Solana, with a market cap of approximately $63 billion, is one of the leading blockchain platforms. It has established itself as a top choice for onboarding off-chain users, particularly in sectors such as Decentralized Physical Infrastructure Networks (DePIN), mobile applications, and payments. In previous newsletters, we highlighted DePINs built on Solana, including Helium and Hivemapper.

Solana has made significant strides over the past year, particularly following a surge in its native token after Visa announced plans to expand stablecoin capabilities on the Solana blockchain. At Consensus 2024, PayPal Holdings, Inc. (NASDAQ: PYPL) revealed that PayPal USD (PYUSD) is now available on Solana, making PayPal’s stablecoin faster and more cost-effective to use (currently, PYUSD has a market cap of $827.83 million, with 58.3% on Solana and 41.7% on Ethereum).

Core Team:

• Founder & Chief Executive Officer: Anatoly Yakovenko
• Co-Founder: Raj Gokal
• Co-Founder & Chief Technology Officer: Greg Fitzgerald
• Co-Founder: Stephen Akridge
• Co-Founder & Chief Scientist: Eric Williams

Solana Funding Insights - Total Raised: $359.55M

Funding Rounds:

• Seed Round: Date: Q1 2018 | Amount Raised: $3.17M | Price: $0.04
• Private Round: Date: Q2 2018 | Amount Raised: $12.63M | Price: $0.2 \
  Selected Investors: Jump Crypto, BlockTower Capital, Distributed Global, Reciprocal Ventures, and others.
• Series A: Date: Q2 2019 | Amount Raised: $20.00M \
  Selected Investors: Multicoin Capital (Lead), Distributed Global, Slow Ventures, RockawayX, NGC Ventures, Blockchange Ventures, and others.
• Validator Round: Date: Q3 2019 | Amount Raised: $5.7M | Price: $0.225
• Private/Pre-sale: Date: 2 Jan 2020 | Amount Raised: $2.29M | Price: $0.250
• Strategic Round: Date: Q1 2020 | Amount Raised: $2.29M | Price: $0.25
• ICO: Date: 23 Mar 2020 | Amount Raised: $1.76M | Price: $0.220 | Platform: Coinlist
• TGE and Distribution: Date: 10 Apr 2020 | Price on Listing: $0.67
• Undisclosed Round: Date: 9 Jun 2021 | Amount Raised: $314.00M \
  Selected Investors: Andreessen Horowitz (a16z) (Lead), Polychain Capital (Lead), Multicoin Capital, CMS Holdings, Ryze Labs (Sino Global Capital), Alameda Research, Jump Trading, and others.

Solana (SOL) Tokenomics (September 12, 2024)

• SOL Total Supply: 584,294,896 SOL
• Circulating Supply: 467,932,073 SOL (80.1%)
• Non-Circulating Supply: 116,362,823 SOL (19.9%)
• Market Cap: $63.3B (#5 overall, 3.104% of total crypto market ($2.04T))
• Staked Supply: 383,399,756.5 SOL (65.6% of total supply)
• Locked Staked SOL: 48,163,740.1 SOL (12.6% of total staked)
• Inflation: Current Rate: 5.036%, Decreases 15% Annually, Final Rate: 1.5%
• Supply Dynamics: Staked SOL includes both active and unstaked assets; locked assets are temporarily frozen until specific dates, usually part of investments or grants by Solana Foundation and Solana Labs.
• Fee Structure: 50% of transaction fees burned; remainder goes as block rewards to validators.

Solana’s Inflation Mechanism

Token Issuance and Reduction Solana’s SOL tokens are introduced through two primary mechanisms: the genesis block and protocol inflation (staking rewards). Conversely, SOL tokens are removed from circulation mainly through transaction fee burns. The inflation schedule is governed by three parameters: an initial inflation rate of 8%, a disinflation rate of -15%, and a long-term inflation rate of 1.5%. The current inflation rate stands at 5.07%, and Solana’s inflation began with epoch 150 in February 2021.

SOL Unlock Schedule (cc: helius)

Impact on Network Participants Proof of Stake (PoS) inflation inherently transfers wealth from non-stakers to stakers, effectively diluting the value of holdings for non-stakers while rewarding those who participate in staking. Solana maintains a high staking rate of 65%, which is robust compared to other networks. As of now, around 380 million SOL are staked, with significant movement observed across epochs.

