Solana is one of the latest blockchains to gain a lot of attention from the public. The reason? It’s offering a network for smart-contracts with extremely high throughput and very fast block finality.
VisaNet by Visa Inc. is the world’s leading payment network. It regularly handles anywhere from 2,000 to 4,000 transactions per second and has the capacity to handle over 50,000 more. On the other hand, the Bitcoin network (BTC) has a substantially lower transaction capacity, with a maximum seven per second. The Ethereum network, central to the operation of many decentralised finance (DeFi) protocols, is only capable of processing approximately 12 to 15 transactions per second. Both networks are also subject to high transaction fees. This is a huge problem, and one that needs to be solved to further advance DeFi and the wider cryptocurrency economy. While Ethereum developers are certainly working on solving these issues with L2 scaling and Proof-of-Stake, other developers are seeing this as their opportunity window.
Solana aims to address this scalability issue through an innovative approach. The purpose of this journal article is to present an in-depth analysis of the fundamental, operational and economic models of the Solana project. Let’s dive right in!
Solana is a delegated Proof-of-Stake (DPoS) protocol with the objective of providing scalability without compromising on decentralisation or security. The hope of Solana’s creators is that it will support high-growth and high-frequency for decentralized blockchain applications (DApps) which are growing in popularity. The Solana blockchain can facilitate over 50,000 transactions per second, making it capable of competing with Visa and Mastercard in terms of transaction speed. Solana produces one block every 0.4 seconds. In comparison, the BTC network produces one block every 10 minutes, and Ethereum creates one block roughly every 12 to 13 seconds.
How does Solana manage to achieve this monumental capacity compared to other blockchains? There are eight key innovations that Solana has developed, the most important one being Proof-of-History.
Solana uses Proof-of-History which is a sequence of computation allowing for the cryptographic verification of the passage of time between two events. Other blockchains rely on sequential validation of blocks which requires validators to talk to each other to reach a consensus on the passage of time when a transaction occurs. This slows down the network because the previous block of transactions must be confirmed by every validator node on the network before the next block can begin. Picture a relay race with three runners, and the racetrack as a snapshot of time. The sum of the distance each runner has covered signifies the total work done, but the second runner cannot begin running until the baton is passed to them by the first runner.
On the Solana blockchain each individual validator measures time with their own clock by encoding it through a sequential-hashing verifiable delay function (VDF). Each transaction made on the Solana blockchain is time-stamped which allows the validator nodes to record and organise them without needing the other nodes for confirmation.
Going back to the relay race analogy, with the Solana blockchain, all three runners can run simultaneously without needing to wait for a baton to be passed. Collectively, they are doing the same amount of work as other teams, but in terms of time, they only use one third of it to complete the race. When compared to the sequential method used by the other team; Solana’s runners are three times more efficient. Solana allows its team to complete three times the work in one full lap of the track, and it does it in the same amount of time.
The Solana network is even faster than this, but this analogy can help us understand one of the main reasons its transaction capacity is so much faster than other blockchains.
In Figure 1, you can see that three transactions are executed simultaneously, and that the ‘Leader’ node which represents the Proof-of-History generator organises these transactions in the proper order. This model suggests a centralized process. The Leader node is rotated every four blocks and delegates to a verifier node. This process is called Delegated Proof-of-Stake and uses a Verifiable Delay Function (VDF) algorithm based on the timestamp of each transaction. This produces a new network state, that is then shared with other verifier nodes which carry out a similar transaction using copies of the original network state. The nodes then vote to confirm the state of the ledger, creating the next set of transactions. These new transactions are then put in order using the new network state as a reference point. This process repeats itself continually.
The Proof-of-History (PoH) is not a consensus mechanism per se; it is a component of Solana’s Proof-of-Stake consensus feature. PoH is the main innovation that has allowed Solana to boast such fast and efficient transaction processing and verification in comparison to conventional blockchain networks. PoH makes Solana a strong competitor for the Ethereum network. Upgrades through Ethereum 2.0 should alleviate some of the issues facing that network. This is not to say that Solana will displace Ethereum as the top DeFi protocol, though it is likely to take over a fair share of the DeFi TVL (Total Value Locked).
BFT stands for ‘Byzantine Fault Tolerance’, named after the Byzantine Generals’ Problem. It is a feature of distributed networks that allows a consensus or agreement on the same value or outcome, to be reached even when some of the network nodes give inaccurate information or fail to respond. In simple terms, the objective of the BFT mechanism is to prevent system failure by distributing decision-making across the network so that the influence of any faulty or malicious nodes is reduced. This process acts to secure the integrity of the network. All blockchains have some form of BFT built into their coding.
