January 27

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What is Solana (SOL)? Ultimate Beginner’s Guide

Ilir Salihi

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A large number of distributed networks are described as “Ethereum killers,” but in 2021, Solana managed to outshine almost all of them. So what is the secret to this success? Will Solana win the so-called “layer 1 wars,” or is it just another overhyped flash in the pan?

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Origin of Solana

Solana is the brainchild of co-founder and CEO Anatoly Yakovenko. Yakovenko was working as a software engineer at Qualcomm, and during the cryptocurrency boom of 2017 he published a whitepaper outlining Proof of History, a concept for a new consensus protocol he believed could improve on the prevailing Proof of Work and Proof of Stake models. 

Two of Yakovenko’s colleagues from Qualcomm, Greg Fitzegerald and Steven Akridge, joined him in developing his idea. Together, they demonstrated that the consensus method could process a throughput of over 10,000 transactions in less than half a second. 

The team then went on to found a company called Loom, but later changed the name to avoid confusion with an Ethereum project by the same name. 

In 2018, the company built a 50-node testnet supporting up to 250,000 transactions per second and began fundraising via token sales. The team managed to raise over $20 million USD in funding rounds led by well-known venture capital firms such as MultiCoin Capital. 

The public testnet went live in March of 2020, and in 2021 the network really started building steam, rallying from less than $2 USD at the beginning of the year to peak at $258 in November of 2021, before backing off to around $80 USD at the time of writing.

Related: Buy or Sell Solana (SOL) Now on Coinbase

Solana’s Value Proposition

Solana’s appeal is centered firmly on technology. The team believes that the fastest, cheapest technology will win the day in the cryptocurrency market, and their development ethos is based on this assumption.

The Solana team regularly refers to Solana as the most high performance blockchain on the market. A host of impressive sounding and well-marketed techniques are used to help the network achieve its high speed and efficiency.

Proof of History. Proof of History was the inspiration for Solana and the main innovation for the network. Proof of History uses a unique timestamp solution to make the order of transactions fully verifiable. Other blockchains typically confirm transactions by propagating blocks through the entire network as a way of verifying authenticity, which is much slower.

Turbine. Turbine is a data propagation protocol that splits up the responsibility of sharing data with the network so that data can be transmitted more quickly.

Tower BFT. Byzantine Fault Tolerance (BFT) refers to a method by which nodes in a network communicate with each other in the event of interruptions in their ability to communicate with each other. Tower BFT achieves this by using an algorithm that ensures all Solana nodes are operating on the same cryptographic clock. This eliminates some of the need for nodes to share data with each other, increasing the speed of the network.

Gulf Stream. On Solana, only one node of the network adds data to the record of transactions. This node, called a leader, is selected in advance which means transactions are only sent to them, rather than being distributed through the whole network as with Bitcoin or Ethereum. Again, this allows the network to achieve a higher speed.

Sealevel. Sealevel is Solana’s method of running smart contracts. With Ethereum, only one smart contract can interact with the blockchain at a time, which creates a bottleneck for the network. Sealevel allows multiple smart contracts to modify the record of transactions at the same time.

Pipelining. Pipelining is a method of partitioning different parts of a single task to different pieces of hardware.A Solana node will assign different parts of the task of verifying transactions ot the CPU, GPU, and other components to enable the network to process more transactions, more quickly. 

Cloudbreak. Cloudbreak refers to a method of memory management which eliminates bottlenecks in the reading and writing of transactional data by transaction validators. 

Archivers. Since Solana is built to handle massive transaction volumes, the record of those transactions will also be massive. Archivers are Solana’s solution for dealing with all of this data. In most blockchains, miners or validators validate transactions and store a copy of the blockchain at the same time. Solana achieves higher performance by delegating storage to specialized archivers that each store portions of the blockchain.

Solana is a highly engineered, high performance blockchain. 

It’s clear that Solana’s goal is to become an internet-scale protocol for the transfer of value, much as everyone in the world today uses TCP/IP. This means that the Solana team is betting heavily on the importance of layer 1 transactions, as opposed to layer 2 approaches like Bitcoin’s Lightning Network. 

