Translated by LC

Table of Contents

1. Introduction

2. Breaking the Mold: Solana’s Vision for Blockchain

2-1. From Monolithic to Modular Structure, Paving the Way for Mass Adoption of Blockchain

2-2. Exploring the Growing Trend of EVM Compatibility

2-3. Solana's Unconventional Path to Becoming the Leading Price Discovery Engine

3. Solana’s Strategy to Win the L1 Competition: Discard the Insignificant and Retain the Substantial

3-1. Structural Limitations of Solana: Impacts on Customization and Resource Allocation Efficiency

3-2. Excellent Scalability and Composability

3-3. Solana Attempts to Turn the Table with its Latest Mobile Venture

 3-4. Misconceptions and Truths about Solana (Feat. Decentralization and Tokenomics)

4. Closing Thoughts

1. Introduction

Although Solana lacks what is commonly referred to as a blockchain's success equation, such as modularity, sharding, and EVM compatibility, it is currently leading the L1 race. Solana currently boasts the highest TPS of any blockchain and ranks third in terms of DAUs and developers, trailing only Ethereum and Polygon (as shown in the chart below). In this article, we'll examine Solana's unique approach, its core technology and competitive advantages, and its long-term strategy for prevailing in the L1 competition.

2. Breaking the Mold: Solana’s Vision for Blockchain

2-1. From Monolithic to Modular Structure, Paving the Way for Mass Adoption of Blockchain

Throughout the history of blockchain, there has been a recurring cycle of technological advancements leading to the creation of new content such as DeFi, games, and NFTs, which then increase the market size and attract more talent to the industry. As a result, there is an increasing demand for blockspace, as seen in the cycles of the 2020 DeFi summer, 2021 NFT summer, and P2E/metaverse trends. However, as noted in Vitalik's Blockchain Trilemma, blockchains cannot simultaneously achieve scalability, security, and decentralization. Ethereum's structure prioritizes security and decentralization at the expense of scalability, making it challenging to keep up with the growing number of transactions. This has prompted calls for Ethereum to improve its scalability, leading to a rollup-centric roadmap that aims to transition from a monolithic to a modular structure to address the scalability problem.

Modular blockchains distribute the four key functions of a blockchain — execution, settlement, consensus, and data availability — across multiple blockchains, aiming to maximize each role's efficiency and address Ethereum's scalability limitations. Over the past two years, numerous L2 projects have been developed in line with this vision, and modular blockchains have become the new standard. While monolithic structures have made a comeback with projects like Aptos and Sui, the consensus remains that rollups based on zero-knowledge proof technology will likely be the future of blockchains.

2-2. Exploring the Growing Trend of EVM Compatibility

In addition to the rise of modular blockchains, EVM compatibility has emerged as another major trend in the blockchain market. EVM compatibility refers to the ability to deploy smart contracts in the Solidity programming language. More than 90% of the market share of blockchains with Total Value Locked (TVL) offer EVM compatibility, including Ethereum, BSC, Tron, Polygon, Avalanche, Avitrum, and Optimism. Of the top 10 blockchains, nine offer EVM compatibility, and the total number of such blockchains exceeds 50. The reason EVM compatibility is crucial for other blockchains is that Ethereum has a dominant developer community and offering a similar development environment can attract developers to new chains.

Top 50 EVM Compatible Networks:

2-3. Solana's Unconventional Path to Becoming the Leading Price Discovery Engine

Modularity and EVM compatibility are currently considered fundamental for success in the blockchain space. However, Solana has remained steadfast in its unique approach, which is understandable when considering its vision. Solana's ultimate objective is to establish itself as a price discovery engine with the speed of NASDAQ, providing everyone with access to market prices simultaneously and without information asymmetry. To achieve this ambitious goal, Solana's co-founder, Anatoly Yakovenko, has expressed the need to construct a "global synchronized state machine with consensus at the speed of light." A modular architecture with sharding or rollups, on the other hand, leads to state separation and could result in fragmentation, which is not aligned with Solana's long-term objectives.

For instance, suppose Jack and Jill are engaged in high-frequency trading (HFT) with one another. A STARK Proof-of-Stake-based L2 solution would only store the necessary final transaction information required for state transition on-chain, keeping all other trading records off-chain. However, it would generate and record STARK proofs in L1 to ensure transaction validity. While this approach is efficient as it performs computations off-chain and records only critical data on the blockchain, it has two limitations: i) Firstly someone may want to view the complete trading process between Jack and Jill, and the record itself may contain valuable information - however, the zero-knowledge solution makes accessing these records challenging. ii) Secondly, the state update is slow due to latency in generating STARK proofs and reflecting transaction history in L1. On the other hand, Solana is free from these issues as it calculates and records all microtransactions that take place between the two in real-time, generating slots in L1 every 400-600ms. For this reason, Solana is considered the optimal blockchain for DeFi.