The Solana blockchain Tower BFT consensus mechanism is a variant of the BFT algorithm that utilises PoH as its cryptographic clock in order to reach consensus inside the blockchain. This is important because many different versions of the Solana ledger can be created by each of the nodes which work independently, but only one is correct. To ensure that the correct state of the ledger is maintained, validator nodes must vote on and establish consensus on which ledger is accurate. Once their collective vote is locked-in, that particular version cannot be changed, and this will become the new iteration of the ledger. The new ledger is then passed on to the ‘Leader’ node so that new transactions can be processed as seen in Figure 1.
Combining PoH with Tower BFT has led to Solana’s main innovative breakthrough; however, there are six other new developments that also improve the speed of the blockchain network.
These improvements include Turbine, Gulf Stream, Sealevel, Pipelining, Cloudbreak, and Archivers. Each feature work in the following way:
- Turbine increases the efficiency of bandwidth usage, allowing for a faster transaction settlement.
- Gulf Stream eases the process of block confirmation, improving the network throughput.
- Sealevel allows thousands of smart contracts to run parallel to each other as long as they are in the same state of the blockchain, improving runtime.
- Pipelining creates streams of input data that are shared amongst various nodes allowing them to be processed faster. This can be understood through the analogy of cleaning clothes. You must wash, then dry, then fold each load of clothes. If you have several loads, you can place one load in the washing machine, another in the dryer, and you can fold another, all at the same time. You will end up with the same amount of work completed, but in a much shorter amount of time than if you washed, dried, and folded one load before starting another.
- Cloudbreak achieves scalability by organising a database that allows transaction data to be simultaneously read and written.
- Archivers is enabled through the PoH technology which distributes the ledger across millions of replicator nodes around the world. This allows the decentralised storage of data, reducing hardware requirements. The Solana network generates an estimated four petabytes (4000 terabytes) of data every year, forcing every node to store all of the data it generates. This data volume can limit network membership to a centralised few that have the necessary storage capacity. Archivers allows more members to access the network and store their data.
A cluster is a group or set of computers that work together and, to the outside observer, behave like a single unit. On the Solana network, validator nodes work as a cluster to process client transactions while also maintaining the integrity of the ledger. Within the broader Solana network, there are many clusters operating without having to rely on other clusters. As long as a copy of the ledger is maintained anywhere in the world, the output of each cluster can be reproduced regardless of which client launches it.
The SOL Token (SOL) is native to the Solana network and is used to interact with its protocol. SOL is mobilised to pay for transaction fees and is passed to clusters of nodes as a reward for validating transactions.
Staking is the act of locking or holding cryptocurrency funds to support the security and operations of a blockchain network. With SOL tokens, every time a transaction is carried out, the SOL are burned, and their holders are able to stake their tokens to become one of the validator nodes responsible for processing transactions. SOL tokens are also an indicator of the general health of the network because you need millions of SOL to become a transaction validator. These two factors reduce the need for circulating supply which adds to the positive price pressure that we have seen over the last few months. SOL token has increased by 20 times in value since late December 2020.
Delegators can stake their tokens without the commitment of becoming a validator and earn a share in the rewards. Solana determines validator votes by the amount of stake delegated to them, providing them with more influence in deciding the next valid block of transactions on the blockchain.
DeFi Use Cases
Solana offers a very attractive value proposition for DeFi applications, and as such there are a couple of projects within in its ecosystem that we have covered in the past. For example, Serum and Oxygen can utilise Solana’s impressive performance characteristics.
Serum, was founded by the team from FTX Exchange. It is a high-speed, non-custodial cryptocurrency decentralized exchange (DEX), and was one of the first major projects built on Solana. It uses on-chain order-books which are hosted directly on the distribution ledger and allow trading similar to Complete Entertainment Exchanges (CEXs). Serum capitalises on the large transaction capacity and low transaction costs of the Solana network which are necessary for high-volume trading and other services available through Serum.
The Oxygen protocol offers DeFi prime brokerage services using both the Ethereum and Solana networks. Its native token OXY is Cryptonary’s latest DeFi investment, accounting for 2% of our portfolio. We have already covered the Oxygen protocol in a full fundamentals report here.
The Solana network is not only improving transaction speed and increasing capacity for processing high volumes by transforming the speed at which transactions are validated, but it can compete with and even surpass other networks like BTC, and Ethereum. Its DPoS protocol provides scalability without (allegedly) compromising on decentralisation or security, making it more competitive with mainstream networks by Visa and Mastercard. This innovative approach is enhancing network security and integrity, while revolutionising blockchain transaction processing and verification.
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