Solana & It’s Emerging Application Layer | Deep Dive
Review Date: May 27th, 2021 |
Introduction
Blockchains are the underlying technology that enable cryptocurrencies. They are protocols that allow a set of participants to converge on a single source of truth in the present, to verify the record of history in the past and to modify the state in the future all in a permission-less manner. Solana is an emerging blockchain protocol focused on being high performant with a rapid 400ms block time and the ability to execute around 65,000 transactions/second. It uses a novel data structure called proof-of-history and a delegated Proof-of-Stake consensus algorithm to enable rapid transaction finality and the propagation of information between nodes of the network. An active ecosystem is forming around Solana heavily backed by individuals such as Sam Bankman-Fried and Alameda Research looking to capitalize on the application layer whilst Ethereum continues to solve scaling through the Ethereum 2.0 architecture and layer-2 solutions.
Solana: A High Performance Blockchain
Solana is a blockchain protocol that has smart contract functionality like Ethereum but aims to be more efficient to avoid any problems such as transaction latency and cost in the application layer. If the Ethereum network experiences high demand, the applications that run on the network as smart contracts will experience increased gas costs and for those not willing to pay such costs transaction latency. Solana has a core set of innovations that enables rapid transaction finality and a definitive history of the events that have occurred on the blockchain that is verifiable to any node.
Proof of History
Proof-of-History is a novel way of time-stamping data on Solana so that the order of events can be verified by each node [1]. It acts as a decentralized clock that orders transactions and events on the Solana blockchain by utilizing the SHA-256 cryptographic hash function to create a hash of data embedding in a timestamp. This is a novel data structure that allows data at a specific time to be efficiently and publicly verified. In other blockchain systems, nodes must communicate with one another to order the sequence of events but with Solana’s Proof-of-History nodes can simply maintain an internal clock and verify the history of transactions and events on Solana.
Turbine
When the nodes on a blockchain increases, so does the time it takes to propagate the most recent data across the nodes of the network. Turbine allows a more efficient way of transmitting data across nodes of the network by implementing a random path per packet of data to a validator so that the data propagates faster over the network [1]. It does this by a block producer sending block data in multiple packets to random validators on the network which then propagate randomly to other nodes. This allows a network of 200 nodes to reach 40,000 valiadors in 200ms.
Gulf Stream
Gulfstream manages the mempool of the Solana network. A mempool is simply where unconfirmed transactions are stored and waiting to be added to the blockchain. Gulf stream enables a high performance network allowing over 50,000 transactions to be verified per second from the mempool [1].
Solana Tokenomics
The Solana network much like Ethereum has a native token to manage the unit of account in the system and to be used as payment for transaction fees. Solana is a delegated Proof-of-Stake blockchain protocol meaning anyone on the network can stake SOL and capture inflation rewards for doing so. SOL stakers can delegate their voting rights to a validator of the network which in turn increases the trustworthiness of the validator committing accurate block data [2]. Staking rewards are calculated and issued once per epoch which is 2 days long. Staking yield can be calculated via the following:
Staking Yield = Inflation Rate x Validator Uptime x (1 – Validator fee) x (1/% SOL Staked) [2]
The Solana token distribution is illustrated in the pie diagram below:
Solana was backed by Multicoin Capital in a Series A round raising $20mm [4] and has the heavy backing of FTX’s Sam Bankman-Fried and FTX’s venture arm Alameda Capital who partake in market making on many of Solana’s DEX’s such as Serum. There are heavy backers funding the Solana application layer to utilize the high performance blockchain for Decentralized Financial applications.
Solana Ecosystem
It takes time for an ecosystem to form around a blockchain protocol. It requires core infrastructure such as wallets, tooling for development, blockchain explorers and many other technologies in order to enable a flourishing application layer. A core application that has found a suitable product-market fit across chains is decentralized finance (DeFi) that emulates banking services in permission-less smart contracts removing middlemen from financial services. Even to build out this ecosystem on the application layer one requires oracles for pricing data and stablecoins (crypto assets pegged to $1) in order to have a proper functioning system.
Solana is still in its early stages for ecosystem development but with help of Alameda Research funding several applications and infrastructure projects the system has already accelerated to a reasonable size to the point where developers are able to participate in hackathons like the early days of Ethereum.
Serum
Decentralized applications, particularly financial applications require cheap transactions in order to create a low barrier to entry decentralized financial system. Currently, DeFi on Ethereum is experiencing large demand and with its current scalability limitations increasing the price to access DeFi services. Uniswap, the most popular DEX on Ethereum becomes unusable for retail when transaction fees exceed $100 for an ERC20 swap. This is why Binance smart chain has increased in popularity and why Solana is better primed to slowly take market share from Ethereum until it solves scalability.
Project Serum is a decentralized exchange (DEX) built on the Solana blockchain capitalizing off it’s fast transaction finality and cost [5]. Since Solana behaves like a single shard allowing for seamless composability for developers it reduces the developer overhead required to think about scalability in regards to emerging layer-2 technologies. Unlike the majority of DEX’s, Serum is a central limit order book compared to the automated market maker (AMM) model used by many Ethereum DEX’s [5]. The main reason for this is AMM’s currently do not have limit order functionality and when providing liquidity you have to supply both assets in a liquidity pool. Central limit order books for now have a better trading experience for traders.