Staking Rewards by Inflation Rate

Staking Yield Calculation

The staking yield is influenced by the inflation rate, validator uptime, commission rates, and the percentage of SOL staked. The formula is:

Fee Burns and Disinflationary Factors:

Transaction fee burns, slashing, and other user-related losses contribute to disinflationary pressures, albeit modestly. Fee burns as a percentage of staking rewards peaked at 7.8% in March 2024 but have averaged 3.2% recently. Post-SIMD-96 implementation, the impact of these burns will become negligible. Slashing, while possible, is rare and not currently a significant disinflationary factor.

Taxation and Market Implications:

Receiving inflationary rewards may be a taxable event in many jurisdictions, potentially leading to sell pressure from stakers needing to cover tax liabilities. Additionally, PoS inflation can impose continuous downward pressure on SOL’s price, affecting fair price comparison and network economics.

Validator Revenue and Inflation Dependence:

Validators have traditionally relied on inflation commissions, but recent growth in alternative revenue sources, such as MEV (Maximal Extractable Value) and block rewards, offer new paths to sustainable income. The long-term sustainability of these alternative sources remains uncertain.

Inflation Parameters and Scenarios (via: Helius)

Solana’s inflation is currently guided by an Initial Inflation Rate of 8%, a Disinflation Rate of -15%, and a Long-term Inflation Rate of 1.5%. The current rate is approximated at 5% as of September 2024, with a total supply of 584 million SOL. Four scenarios are proposed to explore potential changes:

• Scenario A: Double the disinflation rate from -15% to -30%.
• Scenario B: Halve the long-term inflation rate from 1.5% to 0.75%.
• Scenario C: Halve the current inflation rate immediately from 5% to 2.5%.
• Scenario D: Halve the current inflation rate, double the disinflation rate, and halve the long-term rate.

Impact on Supply and Price:

Over the next eight years:

• Scenario A: Reduces total supply by 5.3% (to 678 million SOL).
• Scenario B: Minimal impact, reducing supply by just 1 million SOL.
• Scenario C: Reduces total supply by 7.3% (to 664 million SOL).
• Scenario D: Reduces total supply by 12.2% (to 629 million SOL).

Assuming a starting price of $150 per SOL and keeping other variables constant:

• Baseline: Current inflation schedule decreases price by 18.5% to $122.25.
• Scenario A: Reduces price by 13.93% to $129.10.
• Scenario C: Reduces price by 12.07% to $131.90.
• Scenario D: Reduces price by 7.26% to $139.10.

Architecture

Solana is a high-performance blockchain designed for speed, efficiency, and scalability. It supports thousands of transactions per second with low latency and minimal fees, achieving a block time of 400 milliseconds and costs that are fractions of a cent. This report explores Solana’s mechanisms and architecture, emphasizing its ability to scale and interact seamlessly across a unified ecosystem.

Language

Solana primarily uses Rust for smart contracts due to its concurrency, memory safety, and low-level control, ensuring safe and predictable code. While Rust is the main language, Solana supports all LLVM-compatible languages, such as C and C++, allowing broader developer participation. For client-side development, Solana offers SDKs in Java, C#, Python, Go, and Kotlin, facilitating communication with the Solana network via JSON RPC API. This diverse language support enhances accessibility and flexibility for developers.

Mechanism and Architecture

Solana’s architecture leverages a unified, composable ecosystem that integrates all applications on a single blockchain. This design avoids the need for bridges, separate chain IDs, or liquidity fragmentation, enhancing user experience and simplifying interactions among applications. The blockchain’s performance is rooted in its capacity to fully exploit hardware capabilities, ensuring that software scales alongside advancements in hardware.

Solana’s transaction process begins with users submitting transactions to the leader, who compiles them into blocks and propagates them to the network for execution and confirmation by other validators. Core protocol changes are managed through Solana Improvement Documents (SIMD), which undergo community review and voting.

Transaction Lifecycle

A Solana transaction is the sole method for altering state within the blockchain. Each transaction, or “transaction message,” includes a header, account addresses, a recent blockhash, and instructions. Transactions are atomic, ensuring all operations within a transaction either fully succeed or fail. The structure allows for predefined optimization by requiring accounts to be listed beforehand, which facilitates non-conflicting parallel execution of transactions.

Security and Key Management

Solana employs Ed25519 elliptic curve cryptography for public-private key pairs, ensuring robust security and efficient transaction signing. Wallets generate key pairs, with public keys serving as account identifiers on the blockchain, and private keys used for authorization. Transactions are signed with private keys, ensuring integrity and authenticity, and are then verified using public keys.

Network Operation

Solana utilizes a leader-based approach without a mempool, assigning specific validators as leaders to process transactions within fixed time slots (400 milliseconds). Validators are selected based on stake, and they rotate roles according to a pre-determined schedule, enhancing the system’s decentralization and security.

