Solana: Ecosystem Overview for the Third Quarter of 2024

2024-09-27 15:24:00

Solana has a market capitalization of about $63 billion and is one of the leading blockchain platforms. It has become the preferred choice for off-chain users, especially in the field of decentralized physical infrastructure network (DePIN), mobile applications, and payments. In a previous newsletter, we highlighted the DePIN project built on Solana, including [Helium]Hivemapper and(https://insights4vc.substack.com/p/blockchain-powered-mapping-exploring).

Over the past year, Solana has made significant progress, especially after Visa announced plans to expand the on-chain Stable Coin functionality of Solana Block, causing a substantial pump in the value of its native Token. At the 2024 Consensus conference, PayPal Holdings, Inc. (NASDAQ: PYPL) announced that its Stable Coin PayPal USD (PYUSD) is now live on Solana, making PayPal’s Stable Coin experience faster and at a lower cost (currently, PYUSD has a Market Cap of 8.2783 billion US dollars, with 58.3% on Solana and 41.7% on the ETH chain).

Core Team:

Anatoly Yakovenko：Founder and CEO
Raj Gokal：Co-founder
Greg Fitzgerald: Co-founder and Chief Technology Officer
Stephen Akridge: Co-founder
Eric Williams: Co-founder and Chief Scientist

Solana Financing Overview - Total financing is USD 359.55 million; detailed information on financing rounds is as follows:

Seed Round: conducted in the first quarter of 2018 | Funding amount: $3.17 million | Price: $0.04
PE Round: conducted in the second quarter of 2018 | fundraising amount: $12.63 million | price: $0.2 Main investors: Jump Crypto, BlockTower Capital, Distributed Global, Reciprocal Ventures, etc.
Series A Financing: conducted in the second quarter of 2019 | Financing amount: $20 million Major investors: Multicoin Capital (lead investor), Distributed Global, Slow Ventures, RockawayX, NGC Ventures, Blockchange Ventures, etc.
Validator Round: Conducted in the third quarter of 2019 | Funding amount: $5.7 million | Price: $0.225
Private Sale: conducted on January 2, 2020 | Funding Amount: $2.29 million | Price: $0.25
Strategic round: conducted in the first quarter of 2020 | Funding amount: $2.29 million | Price: $0.25
ICO: conducted on March 23, 2020 | Amount raised: $1.76 million | Price: $0.22 | Platform: Coinlist
Token Generation and Distribution: April 10, 2020 | Listing Price: $0.67
Undisclosed round: conducted on June 9, 2021 | Financing amount: USD 314 million Main investors: Andreessen Horowitz (a16z) (lead investor), Polychain Capital (lead investor), Multicoin Capital, CMS Holdings, Ryze Labs (Sino Global Capital), Alameda Research, Jump Trading, etc.

Solana (SOL) Tokenomics (as of September 12, 2024)

Total Supply of SOL: 584,294,896 SOL
Circulating Supply: 467,932,073 SOL (80.1%)
Circulating Supply: 116,362,823 SOL (19.9%)
Market Cap: $63.3 billion (5th in total, accounting for 3.104% of the total Market Cap of the encryption market)
stake supply: 383,399,756.5 SOL (65.6% of total supply)
Locking stake SOL: 48,163,740.1 SOL (12.6% of total stake)
Inflation rate: The current inflation rate is 5.036%, decreasing by 15% each year, and the final inflation rate is 1.5%
Supply dynamics: SOL staked includes active and unstaked assets; locked assets are typically temporarily frozen due to investments or funding projects by the Solana Foundation or Solana Labs until a specific date unlocks.
Fee Structure: 50% of the transaction fees are destroyed, and the remaining portion is allocated as Block Reward to validators.

Solana’s Inflation Mechanism

Token issuance and reduction:

Solana’s SOL Token is introduced through two main mechanisms: the Genesis Block and protocol inflation (stake rewards). On the other hand, SOL Token is burned through Money Laundering to reduce circulation. The inflation plan is controlled by three parameters: the initial inflation rate is 8%, the annual deflation rate is 15%, and the long-term inflation rate is 1.5%. The current inflation rate is 5.07%, and Solana’s inflation began in the 150th epoch of February 2021.

SOL Unlock Schedule (Source:helius）

Impact on Network Participants Proof of Stake (PoS) inflation essentially transfers wealth from non-staking participants to stakers, effectively diluting the value of assets held by non-stakers while rewarding users who participate in staking. Solana maintains a high staking rate of 65%, which is strong compared to other networks. Currently, approximately 380 million SOL tokens are staked, with significant movement observed between different epochs.