SRM is a governance and utility token which allows traders who hold the asset to reduce fees when trading on the DEX, contribute to a buy back and burn w/ 0.04% of the 0.3% taker fee and to contribute to the governance of the Serum DEX [7]. At this present time there has been $4B in cumulative trade volume since inception and around 1.4mm SRM tokens have been burnt from the buy back and burn trading fees [6]. At this present time, Serum phase 3 is in development which includes new features such as margin trading, lending/borrowing, AMM’s and projects being built on top of Serum.
Mango Markets
Mango Market’s is a decentralized trading platform that facilitates core margin trading functionality in which traders can trade with leverage on derivative products such as perpetual future contracts built on the Serum DEX [9]. The derivatives space is a large emerging market in DeFi and requires transaction latency to be almost instantaneous in order to execute limit orders that allow traders to manage trade entry and stop-loss. Lenders on Mango markets that facilitate leverage trading (traders depositing borrowed assets) have access to attractive yield opportunities similar to Ethereum’s dYdX derivative protocol.
Mango Market, albeit in its early stages of development, aims to merge CeFi liquidity with the permission-less innovation of DeFi. The Solana blockchain solves the transaction latency problem for derivatives with it’s 400ms block time and rapid transaction finality. This significantly improves the trading UX of derivative protocols which is what protocols on Ethereum are attempting to tackle with layer-2 solutions or sidechains. Additionally, SRM is pooled by the protocol to get lower fees on the Serum DEX.
Step Finance
Step Finance is a dashboard that connects to your Solana wallet and displays your current positions and their respective risk profile. It aims to be a central hub for yield farmers on Solana giving them access to liquidity pools with the highest yield via AMM’s on the Solana blockchain. Additionally, Step Finance will be implementing functionality that makes DEX swaps easier for users & new automated investment strategies.
Step Finance’s governance token STEP aims to accrue value as the protocol grows by distributing value to token holders. It does this by transaction fees used by Users on Step Finance for swaps, yield farming & automated strategies which goes directly to those who stake STEP. There is also a buyback mechanism which purchases STEP from the open market with a portion of the transaction fees on the platform which is also distributed to STEP stakers further increasing APY of staking and reducing circulating supply on the market. Additionally, stakers of STEP may be able to unlock additional analytic tools on Step Finance or certain automated trading strategies.
Solana Wallets
Phantom
Phantom is a Solana wallet and browser extension similar to Metamask for Ethereum that allows you to manage your digital assets on Solana and access DApp’s on the Solana blockchain. Currently Phantom is still in Beta but the user experience looks to be easy at onboarding and has a user interface similar to Metamask making it easy to understand for those already transacting on the Ethereum blockchain.
Sollet
Sollet is a non-custodial web wallet created by Project Serum that allows users to manage their digital assets, execute swaps on the Serum DEX and to receive rewards such as SOL and other SPL tokens.
Conclusion
Solana is a smart contract platform that has a high degree of throughput of 65,000 transactions per second with sub-second transaction finality enabled by Proof-of-History and the 400ms block time. It looks to be a promising solution to solving transaction latency for a smart contract protocol’s application layer without the need for sharding the state or to implement layer-2 scalability solutions which will create fragmentation and hinder application composability.
However, we must take into account the scalability trilemma in which the hardware cost for an individual to validate the blockchains history and maintain its state in order to become a consensus participant in the delegate Proof-of- Stake consensus algorithm. The question here is to what degree is decentralization important but it may be that retail do not need to run a node only those who are active in the ecosystem which is still a large degree of network participants. This is how Solana is able to achieve such a high throughput with low transaction latency.
Regardless of scalability trilemma discussions, there is a vibrant ecosystem forming around the Solana protocol aiming to penetrate Ethereum’s emerging DeFi market. Many Ethereum DeFi protocols are experiencing large developer overhead in order to deploy protocols on layer-2 solutions such as Optimistic rollup were as on Solana a single high throughput shard would allows developers to focus on UX instead of scalability so we can foresee many developers capitalising off this fact.
High profile individuals such as Sam Bankman-Fried and Alameda Research are heavily backing projects on the Solana ecosystem such as the Serum DEX and many others. It’s safe to say with the amount of capital Alameda has at its disposal, projects on the Solana ecosystem will continue to receive funding for many years to come. The question is how fast does Ethereum solve scaling and layer-2 interoperability. If it is slower than expected then Solana and it’s application layer could look to eat into some of Ethereum’s market share.
References
- https://solana.com/solana-whitepaper.pdf
- https://solana.com/staking
- https://research.thetie.io/solana-ecosystem/
- https://www.crunchbase.com/funding_round/solana-io-series-a–6b558739
- https://research.binance.com/en/projects/serum
- https://projectserum.medium.com/serum-newsletter-28-6599ea10d19f
- https://projectserum.medium.com/serum-srm-and-the-ecosystem-part-1-2742f6a24597
- https://trade.mango.markets/stats
- https://docs.mango.markets/litepaper
- https://docs.step.finance/the-step-token/step-tokenomics
- https://twitter.com/phantom/status/1389298960989257729/photo/1
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