3. Solana's Scalability Focus: A Strategy to Win the L1 Competition

Solana is a blockchain platform with a unique identity and a set of clear strengths and limitations. Let's explore Solana's strengths and weaknesses and examine how Solana intends to win the L1 competition.

3-1. Structural Limitations of Solana: Impacts on Customization and Resource Allocation Efficiency

To begin with, unlike Cosmos' Tendermint BFT and SDK or Avalanche CLI and Subnet-EVM, Solana doesn't offer a development framework for creating a customized mainnet. As a result, companies and projects such as dYdX, DFK, or BMX, who want to build their own mainnet, are unlikely to find Solana suitable. Nonetheless, it is possible to build rollup or L2 solutions on Solana without a development framework. Some projects, like Nitro or Eclipse, are already building SVM (Sealevel Virtual Machine)-based rollups on Solana. However, it's worth noting that Solana's sidechains/L2 solutions may still be less appealing than other modular blockchains due to their complexity, lack of support for native bridges like Cosmos IBC, and absence of secure sharing mechanisms found in Avalanche and Polkadot.

Solana's resource allocation efficiency is a notable concern. Due to the monolithic structure of the blockchain, apps and services are compelled to compete for blockspace. While Solana recently introduced a local fee market to allow differentiation of gas prices for different apps/services, there is still a need for independent blockspaces for companies or projects launching web3 services. This is where appchains, subnets, and parachains become appealing. Solana, on the other hand, maintains that projects can stake $SOL directly or enter into a contract with a validator to obtain their own blockspace based on stake-weighted QoS. Additionally, Solana is highly scalable, which it believes will prevent resource competition from being a significant issue. For example, as of early 2022, Google receives about 99,000 searches per second, while Solana's theoretical maximum TPS is 750,000, and its blocktime is 150ms, according to Internet Live Stats.

3-2. Excellent Scalability and Composability

Solana's primary advantage is its speed, and it is a proven fact that Solana is the most scalable blockchain available. Scalability is measured by throughput and latency, where throughput is the number of transactions processed per second (TPS), and latency is the time required for a transaction to be confirmed. The key to scalability is to increase throughput and decrease latency without compromising security or cost-effectiveness. Presently, Solana boasts an average throughput of 4,000 TPS and a block time of 500ms, whereas Ethereum's throughput is around 10-11 TPS, and its block time is roughly 12 seconds. Then, what makes Solana so scalable?

Solana utilizes a suite of eight technologies to optimize speed at every stage, from when users submit transactions to when validators reach consensus and generate blocks. Let's take a closer look at how Solana generates blocks and explore the technologies employed for each step.

• Here's how Solana creates a block:
  1. Users submit a transaction.
  2. The application sends the transaction to the RPC server/validator using the sendTransacation HTTP API call.
  3. The RPC server validates the transaction and converts it into a UDP packet
  4. The validator checks the leader schedule and sends the transaction to the next leader's TPU (Transaction Processing Unit).
  5. The leader processes the transaction and sends the final state to the validators.
  6. The validators validate the final state and send the voting result back to the leader.

Gulfstream: Fast and Efficient Transaction

Solana's transaction processing structure is designed to be extremely fast and efficient. When a user submits a transaction, the RPC server immediately converts it into a User Datagram Protocol (UDP) packet and sends it directly to the next leader node. This approach is significantly faster than Ethereum's use of mempools, as the order of leader nodes in Solana is pre-determined and publicly visible (pre-deterministic). Additionally, Solana utilizes Gulfstream, which enables validators to process transactions efficiently, reduces memory overhead, and facilitates quick leader replacements.

Sealevel: Parallel Processing of Transactions

After the transaction is sent to the leader's TPU, the leader executes the transaction and shares the updated final state with the other validators. While EVM or WASM-based runtimes typically use a single thread to execute transactions or contracts sequentially, Solana's SVM (Sealevel Virtual Machine) is specifically designed to process transactions in parallel using multiple threads, depending on the number of cores available on the validator's hardware. Therefore, the processing speed of a Solana validator depends heavily on the hardware performance.

Solana is able to handle transactions in parallel through its use of an instruction vector. Each Solana transaction contains an instruction vector that includes a program ID, a program instruction, and a list of accounts to be read from or written to (read/write). The instruction vector directs the kernel to pre-sort the read/write transactions and process them in parallel using different threads for non-overlapping transactions. This is accomplished using Cloudbreak, an account database specifically designed for Solana. To achieve this parallel processing, Solana's SVM is utilized on CPUs/GPUs that support SIMD (Single Instruction, Multiple Data). This is why a multi-processor with AVX (Advanced Vector Extension) is necessary to become a Solana validator node.

Pipelining: Maximizing the Utilization of Hardware

When a UDP packet is sent to the leader's TPU, the leader goes through a process of pipelining. This involves dividing the block validation process into different hardware units, which allows all units to run continuously. This technique maximizes the utilization of the leader's hardware, thereby increasing hardware efficiency and accelerating the block validation and propagation processes.

