DeFi
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Solana - Scalable Networks Redefined
A deeper dive into the Solana Foundation, its network design and ecosystem
This opinion piece will act purely to express my views on Solana and help me practice for further investment-driven theses. Note that I do not represent Solana, and data within this space is updated rigorously, so DYOR before investing.
Solana’s market cap at the time of writing is $35 billion with a fully diluted market cap (total value of the crypto at today’s price if the entire future supply of coins were in circulation) of $55 billion (Note that the market is down an average of 11.31% today). Regardless of this, since its ICO in 2020, Solana has settled 52 billion transactions. Furthermore, the network runs at an average of 1750 tps meaning Solana has approximately x125 the scalability of its competitor, Ethereum. Thus for these reasons, my interest in the Solana ecosystem is at an all-time high despite the rapid price fluctuations.
So far,
Solana has $11 billion in TVL
Minted over 5.7 million NFTs
Bank of America recently expressed that the Solana blockchain could become the “Visa of the digital asset ecosystem” as it focuses on scalability, low transaction fees, and ease of use. Moreover, Solana has sealed a bridging partnership with Arweave, where Arweave will facilitate the permanent storage of Solana’s transactions. (To learn more about Arweave, check out my previous blog)!
Solana Team and Community
Anatoly Yakovenko leads the Solana Foundation. Anatoly is the founding member of Alescere (a VOID startup), senior staff engineer at Qualcomm, software engineer at Mesosphere and Dropbox.
Anatoly has built a strong team around Solana, bringing on the likes of Greg Fitzgerald (Co-Founder and CTO), Raj Gokal (COO), Eric Williams (Data Science and Tokenomics), and many more blockchain professionals.
While growing the team internally, Solana, thanks to its scalable blockchain, has created a strong community with over 1.5 million followers across its social media. In addition, Solana writes blogs and has a podcast, which I highly recommend checking out!
Solana Ecosystem
One of the significant factors for a successful blockchain is a robust ecosystem. What I mean by this is that blockchain companies want to facilitate powerful decentralized applications which effectively bring all the user base. Solana has nothing short of a robust ecosystem directly shown in its success since ICO. Solana currently facilitates 2329 projects ranging from DeFi projects, lending protocols, NFT marketplaces, and web 3 Dapps.
Solana facilitates many known projects, namely Serum, Audius, and many more.
Serum is a high-speed non-custodial decentralized exchange (DEX). FTX, Alameda Research, and other partners created the Serum Foundation Serum aims to resolve the traditional problems of DeFi: high gas costs, slow transactions, centralization, and liquidity segmentation. Ecosystem partners can share liquidity on Serum and power their trading features for users.
Audius is creating a fully decentralized community of artists, developers, and listeners collaborating to share the world's music. Using Audius, creators can generate immutable and time-stamped records for creative works and register assets to the Audius network. Audius has tested many blockchains. Choosing Solana is a testament to Solana’s scalability and censorship resistance.
Solana Funding
Solana has raised over $335.8 million over six funding rounds. Their most prominent rounds include their Series A (July 30th, 2019) led by Multicoin Capital which raised $20 million, and their Initial Coin Offering (ICO) held on March 26th, 2020, and June 9th, 2021, which attracted 16 investors led by Andreesen Horowitz (a16z) and Polychain Capital raising over $315.8 million.
Proof of History (PoH)
Solana’s blockchain architecture is based on Proof of History (PoH). PoH is designed to create a ledger with verifiable passage of time between events enabling the blockchain to work fast while maintaining security and decentralization. This is achieved by using a recursive verifiable delay function to hash incoming events and transactions and by the network (all nodes) agreeing on the time and order of events by using a cryptographic clock.
The main advantage of PoH:
When used with consensus mechanisms like PoS/PoW, PoH can reduce messaging overhead resulting in sub-second verification times.
Two algorithms that leverage PoH ledger (explained later):
- Proof of Stake (PoS) algorithm
- Efficient streaming Proof of Replication (PoRep)
Vision: every node in the network will rely on the recorded passage of time in the ledger without trust.
Network Design
At any given time, a system node is chosen as a leader to generate a PoH sequence providing a verifiable passage of time through the PoS based elections.
The leader executes the transactions on the current state (stored in RAM) and publishes the transaction and the final state signature to the other nodes called verifiers in a way that can be efficiently processed by other network nodes – thus maximizing throughput.
Verifiers execute the same transaction checking each sequence segment on a separate core and publish their computed signatures of the state as confirmations. These confirmations serve as votes for the consensus algorithm.
To make this simpler:
- Messages sent by the users
- Leader sequences and verifies messages creating a state which is published to other nodes while maximizing throughput
- Nodes verify, and their state acts as confirmations/votes. A super majority (2/3rds) is needed for the confirmation to be deemed valid.
- Once network validation is completed, the leader records the nodes' output and how many times the function has been called.
With the use of cryptographic hash functions, nodes run the function from some random value, take its output and use it as the input into the same function for the next block, ensuring consistency of the sequence.
The hash functions work something much like this:
Index 1 sha256(random string) hash 1
Index 45 sha256(hash44) hash 45
Index 100 sha256(hash 99) hash 100
The primary purpose of this cryptographic structure is related to the network's security. There is no way to predict the hash value at index 100 without running the algorithm from index 1 to 100.
This is one of the significant advantages of this blockchain structure. As the network scales, security enhances.