Related: What is Uniswap (UNI) - Ultimate Beginner's Guide 

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The Solana Ecosystem

The Solana ecosystem features most of the usual apps that can be found on blockchains of this kind; a decentralized exchange, some NFT marketplaces, and some DeFi protocols like Raydium and Mango Markets.

There are also a couple of Solana based multiplayer games under development, and Solana’s low transaction costs and high speed make it well suited for this.

Though the user count on Solana apps is not as high as on other chains, it’s still a strong beginning for a relatively young network.

Related: How to Buy Cryptocurrencies Like Solana (SOL) with Your 401(k)

Solana’s Tokenomics

Solana’s native token is the Sol (SOL). The circulating supply of Solana as of January 2022 was around 310 million. There is no hard cap on the total supply, but the amount of the total supply generated each year is scheduled to decrease each year before finally settling at 1.5%. 

Although Solana’s Proof of History has some unique attributes, in terms of incentives for network participants, it’s very similar to Proof of Stake. This means that much of the total supply will be tied up by stakers who earn rewards by helping to operate the network.

Solana has some deflationary forces built in, since a percentage of transaction fees are burned rather than going to network participants. This means that some SOLs will be removed from circulation, countering some of the inflationary pressure generated by minting new SOLs. 

What is Solana (SOL)? Ultimate Beginner's Guide

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Can Solana Challenge Bitcoin or Ethereum?

It’s unlikely that Solana will ever be able to challenge Bitcoin’s leadership as a “store of value” coin for two reasons.

First, there are many people that believe Bitcoin’s energy consumption is core to its value, because it links real economic activity— energy consumption— to the issuance of currency. This gives Bitcoin value, because as the network gets bigger, it costs more money to produce Bitcoin, which makes it more expensive. 

This is the same with any commodity. When cheap, easy to drill oil started to run out, oil producers turned to more difficult to access sources which made their production costs go up, and those costs are eventually passed on to consumers at the gas pump. 

Secondly, many cryptocurrency enthusiasts value decentralization very highly. As is the case with many high performance blockchains, Solana sacrifices some decentralization for performance. Some investors fear that this could make the network vulnerable to political pressure and lead to censorship of transactions or other threats to the network.

Although Ethereum is far behind Solana in performance, it is still much more decentralized than Solana. In addition to this, there is a huge ecosystem of libraries and utilities which make it much easier to build projects on Ethereum. 

On the other hand, Solana is much cheaper and faster than Ethereum. As Ethereum’s scheduled scaling updates continue to be delayed, and transaction fees on Ethereum remain high, more developers are demonstrating interest in Solana.

Related: How to Diversify Your Retirement with Cryptocurrencies

Solana’s Future Prospects

Solana’s tech suite is impressive and innovative, and the development team is solid. Having superior technology is not enough to win the race for the burgeoning cryptocurrency market, however. 

Through history, many times inferior technology has won out because of superior traction or first mover advantage. The QWERTY keyboard, for example, was actually first designed to prevent typewriters from jamming, and is actually less efficient for typing than other layouts. Since we’re all used to the QWERTY layout, we just keep using it.

Solana has made impressive gains in the market because of its impressive technology, but this isn’t a guarantee that it will get the massive traction it is designed for. So far, the bulk of Solana’s market capitalization appears to be speculative rather than based on real value.

The high speed and low cost has attracted many developers, but the actual revenue generated by Solana dapps is still far lower than competitors like Ethereum or Avalanche.

Solana’s future prospects may depend on the performance of other, similar projects. If Ethereum continues to face difficulties implementing its scaling solutions, it could push more developers and users toward Solana. 

Other networks are also waiting to snap up market share from Ethereum, so Solana will also have to contend with them, and there is more at play here than just technology. Cardano, for example, has the leverage of a lot of connections in academia and has inked agreements with the governments of African countries like Ethiopia and Burundi

As the industry continues to mature, partnerships, politics, user base, and other factors may play a more important role than technology. It’s certainly worth keeping an eye on Solana, but they will have to add a lot of users to truly justify the project’s current valuation. 

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About the Author

Ilir writes about personal finance, entrepreneurship, and digital marketing. When he's not creating content online, he's spending time with his family in Washington, DC.

Ilir Salihi


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