Stake rewards measured by inflation rate

stake收益计算 The staking yield is influenced by the inflation rate, the online time of the validating Node, the commission rate, and the proportion of SOL staked. The calculation formula is:

Cost destruction and deflation factors: The costs of Money Laundering, slashing penalties, and other user-related losses have had a certain impact on deflation, although the scale is small. In March 2024, the peak of fee destruction accounted for 7.8% of the staking reward, but has recently averaged down to 3.2%. After the implementation of SIMD-96, the impact of these fee destructions will become negligible. Although slashing penalties may occur, they are rare and currently not a significant deflationary factor.

Taxation and Market Impact: In many jurisdictions, receiving inflation rewards may be considered a taxable event, which may lead to dumping pressure for stakers to pay taxes. In addition, PoS inflation can exert continued downward pressure on the price of SOL, affecting its fair price comparison and network economy.

Dependency of Validators’ Income and Inflation: Traditionally, validators have relied on inflation commissions, but recently, the rise of alternative sources of income such as MEV (maximal extractable value) and Block Reward has provided validators with new sustainable income paths. However, the long-term sustainability of these alternative sources of income is still uncertain.

Inflation Parameters and Scenario Analysis (with the help of Helius）：

Solana’s inflation rate is currently guided by an initial inflation rate of 8%, a deflation rate of -15%, and a long-term inflation rate of 1.5%. As of September 2024, the current inflation rate is approximately 5%, with a total supply of 584 million SOL. Four scenarios have been proposed to explore potential changes:

Scenario A: doubling the inflation rate from -15% to -30%.
Scenario B: Halving the long-term inflation rate from 1.5% to 0.75%.
Scenario C: Immediately reduce the current inflation rate from 5% Halving to 2.5%.
Scenario D: Halve the current inflation rate, double the deflation rate, and halve the long-term inflation rate.

Impact on supply and price:

In the next eight years:

Scenario A: Reduce the total supply by 5.3% (to 678 million SOL coins).
Scenario B: The impact is relatively small, only reducing 100 million SOL.
Scenario C: Reduce the total supply by 7.3% (to 660 million SOL).
Scenario D: Reduce the total supply by 12.2% (to 6.29 billion SOL).

Assuming the starting price of SOL is $150 and keeping other variables unchanged:

Benchmark Scenario : According to the current inflation plan, the price drops by 18.5% to $122.25.
Scenario A: The price fell 13.93% to $129.10.
Scenario C : The price dropped by 12.07% to $131.90.
Scenario D: The price dropped by 7.26% to $139.10.

Architecture

Solana is a high-performance blockchain that focuses on speed, efficiency, and scalability. It supports thousands of transactions per second, with low latency and extremely low costs. The block time is 400 milliseconds, and the cost is only a fraction of a few cents. This report explores the mechanism and architecture of Solana, emphasizing its ability to seamlessly scale and interact within a unified ecosystem.

Programming language Solana is primarily written in Rust for smart contract development because it offers concurrency, memory safety, low-level control, and ensures code security and predictability. While Rust is the main language, Solana supports all LLVM-compatible languages such as C and C++, which attract more developers to participate. For client development, Solana provides SDKs for Java, C#, Python, Go, and Kotlin, supporting communication with the Solana network via JSON RPC API. This diverse language support enhances developer accessibility and flexibility.

Mechanism and Architecture Solana’s architecture leverages a unified and composable ecosystem, where all applications are integrated on the same on-chain Block. This design avoids the need for bridges, separate chain IDs, or fragmented Liquidity, enhances user experience, and simplifies interactions between applications. The high performance of the Block chain stems from its full utilization of hardware capabilities, ensuring synchronous expansion of software and hardware.

Solana’s transaction processing begins with users submitting transactions to leaders, who compile them into blocks and propagate them to the network for execution and confirmation by other validators. Core protocol changes are managed through Solana Improvement Proposals (SIPs) and undergo community review and voting.

Trade lifecycle In Solana Blockchain, transactions are the only way to change the state. Each transaction or “transaction message” includes a block header, account address, recent blockhash, and instruction. Transactions are atomic, ensuring that all operations in the transaction either succeed completely or fail completely. This structure allows for predefined optimizations through a pre-listed account, promoting conflict-free parallel transaction execution.

Security and Secret Key management Solana uses Ed25519 Elliptic Curve Cryptography to generate Public-Private Key pairs, ensuring strong security and efficient transaction signatures. The wallet generates Secret Key pairs, with the Public Key serving as the on-chain account identifier for Blocks, and the Private Key used for authorization. Transactions are signed using the Private Key to ensure integrity and authenticity, and then verified using the Public Key.