The network employs Stake-Weighted Quality of Service (SWQoS) to prioritize transactions from staked validators, reducing the impact of spam and Sybil attacks. SWQoS reserves 80% of a leader’s capacity for transactions routed through staked validators, with the remainder allocated to non-staked nodes.

Scalability Enhancements

Recent scaling solutions, such as SVM rollups and ZK Compression, are being developed to further enhance Solana’s performance, although they remain in early stages of adoption. The blockchain’s adoption of the QUIC networking protocol facilitates efficient, secure, and scalable transaction message transmission, accommodating high-throughput demands.

Consensus and Block Production

Solana’s consensus mechanism employs continuous block building, where leaders construct and broadcast blocks in real-time during their slots. This approach reduces latency and optimizes transaction processing. The validator’s Transaction Processing Unit (TPU) manages block creation, executing transactions in parallel where possible to maximize throughput and efficiency.

Proof of History (PoH)

The detailed description of the proof of history mechanism can be found in the Solana whitepaper here.

Proof of History (PoH) is a key feature of Solana, acting as a cryptographic clock that enables network synchronization by establishing a verifiable order of events. Unlike consensus algorithms like Proof of Work, PoH is not used to reach consensus but to provide a time reference that validators use to sequence transactions and adhere to the leader schedule.

PoH operates through the continuous computation of a SHA-256 hash chain, where each hash depends on the output of the previous hash. This sequence must be computed in order, creating a “micro proof of work.” Validators run a PoH service that produces these hashes, which are difficult to generate but easy to verify by other validators. By embedding transaction data into this hash chain, PoH timestamps transactions, proving the order in which they occurred and preventing validators from manipulating the sequence of blocks.

Mechanism and Functionality

Each Solana validator continuously runs a PoH service, hashing sequentially to maintain a ledger of cryptographic timestamps. When the current leader processes new transactions, these transactions are combined with the current PoH hash, updating the chain and embedding the transactions into a cryptographic timeline. This process ensures that the leader cannot manipulate the timing or order of transactions.

In each 400-millisecond block, the PoH stream includes approximately 800,000 hashes and “ticks” that mark the passage of time in 6.25-millisecond intervals. These ticks serve as evidence of liveness and maintain the cadence of the network’s operation. Even when not acting as the leader, validators keep their PoH clock running to synchronize with the rest of the network and ensure compliance with the leader schedule.

Accounts Model

Solana’s state management relies on an accounts database, AccountsDB, structured as a large key-value store where keys are account addresses and values are the corresponding data. Solana accounts can be of various types:

• User Accounts: Represent individual users with private keys.
• Data Accounts: Store state information, such as token balances.
• Program Accounts: Contain executable bytecode for specific programs.
• Native Program Accounts: Perform core network functions.

Solana differentiates between code and state by keeping program accounts immutable, while state is stored in separate accounts. This separation allows for efficient state management and optimizations unique to Solana’s architecture.

Programs and State Management

Programs on Solana are written in languages like Rust and are used to manipulate account data, but they do not store state within themselves. Instead, programs interact with Program Derived Addresses (PDAs), special accounts that do not have a private key and are controlled by a program. PDAs ensure that only the associated program can modify the state, enhancing security and programmatic control over state changes.

Rent and Account Management

To mitigate state bloat, Solana implements a rent mechanism requiring accounts to maintain a minimum SOL balance. Accounts can be closed when no longer needed, returning the rent balance to the user. This approach encourages efficient use of state and discourages unnecessary accounts from remaining open indefinitely.

Turbine: Data Propagation

Turbine is Solana’s data propagation protocol, inspired by BitTorrent. It breaks transaction data into small packets called “shreds,” which are then disseminated across the network in a structured manner. Shreds are grouped into batches and broadcast through a Turbine Tree, where validators are organized in layers to relay shreds to others. This reduces the data load on leaders and improves the network’s ability to distribute blocks efficiently.

Consensus: Tower BFT

Solana uses Tower BFT, a custom implementation of Practical Byzantine Fault Tolerance (PBFT), enhanced by PoH’s synchronized clock. This approach reduces communication overhead during consensus as validators rely on the pre-established order of transactions from PoH rather than multiple rounds of messaging. Validators vote on blocks using credits earned for correct votes, with the system ensuring validators adhere to their chosen forks for a minimum duration, minimizing the likelihood of forks.

Gossip and Archival

Solana’s gossip network serves as the control plane, disseminating critical metadata and ensuring nodes can communicate and synchronize state across the network. Archival nodes maintain the network’s history, with data stored in warehouse nodes to ensure the availability of past transactions.

