Yahoo Finance Solana: Why Ethereum's lesser known rival is steadily rising
Solana has long been heralded as the main contender to knock ether (ETH-USD) from its perch as the world’s pre-eminent network for decentralised finance.
The Swiss-developed “high-performance, permissionless” blockchain was launched in March 2020, by lead designer Anatoly Yakovenko.
Its sol (SOL) token has soared in value by more than 88% since the beginning of this year, now trading at $168.46 (£132.35). However, this is still significantly lower than the token's all-time-high of $260 (£204.27) on 7 November 2021.
Approximately 63% of sol is staked on the solana blockchain — this limits the supply of the token and has acted as a tailwind on the price. The market capitalisation for the blockchain has grown to over $77bn, ranking fifth in terms of cryptocurrency market cap, just behind Binance's BNB (BNB-USD).
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This week, PayPal (PYPL) announced that its stablecoin PYUSD would launch on the solana network, nearly a year after debuting on the ethereum blockchain. PayPal senior vice-president of blockchain, Jose Fernandez da Ponte, praised solana's cost and speed efficiencies, stating: "Ethereum works well enough, but if you’re interested in retail payments as we are, basically you need at least 1,000 transactions per second and you need transaction costs in the pennies, not in the dollars."
The ability of solana to handle large-scale blockchain movements is key to its value proposition. Solana can average 65,000 transactions per second (TPS). When compared with Ethereum’s 30 TPS, it becomes evident that the Swiss-developed blockchain is a major challenger to Vitalik Buterin’s brainchild, Ethereum.
Solana has many key innovations that could see its native SOL flip Binance's BNB token, which is next in line in the market capitalisation rankings. However, Solana is more decentralised than Binance, with over 1,000 validators, compared to only 21 validators on the BNB smart chain (BSC). The lack of decentralisation on the BSC leaves it vulnerable to manipulation or even a blockchain-wide hack, which in the long-term makes institutional players wary of deploying smart contracts on it.
Thus, the real target for solana is ethereum and it is expected to continue munching away at large chunks of ethereum’s market share because of its advanced transaction speed, lower transaction costs and attractive programming language.
Ease of use for application development accelerates the wider adoption of a blockchain by users and developers, a key factor in long-term success.
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The developers of the solana blockchain have a mechanism for validating transactions called "proof of history." This involves a cryptographic time-stamping mechanism that speeds up the settlement of on-chain (recorded on the main blockchain) transactions. This fundamental innovation in solana’s blockchain validation method, where every block is time-stamped, allows a multitude of transactions to be processed simultaneously.
The Solana Foundation’s website states that it maintains “a single global state as the network scales and never deals with fragmented layer two systems or sharded chains.” Thus, it does not need a layer two solution as its main blockchain can settle transactions at high speeds and with a fraction of the costs required on the ethereum network.
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Ethereum must rely on layer two solutions to handle large-scale transactions, as its layer one main network, where monetary settlements are recorded, experiences crippling congestion when a large number of transactions need to be verified. Layer two solutions can handle transactions at high speeds and with a fraction of the usual gas-fees, but are settled 'off-chain.' and then validated on the main blockchain network in a singular bundle at a later time.
Yahoo Finance asked Austin Federa, head of communications at Solana Labs, to explain why solana’s transaction speeds are faster than ethereums.
He said: “Solana is a proof of stake blockchain whose architecture unlocks network speeds and transactional capacity comparable to NASDAQ. It leverages proof of history, a decentralised clock before consensus, to timestamp incoming transactions, allow for faster block finalisation and increased transaction throughput.”
Federa described how solana’s 'proof of history' consensus mechanism has a low energy requirement when compared to the 'proof of work' method used to validate bitcoin settlements. He said that: “Solana's consensus mechanism is greener because it doesn't use energy and it allows for the next generation of optimisations in technology improvements to make these networks much faster and scalable.”
The programming language that solana is based upon is attractive to developers — a key factor in accelerating the rate of blockchain adoption.
If many decentralised applications are developed for a blockchain, then the proportion of users who flock to the network will appreciate.
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Federa described solana as being “built on Rust, one of the most-loved programming languages by developers. It can be used to create smart contracts on solana using a universal coding language that possesses a powerful toolkit of community resources developed by Google (GOOG), Amazon (AMZN), and Facebook (FB). Combining these tools with Rust’s compiler means developers can use less energy thinking about technical errors and spend more time focusing on smart contract logic, so it’s easier to write safe code for DeFi.”
Another reason why capital is pouring into Solana is because the platform has exploited the growing interest in non-fungible tokens (NFTs). Purchasing these one-of-a-kind digital artefacts on solana is much cheaper than the gas-fees that must be forked out to buy equivalents on the ethereum network.
The ethereum network has average gas fees of $16 per transaction. On the solana network, the average gas fee is $0.00025 per transaction.
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Some critics of ethereum suggest that Vitalik Buterin’s network is hanging on solely because of its first-mover advantage, which has seen it consolidate the majority of all known DeFi applications (dApps). But there are reasons to hesitate before concluding that solana will supersede its older rival.
Last December, Yakovenko, the co-founder of Solana Labs, took to X.com to shoot down any descriptions of the solana network as an "ethereum killer." He doesn’t “see a future where solana thrives and somehow ether dies.”
He wrote on X.com: "Don’t bring back last cycle 'eth killer' bs. It’s lame. Pareto-efficient technologies can have overlapping features and will compete, but that’s all ok. I am such a techno-optimist that I am certain that eventually danksharding will have enough bandwidth for all of solana’s data."
Also, hardware costs to run a solana node could see a diminishing number of validators on the network over time, making it less decentralised and at a higher risk of network weaknesses long-term.
* This story is an updated version of the original article published in November 2021.
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