Network Operation Solana adopts a leader-based model, without using a transaction pool (mempool), and processes transactions through the allocation of specific validators as leaders within a fixed time period (400 milliseconds). Validators are selected based on the amount staked and rotate roles according to a predetermined schedule, thereby enhancing the system’s Decentralization and security.

The network uses the Stake Weighted Quality of Service (SWQoS) mechanism to prioritize transactions from stake validators, reducing the impact of spam transactions and Sybil Attacks. SWQoS reserves 80% of the leader’s processing capacity for transactions routed through stake validators, with the remaining portion allocated to unstaked Nodes.

Enhanced Scalability Some recent expansion solutions, such as SVM Rollups and ZK Compression, are under development with the aim of further enhancing Solana’s performance, although these solutions are still in the early adoption stage. The QUIC network protocol adopted by Solana helps with efficient, secure, and scalable transaction message transmission, meeting high throughput demands.

Consensus and Block production Solana’s Consensus Mechanism adopts a continuous Block construction pattern, with leaders constructing and broadcasting Blocks in real time within their time slot. This approach reduces latency and optimizes transaction processing. validators’ Transaction Processing Units (TPUs) are responsible for Block creation, executing transactions in parallel as much as possible to maximize throughput and efficiency.

Proof of History（PoH）

A detailed description of the Proof of History mechanism can be found in Solana’s White Paper.

Solana’s Proof of History (PoH) is a type of encryption clock used to achieve network synchronization by establishing a verifiable event sequence. Unlike Proof of Work (PoW) and other Consensus Algorithms, PoH is not used to reach consensus, but rather provides a time reference for validators to order transactions and follow the leader’s schedule.

PoH operates by continuously calculating SHA-256 hash chain, with each hash depending on the output of the previous hash. This sequence must be calculated in order to form a “mini Proof of Work”. Validators run PoH service to generate these hashes, which are difficult to calculate but can be easily verified by other validators. By embedding transaction data into this hash chain, PoH marks the Timestamp of the transaction, proves the order in which the transaction occurred, and prevents validators from manipulating the Block order.

Mechanism & Function Each Solana validators will continuously run the PoH service, performing hash calculations sequentially to maintain the timestamp of the encryption. When the current leader processes new transactions, these transactions will be combined with the current PoH hash, updating the hash chain, and embedding the transactions in the timestamp timeline. This process ensures that the leader cannot manipulate the time or order of transactions.

In each 400 millisecond Block, the PoH stream contains approximately 800,000 hash and ‘tick’ that marks the passage of time at intervals of 6.25 milliseconds. These ticks serve as proof of activity and maintain the rhythm of network operations. Even if not acting as leaders, validators still keep their PoH clocks running to synchronize with other parts of the network and ensure compliance with the leader’s schedule.

account model Solana’s state management relies on an account database called AccountsDB, which is structured as a large key-value store with accountAddress as the key and the corresponding data as the value. Solana accounts can be divided into multiple types.

User account: Represents individual users with Private Key.
Data account: stores state information, such as Token balance.
Program account: Contains the executable bytecode of a specific program.
Native program account: Perform core network functions.

Solana distinguishes between code and state, where the program account is immutable and the state is stored in a separate account. This separation enables more efficient state management and achieves unique optimizations in the Solana architecture.

Programs on Solana are written in languages like Rust to manipulate account data, but they do not store their own state. Instead, programs interact with Programmable Address (PDA), which is a special account without a Private Key controlled by the program. PDA ensures that only relevant programs can modify the state, enhancing security and controlling state changes in the program.

Rent and account management In order to reduce state bloat, Solana implements a rent mechanism that requires accounts to maintain a minimum balance of SOL. Accounts can be closed when no longer needed, and the rent balance is returned to the user. This approach encourages efficient use of state and avoids unnecessary accounts being kept open indefinitely.

Turbine: Data Transmission Turbine is Solana’s data dissemination protocol, inspired by BitTorrent. It breaks transaction data into small data packets called “shreds” and spreads them in a structured way across the network. The shreds are grouped into batches and broadcasted via Turbine trees. Validators are organized in a hierarchy, forwarding the shreds to other validators. This reduces the data burden on leaders and improves the network’s ability to efficiently distribute blocks.

Consensus: Tower BFT Solana uses Tower BFT, which is a customized implementation of practical Byzantine fault tolerance Algorithm (PBFT) enhanced with PoH synchronized clocks. Due to the validators’ dependency on the pre-set transaction order of PoH rather than multi-round communication, the communication overhead during the Consensus process is reduced. Validators earn points by voting correctly, vote on Blocks, and the system ensures that validators stay on the chosen fork for a certain period of time, reducing the likelihood of fork.

