adopted a more community-based solution through on-chain governance by whitelisting 20 validators (different categories chosen by the regular model, simulations and consensus). Users can individually opt in to stake on the nodes, either stake to the individual one, or diversify the assets through Liquid staking protocol. It's a very interesting product you should have a look at.
Solana's NFT trading volume is currently second close to Ethereum, accounting for 5%-6% of total Ethereum trading volume. after Ethereum (Solana’s volume accounts for 5%-6% of Ethereum’s). The number of projects, the number of individual buyers and sellers, and the number of transactions are useful measures in NFT markets. The main difference between Solana’s and Ethereum’s NFT market is that Solana charges lower prices and fees. Also, there is a positive correlation between them where both Solana and Ethereum trading volumepeaked in February this year. Magic Eden is the top player in the NFT market on Solana, ranked both in terms of user base (38,000 daily users) and trading volume, followed by Solanart and Solesea (with 2,000-3,000 users).
· Currently, Magic Eden captures 92.4% of the NFT trading volume in the secondary market on Solana gaming
· 3,000+ new wallets are opened per day · ME team has currently over 50 people, with 20 core developers
Magic Eden has a launchpad for NFT creators to help them get their collections out by making the minting process simple and seamless; several new projects are launched every week on the Magic Launchpad. Projects need to apply to be listed on ME through a self-service creator hub, subsequently the ME team reviews and approves applications daily. This is a mechanism to ensure the quality of listings and reduce the number of scam projects traded. ME takes a 2% transaction fee per trade.
Two weeks ago, Magic Eden launched another new product, Magic DAO, which integrated the governance mechanism in the project. The DAO airdropped Tickets to all users of Magic Eden with three levels: OG, Degens, and Normies. The DAO assigned users a grade based on their first transaction time on the platform. Currently, the total supply of tickets is 30,602, and users can enjoy the privileges and benefits of accessing the private Discord channels, including community communication and Alpha access, the opportunity to be whitelisted on Launchpad, and gaining related revenue based on trading behaviour, Discord activity, and governance participation. Also, they will receive a share of the platform's revenue in the future. Participants in governance include the team and advisors, ticket holders and so on. Users may also participate in several selections, product decisions, and various online/offline activities.
An interesting development 2 weeks ago was that the ME team outlined their vision to be more community-driven with the launch of Magic DAO. This began with an airdrop of Magic Tickets to prior users of Magic Eden. There were 3 tiers of tickets dropped to users: OG, Degens, and Normies, depending on when they first transacted on ME. with a total supply of 30,602 tickets. Holders of the Magic Tickets can link their discord IDs to their ME accounts and gain access to private gated channels on discord, which include community discussions & alpha channels.Members will also be able to earn whitelists for Launchpad projects, earn reward points based on trading activity, discord engagement and governance participation, which can potentially be exchanged for a share of marketplace revenues in the future. So in total, there will be 3 major groups of people involved in governance: Magic Eden core team members, Magic Ticket holders and Advisors. They will be entitled to participate in decisions for the platform, including which collections to list, which collections to feature on the front page, what new features to build, etc.on the product side and participate in various online/offline events.
Although Opensea has also started supporting Solana recently, we cannot find many high-quality NFT assets like on the Ethereum and hence pose significant risk to participants. It is suggested here to use some helpful tools(Like Nansen, NFTGo, etc.) for investments to avoid some noise from the makret.
Wormhole is the largest bridge on Solana and holds the majority of wrapped assets On February 2nd, over 120,000 wETH (worth over $325 million) of assets were stolen for the Ethereum- Solana bridge. This incident was just second only to the most significant loss in the Ronin chain ($600 million). The was caused mainly by the smart contract risk and execution risk Hackers could mint wETH without providing the required collateral ETH, then trade it and cash it out on the Ethereum chain. If Jump Crypto did not remediate emergently, there would cause catastrophic liquidation of a large number of wETH due to the insufficient collaterals
The stability of the Solana network has always been a problem. This network instability issue roughly began back in September 2021 during the Grape IDO on Raydium that sent the network down for 17 hours and caused the SOL token price to tumble by 16%. According to Solana’s founder Anatoly, this outage was caused by bots flooding the network trying to participate in the FCFS IDO on Raydium. On 21 Jan 2022, the Solana network was in a state of instability, which Solana termed as “performance degradation”, and this instability caused many Solend transactions to fail. For those unfamiliar with Solend, it's basically a protocol for lending on borrowing on Solana, similar to other money market protocols like Aave or Compound. As a result of the network instability, it caused many failed user attempts at depositing and repaying which resulted in users having their positions liquidated.To make matters worse, there were also issues with the Pyth oracle price feed causing many wrongful liquidations on Solend. Finally, we have seen more modular blockchain solutions created for different ecosystems. It is crucial for monolithic chains like Solana to gain greater market share through their core advantages: high efficiency of parallel processing, low fees, and fast confirmation times. while improving its network speed and centralization problem caused by the early distribution of tokens. CFG Labs will follow up on the subsequent development of SQLANA.