Solana

Solana: All that glitters is not gold (Cryptocurrency: SOL-USD)

Gold Coins

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Summary of the thesis

Solana (SOL-USD) is a fast-growing layer-1 blockchain that could one day dethrone Ethereum (ETH-USD). In a previous article, I compared Solana and Ethereum and pointed out that Solana offers many advantages over the latter. However, Solana has a few major downsides and one that I find particularly concerning.

Decentralization is a key crypto selling point, but one that Solana does not offer. That being said. Is decentralization worth sacrificing to gain efficiency? Will users/companies be comfortable building on a centralized network?

I hold Solana in my portfolio, but am cautious about its future and have more money invested in cryptos where I see longer term potential.

Too good to be true

Solana was founded by Anatoly Yakovenko and officially launched in 2020. Since then, it has appreciated at a very rapid rate:

Solana Award

Solana Price (TradingView)

Launched at around $1, Solana reached over $250 at its peak, but has since fallen to around $90 as the general crypto market has corrected. Solana’s rise coincided with a general crypto bull market, but this altcoin was one of the top performers, and that’s no surprise when you look at its technical specs.

Solana uses historical evidence, which allows validators to calculate the passage of time. In practice, this means that validators do not need to complete for blocks to complete in order to validate more transactions. They can validate transactions as they happen. Solana also uses a protocol called Turbinewhich, like sharding, breaks blocks down into smaller, more manageable pieces of information.

All this allows Solana to achieve up to 50,000 transactions per secondand according to its website, transaction fees average around $0.00025.

Solana has a very active developer community, and its native wallet, Phantom, reached a valuation of $1.2 billion. And we also have Solanart, a thriving NFT marketplace on the Solana blockchain.

Solana’s popularity growth can also be gauged through on-chain metrics:

Solana activity

Solana Activity (ChainCrunch Twitter)

Developers love Solana for obvious reasons, and there is a lot of support for this crypto. But does that mean you should buy it?

Solana: All that glitters is not gold

Let me start by stating that I own Solana and intend to hold her in the next bull run. However, there are some key “risks” that investors should be aware of.

First, investors should know that Solana is inflationary. Solana’s offer swells by 8% every year due to wagering rewards. However, this inflation should be reduced at a rate of 15% per year until it reaches 1% per year.

More importantly, the big concern some have with Solana is the centralization of the network and token provisioning:

Liquid Supply Curve

Liquid supply curve (Messari)

As we can see above, the bulk of Solana’s offering is held by insiders and early stage investors. The “public auction” part of the offer only represents 1.3%. Arguably this could be evened out as staking rewards increase supply, but the truth is that staking at Solana is not feasible.

The hardware costs for Solana are much higher than for other cryptocurrencies, which means running a node is more cost-prohibitive. In this respect, so far, most validating nodes are run by insiders and early investors. In the current snow conditions, operating a node on Solana is very unprofitable, which led the The Solana Foundation will manage a grant program, effectively giving them more control over the network. Supposedly, a validator would need $1 million of SOL staked without subsidy just to break even when running a node on the network. And to make matters worse, 45% of Solana’s validators are hosted on 2 data centers. This poses a problem of decentralization and security. Solana has already suffered 4 major network incidents in the last few months.

Finally, there is no Solana on-chain governance. Solana uses a delegated proof-of-stake mechanism, which again leaves the power in the hands of a few.

This high level of centralization means that Solana is not a “neutral” network. It is controlled and will serve the interest of the few. It doesn’t have to be bad. It can be said that these people are always interested in seeing Solana succeed. Despite the high level of concentration of Solana tokens in the hands of early investors, it would appear that these tokens are held, for the time being, which shows that there is confidence in the long-term potential of the network.

Carry

the blockchain trilemma is not a joke. Security, decentralization and scalability cannot perfectly coexist. Solana forgoes decentralization to allow for scalability. It doesn’t have to be bad, but I can understand why some crypto investors don’t like it. There’s no reason a successful blockchain can’t be run by a company, rather than being fully decentralized. As long as it works, why would I care about decision making and such? There is probably room for both types of ecosystems.

My biggest concern is perhaps safety. Solana has had issues in the past, and the fact that validation is not cost effective limits the potential for improving security. The fact that most validators are operated in two data centers is also alarming.

That said, I own Solana. They are not my favorite altcoins, but they are popular and I expect them to reach much higher levels, which I have discussed in depth in my market.