Economics and Jito

Solana’s economic model includes inflation-based staking rewards, with validators earning SOL by participating in consensus and producing blocks. Block rewards consist of transaction fees, partially burned and partially awarded to the producing leader. Liquid staking enables SOL holders to stake their tokens in pools, receiving Liquid Staking Tokens (LSTs) that can be traded or used across applications while earning staking rewards.

The Jito client, widely adopted by Solana validators, enhances economic incentives by implementing an out-of-protocol blockspace auction system, allowing transactions to be prioritized through tips in addition to standard transaction fees. This has significantly improved validator rewards and contributed to the widespread adoption of the Jito client within the Solana network.

Solana Virtual Machine (SVM)

The Solana Virtual Machine (SVM) is an innovative framework designed to manage Maximal Extractable Value (MEV) within the Solana blockchain. MEV involves extracting additional value from transactions by reordering, including, or excluding them from blocks. SVM provides technologies and protocols to detect, analyze, and manage MEV activities, promoting efficiency, fairness, and security in the Solana ecosystem.

Ethereum Virtual Machine (EVM) vs Solana Virtual Machine (SVM)

SVM differs from the Ethereum Virtual Machine (EVM) in smart contract execution and transaction processing. In SVM, each validator executes smart contracts individually, allowing high transaction throughput. In contrast, EVM requires node consensus for execution, resulting in slower processing. Additionally, Solana’s parallel processing model enables simultaneous execution of multiple transactions, whereas Ethereum’s sequential model processes transactions one at a time, making Solana faster and more efficient.

Purpose and Importance of SVM

SVM aims to address MEV by offering a structured approach to prevent manipulation in transaction ordering and block validation. This is crucial for maintaining the integrity of financial interactions on Solana, protecting users from practices like frontrunning, and enhancing the network’s credibility. Given Solana’s high transaction throughput, effective MEV management is vital for preventing rapid value extraction that could harm regular users.

Defining the Solana Virtual Machine

SVM is viewed differently within the Solana ecosystem. Some see it as encompassing the full transaction processing pipeline, including validator runtime and program execution, while others focus on the lower-level eBPF virtual machine responsible for executing programs. Generally, SVM is understood as a comprehensive system involving the Agave validator’s Bank component, which manages state during each slot. SVM processes transactions in batches, each containing instructions that target specific programs, and uses a cache mechanism to optimize execution efficiency.

Opportunities for SVM

The SVM’s decoupled and well-defined interface allows for various applications beyond Solana validators, including:

• Off-Chain Services: Emulating Solana’s transaction processing off-chain for simulations and testing.
• Diet Clients: Enabling fraud proofs for lightweight clients, enhancing scalability and security.
• State Channels: Managing peer-to-peer connections with SVM-based state channels, posting final results to the main chain.
• Rollups: Serving as an execution layer for rollups to enhance scalability without full consensus protocol overhead.
• Avalanche Subnets: Integrating with Avalanche modules for consensus and networking.
• Extended SVM: Custom SVM units for specific protocols, enhancing flexibility.

The SVM is now available through the solana-svm Rust crate, supporting diverse applications and driving innovation within the Solana ecosystem.

FTX

However, Solana faced challenges following the collapse of FTX, a prominent entity closely linked to its ecosystem. FTX’s founder, Sam Bankman-Fried (SBF), was a major advocate of Solana, onboarding projects like the Serum DEX and others traditionally associated with the Ethereum ecosystem. Under SBF’s influence, FTX grew to become one of the largest centralized exchanges, further boosting Solana’s prominence. Unfortunately, FTX’s misuse of company assets and customer deposits for risky investments led to its downfall, placing Solana’s ecosystem, which had connections with FTX, at significant risk. On September 12, FTX/Alameda Research unstaked $24 million worth of $SOL, and Solscan data indicates that the wallet still holds over $1 billion worth of $SOL, including staked and locked tokens. Despite these challenges, the core community of developers aligned with Solana’s philosophy remained committed. Solana responded by focusing on enhancing the network’s stability and creating a more developer-friendly environment, addressing technical issues to restore trust within its community.