Gossip and Archive Solana’s Gossip network serves as the control plane to propagate critical Metadata, ensuring that Nodes can communicate and synchronize states on the network. Archive Nodes store network history, with data stored in Warehouse Nodes to ensure past transactions are accessible.

Economy and Jito Solana’s economic model includes inflation-based stake rewards, validators earn SOL by participating in Consensus and generating Blocks. Block rewards include partial destruction and partial rewards to the leaders who generate Blocks. Liquid stake allows SOL holders to stake their Tokens in a pool and receive liquid stake Tokens (LST) that can be traded or used across applications, while also earning stake rewards.

Jito client is widely adopted by Solana validators, it enhances economic incentives by implementing a Block space auction system outside the protocol. In addition to standard Money Laundering, the system also allows for priority processing of transactions by providing ‘tips’. This significantly increases rewards for validators and promotes the widespread adoption of the Jito client in the Solana network.

Solana Virtual Machine (SVM)

Solana Virtual Machine (SVM) is an innovative framework designed to manage maximal extractable value (MEV) on-chain in Solana Blocks. MEV refers to the additional value extracted from a Block by reordering, including or excluding transactions. SVM provides the technology and protocol to detect, analyze and manage MEV activities, thereby promoting efficiency, fairness, and security in the Solana ecosystem.

Ether坊Virtual Machine（EVM） vs Solana Virtual Machine（SVM）

There are differences between SVM and Ethereum Virtual Machine (EVM) in Smart Contract execution and transaction processing. In SVM, each validator executes Smart Contract separately, allowing for high transaction throughput. In contrast, EVM requires consensus among nodes before execution, resulting in slower processing speeds. In addition, Solana’s parallel processing model can execute multiple transactions simultaneously, while Ethereum’s sequential processing model can only process one transaction at a time, making Solana faster and more efficient.

The Purpose and Importance of SVM

SVM aims to prevent the manipulation of transaction ordering and block validation by providing a structured approach, thereby addressing the MEV problem. This is crucial for maintaining the integrity of financial interactions on Solana, protecting users from behaviors such as front running, and enhancing the credibility of the network. Given Solana’s high transaction throughput, effective MEV management is crucial in preventing harm to ordinary users from rapid value extraction.

Definition of Solana Virtual Machine

In the Solana ecosystem, people have different views on SVM. Some believe that SVM includes the entire transaction processing flow, including validators runtime and program execution, while others focus on the underlying eBPF Virtual Machine responsible for executing programs. Generally, SVM is understood as an integrated system that involves the Bank component of Agave validators, which is responsible for state management during each slot period. SVM processes transactions in batches, with each batch containing instructions for a specific program and uses caching mechanisms to optimize execution efficiency.

Opportunity for SVM

The decoupling and clear interface of SVM enable it to be applied in a variety of scenarios, beyond the scope of Solana validators, mainly including:

off-chain service: used for testing and simulation, simulating the transaction processing of Solana off-chain.
Lightweight Client: Provide fraud proof for lightweight clients to enhance scalability and security.
State Channels: Use SVM-based State Channels to manage peer-to-peer connections and publish the final result to mainchain.
Rollups: As the execution layer of Rollups, it enhances scalability without bearing the full cost of the Consensus protocol.
Avalanche subnet: Integrated with the Avalanche module for Consensus and network connectivity.
Extend SVM: Customize SVM unit for specific protocol to enhance flexibility. SVM is now available through the solana-svm Rust crate, supporting various applications and driving innovation within the Solana ecosystem.

FTX

However, with the collapse of FTX, Solana has faced significant challenges. FTX is an important entity closely associated with the Solana ecosystem, and its founder, Sam Bankman-Fried (SBF), is a major supporter of Solana, driving projects traditionally associated with the Ethereum ecosystem, such as Serum Decentralized Exchange (DEX), to migrate to Solana. Under SBF’s influence, FTX has become one of the world’s largest centralized exchanges, further enhancing Solana’s reputation. However, due to FTX’s misuse of company assets and customer deposits for high-risk investments, it eventually led to its closure, posing a significant risk to the Solana ecosystem associated with FTX.

On September 12, 2023, FTX/Alameda Research unstaked $24 million worth of $SOL, while Solscan data shows that the wallet still holds over $1 billion worth of $SOL, including staked and locked tokens. Despite these challenges, the core developer community that shares the vision of Solana remains committed. Solana is striving to restore the community’s trust by focusing on improving network stability, creating a more developer-friendly environment, and addressing technical issues.

