Solana: the high-flyer of the current crypto cycle

As one of the few crypto projects to do so besides Bitcoin, Solana has just hit a new all-time high in terms of its US dollar price. Generally speaking, the project is currently seen as one of the brightest stars in the blockchain sky despite the fact that it almost found itself shipwrecked in the aftermath of the collapse of the FTX crypto exchange. But what is behind the project? And will Solana eventually succeed in surpassing Ethereum?

What is Solana?

Solana is an open source blockchain platform that was founded back in 2020 by Anatoly Yakovenko. It was developed in order to pave the way for high-speed and low-cost blockchain applications.

The key to this lies in the innovative proof-of-history (PoH) mechanism, which is combined with proof-of-stake (PoS). This approach allows the platform to process transactions more efficiently by cryptographically verifying the sequence of transactions before they are passed on to the network.

From a technical standpoint, the Solana blockchain, like those of many of its rivals, has always been considered promising. What is impressive, however, is the manner in which the project has staged a remarkable comeback since the FTX fiasco. After all, the blockchain itself was written off by many industry insiders in the wake of the devastating revelations surrounding FTX, which was the world’s second largest crypto exchange at the time. 

It was rumoured that Solana had enjoyed close ties with the former FTX founder Sam Bankman-Fried. According to research, he and his company had held up to 15% of the total Solana token supply. Within the crypto community, the various tokens of the Solana ecosystem were therefore often also labelled “Sam coins”.

_{The legendary tweet by Sam Bankman-Fried from early 2021 in which he proudly announced that he would purchase as many Solana tokens as possible at a point in time when the price still stood at USD 3 has gone down in history in the crypto community. Just seven months later, the SOL token hit a new high of almost USD 260. Source: X}

Solana’s native token is called SOL. It serves to drive the network and is used to pay transaction fees, as a reward for validators and for staking purposes. SOL is also an important part of the network's governance, as token holders are able to vote on future developments.

What makes Solana so special?

Among the large layer-1 blockchains including Ethereum, Cardano and the like, Solana remains one of the fastest blockchains with 900 transactions per second. This high transaction throughput continues to represent one of Solana’s most important technological advantages. The upcoming Firedancer update is also set to significantly boost the performance of the blockchain. The update is planned for early 2025 and will also increase Solana’s decentralisation.

Solana has made considerable progress in stabilising its network. While the blockchain experienced repeated outages in 2022, during which it was neither possible to create blocks nor process transactions, the situation has now improved markedly.

Over the past two years, the developers have worked intensively to resolve these problems. The work has borne fruit: this year, the Solana blockchain has recorded an impressive uptime of 99.94%, with outages having become much rarer.

_{The stability of Solana over the past eight months stands at 100%. Only in February of this year was there a network interruption of just over four hours. Source: Status Solana}

What is currently happening in the Solana ecosystem? 

The fact that interest in Solana has grown over recent months is also demonstrated by figures from the blockchain itself. A popular metric to estimate the capital held in a blockchain’s applications is TVL, which stands for “total value locked”. In this respect, Solana recently achieved a new two-year high and, at just under USD 8.4 billion, now stands only around USD 1 billion from its all-time TVL high, which was recorded in 2021.

_{Source: DefiLlama}

In the layer-1 blockchain sector, Solana is currently dominating several on-chain metrics. The trading volume of decentralised exchanges (DEXs), which are operated on various blockchains, is particularly worthy of note. Solana is leading the pack here: for the first time ever, the monthly DEX volume on the platform has exceeded the USD 70 billion mark.

As the chart below reveals, Solana currently has the highest DEX trading volume in US-dollar terms and is even significantly outperforming Ethereum in this regard.

_{Source: Dune analytics}

The primary reason for this dominance is memecoin trading, which has been enjoying brisk activity on Solana for several months and is continuing to blossom. For example, Solana is currently by far and away the most popular platform for launching new tokens. In November alone, up to 750,000 new tokens have been created so far (as at 22 November).

This is an incredibly high number and chiefly comprises so-called memecoins. Crypto enthusiasts have created in excess of 3.5 million new memecoins via the popular Pump.fun memecoin platform since its launch in March. It is important to understand, however, that 60% of all memecoin traders on Pump.fun lose money. As on-chain data shows, only some 3.5% of all traders succeed in earning more than USD 1,000.

Use cases besides speculation

Solana appears to be slowly making up ground in the area of stablecoins. As the foundational infrastructure for stablecoin transactions, the blockchain still finds itself trailing Binance Chain and well behind Ethereum and Tron, but developments are trending in the right direction. In November alone, stablecoin transactions worth USD 24.5 billion were processed on Solana, representing a considerable advance.

And just recently, Sky, which was formerly known as Maker, announced it would also be launching its new stablecoin on Solana. This step sends out a real signal, as Sky is considered one of the long-standing OG projects on Ethereum.

The growing role of stablecoins on Solana will also help Solana Pay, the blockchain’s own payment application. It is an open-source payment system that allows for almost fee-free transactions and instant settlements. The application is also integrated into e-commerce platforms such as Shopify, making it accessible around the world to millions of companies.

Solana: the new Ethereum? 

It is undisputed that Solana is the high-flyer among the layer-1 blockchains in the current cycle and has so far left Ethereum in its shadow. While Solana primarily scales through innovations at the base layer, Ethereum has opted to pursue the path of a multi-layer network with numerous layer-2 blockchains. The latter approach is currently leading to the fragmentation of capital and a cannibalisation of Ethereum’s own equity. It is difficult to predict today which path will turn out to be the right one over the long term. 

In the case of Solana, there is of course the risk that the blockchain could lose some of the demand for its “block space” and its own SOL coin should the hype surrounding memecoins actually come to a standstill. 

This could prove negative for the SOL coin, as it still has a high inflation rate. This is demonstrated by the following example: just one year ago (20 November 2023), SOL had a circulating supply of 423.3 million units. Today (22 November 2024), the same figure is 474.6 million units, which corresponds to one-year inflation of 12.12%. If staking rewards are included, real inflation is around 7%. 

The chart below illustrates that inflation is considerable: the last time the SOL price was USD 260 per coin, Solana’s market capitalisation stood at USD 75 billion. Now that SOL has returned to this price, its market capitalisation has risen by 64%.

_{Source: CoinMarketCap}

Important legal information

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Editorial deadline: 28 November 2024

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