For example, take a network with 1000 indexes; an attacker would need to run the algorithm from index 1 - 1000 while trying to keep up with the current blocks, and doing so requires immense computational power.
Thus, on a hypothetical data structure of 100 indexes, the PoH provides a verifiable data structure to infer that real-time has passed between index 0 - 100.
Timestamp for Events
The sequence of hashes verifies that data was created before a particular hash index was generated. This verification is consistent as the next generated hash represents the timestamp of data, only generated after the specific piece of data was inserted.
Horizontal Scaling
Horizontal scaling is one of the mechanisms used to further Solana’s scalability. It is achieved by synchronizing multiple PoH generators by mixing the sequence state from one generator to another without any sharding.
By synchronizing the generators, each generator can handle a portion of the external traffic; thus, the overall system can handle a larger amount of events.
Proof of Stake (PoS) Consensus
Aims:
- Quick confirmation of the current sequence produced by the PoH generator
- For voting and selecting the next PoH generator
- Punishing any misbehaving validators
Terminology
Bonds: coins that the validator commits as collateral while validating transactions. Bonding transactions take the amount of coins and transfer it to the bonding account under the user's identity (coins in this account can't be spent).
Slashing: proposed solution to the "nothing at stake" problem in PoS systems
When a proof of voting for a different branch is published, the proposed branch can destroy the verifiers' branch upon vote of super majority, which acts as a network risk.
Super majority: 2/3rds of bonds indicates that the network has reached consensus. Thus a 1/3rd of the market cap is at risk of an attack as it would take a 1/3rd of the network to vote maliciously for the branch to be invalid.
Voting
The PoH generator will publish the state's signature at a predefined period. Each verifier must confirm that signature by publishing their own signed signature of the state. If a super majority of the verifiers have voted within the timeout, the branch will be accepted as valid.
Elections
Elections for a new PoH generator occur when the PoH generator failure is detected, and the validator with the largest voting power is picked as the new PoH generator.
A super majority of confirmations are required on the new sequence. If the new leader fails prior to a super majority confirmation, the next highest validator is selected, and a new set of confirmations is required.
Once a PoH generator is established, a secondary can be elected to take over the transactional processing duties. If a secondary exists, it will be considered as the next leader during a PoH generator failure.
Thus, the network is designed so that lower-rank generators are promoted (if an exception is detected).
Streaming Proof of Replication
Replication isn’t used as a consensus algorithm but as a tool to account for the cost of storing blockchain history. PoRep and PoH combined create a strong defense mechanism against forgery of the ledger with respect to time and storage.
Algorithm and Hash Selection
The PoH generator publishes a hash to be used by the entire network for encrypting the Proof of Replication.
Each replication identity must use the same hash and use the signed result of the hash as the seed for the encryption key. This ties the key to a replicator's identity and to a specific PoH sequence.
To generate the proof, the key is used to retrieve a pseudorandom number generator considered the root. The generated root, key, and selected hash are then published.
The replication node is further required to publish another proof in N hashes as they are generated by the PoH generator. After a period of N proofs, the data is re-encrypted with the new CBC key.
Note that the period that each replicator must provide a proof < the encryption time. If not, the replicator can stream the encryption and delete it for each proof.
Proof Validation
The PoH node isn't expected to validate the submitted proof of Replication proofs. Instead, it is expected to keep track of the number of pending and verified proofs submitted by the replicator's identity.
The verifications are collected by the replicator via a p2p "gossip" network and submitted as a packet containing a super majority vote. This packet can contain multiple replicator identities at once (1 - many relationship), which allows the data structure to scale efficiently.
Tokenomics
Circulating supply: 314.5 million
Total supply: 513.8 million
Active stake: 392 million
The SOL token distribution is as follows:
- 16.23% towards the initial seed sale
- 12.92% dedicated to founding sales
- 12.79% distributed to team members
- 10.46% to the Solana Foundation
The remaining 47.6% of tokens were either already released to public and private sales or are still to be released to the market.
One of the primary discussions is whether the SOL token is inflationary or deflationary. After reading the inflation schedule (referenced below), Solana is a true balance of inflationary and deflationary forces.
Inflationary forces derive from its staking rewards, which are paid out on a set epoch schedule producing a pre-defined inflation rate. The inflation rate at the time of writing is 7.78%; however, by reducing the rate every epoch (about 2 days and 19 hours), it is expected to reach a final rate of 1.5% in a decade or so.
The deflationary forces derive from the percentage of every transaction fee that is burnt. With enough transactions, this burn could equal 1.5% per year, meaning that if Solana reaches 1.5% of inflation, it would actually make Solana long-term deflationary.
Note that these predictions are derived from using the Solana Epoch Years, which are usually slower than expected. This implies that the inflation rates are actually lower, meaning the interest rates are also lower as the staking periods are longer.
Conclusion
Since its ICO in 2020, there is no doubt that Solana has placed itself within the market as a respectable blockchain alternative allowing for high scalability, transparency, and immutability. Despite its short-term price fluctuations, one must not be persuaded to ignore Solana’s rapid ecosystem growth. I believe that the Solana network has an unbelievable structure allowing for seamless scalability and adoption by other developers who have developed Dapps of sufficient utility. Ultimately, I am excited to see how Solana develops, as so does the crypto market, and until an alternative layer 1 solution rolls out with enhanced scalability while maintaining network security and decentralization (which I’m sure will indeed happen), Solana is high on my watchlist for 2022 and years to come!
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