Selected Projects Built on Solana Blockchain

Solana Ecosystem (TOP 10 Projects by MC)

1. Neon EVM: Neon EVM allows Ethereum-based applications to run on Solana, offering faster processing, lower costs, and access to Solana’s parallel processing.
2. Eclipse: An Ethereum Layer 2 solution that leverages Solana’s SVM, using Ethereum for settlement and Zero-Knowledge proofs for security.
3. Nitro: A bridge connecting Solana with the Cosmos and IBC ecosystems, enhancing interoperability and liquidity access.
4. Wormhole: A cross-chain bridge enabling seamless asset and message transfers across multiple blockchains, including Solana.
5. Allbridge: A cross-chain bridge that facilitates asset transfers between Solana and other blockchains, enhancing Solana’s interoperability.
6. LI.FI: A liquidity aggregation protocol that integrates multiple bridge solutions and DEX aggregators for cross-network swaps.

DePIN

1. Helium: A decentralized wireless network using Solana for scalability, supporting IoT devices and offering cost-effective connectivity solutions.
2. Hivemapper: A decentralized mapping network that rewards users with tokens for contributing real-time road images using dashcams.
3. Render Network & io.net: Distributed GPU computing networks on Solana for 3D rendering and AI tasks, providing scalable and cost-efficient computing power.
4. IoTeX: A Web3 infrastructure platform connecting smart devices and real-world data to blockchain, enhancing data accuracy and utility.
5. Teleport: A decentralized ride-sharing service on Solana, offering lower costs and higher earnings for drivers through blockchain-based protocols.

DeFi

1. Marinade Finance: A liquid staking platform on Solana allowing users to earn staking rewards while maintaining liquidity with mSOL tokens.
2. Jito: A protocol optimizing MEV profits through liquid staking, aiming for permissionless operation in the Solana ecosystem.
3. Sanctum: A liquidity-sharing solution for liquid staking tokens on Solana, enabling seamless interactions and revenue generation.
4. Drift Protocol: A decentralized trading platform on Solana offering spot and perpetual trading with real-time price updates.
5. Jupiter: Solana’s leading DEX aggregator offering efficient trade routes, limit orders, and perpetual trading.
6. Zeta Markets: A decentralized derivatives trading protocol on Solana, supporting options and futures trading.
7. marginfi: A decentralized lending protocol offering integrated financial activities across various DeFi protocols on Solana.
8. Kamino: A DeFi platform for strategic financial activities, including lending, liquidity provision, and portfolio management.
9. Parcl: A fractional real estate investment platform that tracks property prices using a data feed.

Others (NFT & Memecoins etc.)

1. Magic Eden: The leading NFT marketplace on Solana, supporting multiple chains and offering a user-friendly interface and low fees.
2. Tensor: A marketplace designed for professional NFT traders, integrating AMM and real-time data features.
3. Metaplex: A platform offering tools for creating, selling, and managing digital assets on Solana.
4. DRiP: An NFT drop platform supporting new artists on Solana with affordable minting and free NFT art mints.
5. TipLink: A lightweight wallet enabling easy asset transfers via links or QR codes, accessible through Gmail or Solana accounts.
6. Solchat: A communication protocol on Solana for on-chain messaging and P2P calls, expected to integrate with Solana’s mobile ecosystem.
7. Dialect: A decentralized messaging protocol enabling token transfers through messages on Solana.
8. Mad Lads: An xNFT collection by Coral exploring NFTs as decentralized applications, revitalizing the Solana community.
9. MonkeDAO: The first NFT DAO on Solana, originating from Solana Monkey Business, engaging in various community-led initiatives.
10. Superteam DAO: A DAO promoting Solana in emerging markets, supporting innovative projects through community-driven efforts.
11. Solana University: An international student organization providing educational resources and events for Solana and Web3.
12. Memecoins: $BONK; $WIF, $POPCAT

Key Metrics (September 12, 2024)

SOL/USD - $135.07 (06:06 UTC; Sep 12, 2024); MC - $63.3B

SOL Markets (Top 5 by 24h Volume; Sep 12); via: coingecko

Total Value Locked - $80.45B

Purple - SOL Price; Yellow - SOL Daily Active Addresses (5.5m - all time high)

Purple - SOL Price; Yellow - SOL Daily Volume

Solana - Financial statement (via: tokenterminal)

TOP 5 Solana Validators (NOTE: All values are in SOL; Data includes all stake, not just active stake)

Solana DEX Volumes (USD)

Solana DEX Stats

Jito Validator Tips

Links

1. https://solana.com
2. https://solana.com/solana-whitepaper.pdf
3. https://gitbook.solanavirtualmachine.net

Sources

1. https://cryptorank.io/
2. https://solana.blockworksresearch.com/
3. https://solanacompass.com/tokenomics
4. https://app.artemisanalytics.com/
5. https://www.helius.dev
6. https://dune.com/ilemi/solana-staking
7. https://www.theblock.co/data/on-chain-metrics/solana

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