Featured projects built on Solana on-chain Block

Solana ecosystem (top ten projects by Market Cap)

Neon EVM: Neon EVM allows Ethereum applications to run on Solana, providing faster processing speeds, lower costs, and leveraging Solana’s parallel processing capabilities.
Eclipse: An Ethereum Layer 2 solution using the Solana Virtual Machine (SVM) for settlement on Ethereum and ensuring security through zero-knowledge proofs.
Nitro: A bridge connecting Solana with the Cosmos and IBC ecosystems, enhancing interoperability and liquidity acquisition.
Wormhole: A cross-chain bridge that enables seamless transfer of assets and messages between multiple blockchains, including Solana.
Allbridge: Cross-chain bridge that facilitates asset transfers between Solana and other blockchains, enhancing Solana’s interoperability.
LI.FI: A Liquidity aggregation protocol that integrates multiple cross-chain bridges and Decentralized exchange (DEX) aggregators, supporting exchanges across networks.

DePIN

Helium: A decentralized wireless network that uses Solana to expand support for Internet of Things (IoT) devices and provides an economically efficient connectivity solution.
Hivemapper: Decentralized mapping network where users contribute real-time road images through their dashcams and receive token rewards.
Render Network & io.net：A distributed GPU computing network built on Solana for 3D rendering and artificial intelligence tasks, providing scalable and cost-effective computing power.
IoTeX: A Web3 infrastructure platform that connects smart devices and real-world data to the blockchain, enhancing data accuracy and utility.
Teleport: A decentralized ride-hailing service platform that uses Solana’s blockchain protocol to provide drivers with higher profits and reduce passenger costs.

Decentralized Finance

Marinade Finance: A liquidity stake platform on Solana that allows users to earn stake rewards by holding Liquidity and mSOL Tokens at the same time.
Jito: A protocol that optimizes MEV returns through liquid staking and is committed to achieving permissionless operations in the Solana ecosystem.
Sanctum: Provides liquidity sharing solutions for staked tokens on Solana, promoting seamless interaction and yield generation.
Drift Protocol：Decentralization trading platform on Solana, providing Spot and Perpetual Contract Trading, supporting real-time price updates.
Jupiter: Solana’s leading DEX aggregator, providing efficient trading paths, limit orders, and perpetual contract trading.
Zeta Markets: A Decentralization Derivatives trading protocol that supports Options and futures trading on Solana.
marginfi: A decentralized lending protocol that provides comprehensive financial activities across multiple Solana DeFi protocols.
Kamino: A DeFi platform that offers strategic financial activities including lending, liquidity provision, and portfolio management.
Parcl: A real estate investment platform based on data feed tracking house prices.

Others (Non-fungible Token and Meme Token, etc.)

Magic Eden: The leading Non-fungible Token market on Solana, supporting multi-chain transactions and providing users with a friendly interface and low Money Laundering.
Tensor: A market designed for professional NFT traders, integrating automated market makers (AMM) and real-time data functions.
Metaplex: The platform provides tools for creating, selling, and managing digital assets on Solana.
DRiP: Airdrop platform for emerging artists on Solana, providing affordable minting services and free NFT art minting services.
TipLink: This lightweight wallet allows for easy transfer of assets via links or QR codes, supporting access to Gmail or Solana accounts.
Solchat: It is a communication protocol on Solana that supports on-chain messaging and peer-to-peer (P2P) calling and is expected to integrate with Solana’s mobile ecosystem.
Dialect: It is a decentralized messaging protocol that supports token transfers through messaging.
Mad Lads：The xNon-fungible Token series created by Coral rekindles the vitality of the Solana community by using Non-fungible Tokens as Decentralization applications.
MonkeDAO: The first NFT DAO on Solana, originated from Solana Monkey Business, dedicated to community-led activities.
Superteam DAO：The DAO is committed to promoting Solana in emerging markets and supporting innovative projects through community-driven efforts.
Solana University: This international student organization provides Solana and Web3 educational resources and activities.
Meme Token: $BONK; $WIF; $POPCAT

Key Metrics (as of September 12, 2024)

SOL/USD - $135.07 (Coordinated Universal Time 06:06; September 12, 2024); Market Cap - $63.3 billion

SOL Market (ranked top five by 24-hour volume; as of September 12, 2024); Data source: coingecko

Total locked value - $8.045 billion

Purple - SOL price; Yellow - SOL daily active Addresses (5.5 million - all-time high)

Purple - SOL price; yellow - SOL daily volume

Solana - Financial Statements (Source:tokenterminal）

Top 5 Solana validator Nodes (note: all values are in SOL units; including all stake data, not just active stake data)

Solana DEX volume (USD)

Solana DEX data

Jito verification Node prompt

Link

Data Source

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