As an example, imagine that washing the laundry is the first step, drying it is the second step, and folding it is the third step. Pipelining is like starting the first pile of laundry in the washer and immediately putting the second pile into the washer. Then, the dried laundry is opened, the washed pile is put in the dryer, the third pile is put in the washer, and so on. Similarly, in Solana, the leader goes from data fetching in the kernel, to signature verification in the GPU, to banking in the CPU, and finally writing back to the kernel in real-time. By the time the leader's TPU propagates the block to the validators, the leader is already fetching and processing the next UDP packet, allowing for a highly efficient parallel processing of transactions.

Turbine: Increased Performance with Data Propagation

Once the leader completes processing a transaction, it must send information regarding the changed state to the validators. If a leader sends 128MB of data to 2,000 validators one after another, it could overload the network bandwidth. Solana resolved this issue with Turbine technology, which is akin to BitTorrent. It allows the leader to divide UDP packets into 64KB blocks and transmit them in a top-down pattern to validators. For instance, if a block is 128MB in size, the leader breaks it into 2,000 64KB packets and sends them to Validators 1 and 2. These validators then distribute the packets to Validators 3, 4, 5, and 6. The first validators to get a packet from the leader are those with the most responsibility, which is proportional to their $SOL staking percentage. However, this framework could jeopardize the entire network if only a few nodes act maliciously or are hacked. Therefore, Solana uses a fanout algorithm that randomly directs packets to a different root each time to prevent this from happening.

PoH+ TowerBFT: Faster Block Time

Blockchains require consensus and verification to maintain the correct order of transactions and the final state. Typically, the order of events is recorded through block height rather than time, which can result in slow agreement among nodes on the creation of a block. As a result, Bitcoin's block time is 10 minutes and Ethereum's is 15 seconds. However, Solana has a much faster block time, averaging between 500ms to 600ms, which is 25-30 times quicker than Ethereum. This is due to Solana's implementation of Proof of History (PoH) technology, which enables faster processing of transSoactions.

PoH is a technology that employs SHA256-based VDF (Verifiable Delay Function) to verify the passage of time between two transactions. Its primary purpose is to introduce the concept of a synchronized clock, which forms the basis of time in the blockchain. To illustrate this, let's consider an example where Jill residing in Connecticut sends a letter to Jack in Maryland via train. The train passes through several stops such as Pennsylvania, New Jersey, and New York along the way. In Ethereum's case, the train pilot must stop at each stop and inform the concerned personnel about their current location. On the other hand, Solana's train pilot doesn't need to call each person at every stop. Instead, they can simply stamp the city's name and time of arrival and proceed without any further delay. This way, Solana trains can travel much faster than Ethereum trains since they avoid the need to agree on a time sequence through phone calls and instead use a stamp certification system.

PoH is a technology that employs SHA256-based VDF (Verifiable Delay Function) to verify the passage of time between two transactions. Its primary purpose is to introduce the concept of a synchronized clock, which forms the basis of time in the blockchain. To illustrate this, let's consider an example where Jill residing in Connecticut sends a letter to Jack in Maryland via train. The train passes through several stops such as Pennsylvania, New Jersey, and New York along the way. In Ethereum's case, the train pilot must stop at each stop and inform the concerned personnel about their current location. On the other hand, Solana's train pilot doesn't need to call each person at every stop. Instead, they can simply stamp the city's name and time of arrival and proceed without any further delay. This way, Solana trains can travel much faster than Ethereum trains since they avoid the need to agree on a time sequence through phone calls and instead use a stamp certification system.

3-3. Solana Attempts to Turn the Table with its Latest Mobile Venture

Solana is making a significant move by launching a mobile business, marking the first L1 to develop mobile infrastructure in the desktop-centric crypto market.  Currently, Saga has only received 6,700 pre-orders, but what's more important is the potential impact on consumer behavior, UX/UI improvements for mobile dapps, and scalability of mobile content that the Solana Mobile Stack (SMS), Seed Vault, and Dapp Store will bring. Solana Labs started distributing Saga to developers on December 15, and it is set for general availability in the first quarter of this year. In addition, Solana Labs is now accepting applications for DApp Store onboarding for Solana projects, further expanding its ecosystem.

3-4. Misconceptions and Truths about Solana (Feat. Decentralization and Tokenomics)

A. Misconception #1: Solana Is Not as Decentralized as Many Users Would Like

Solana has been a subject of much controversy regarding its level of decentralization. Before delving into the details, let's first understand what decentralization means in a blockchain. Decentralization consists of two factors: the number of nodes and inclusivity. The number of nodes refers to the total number of databases for transactions on the blockchain. Generally, the more nodes there are, the more secure and decentralized the blockchain is considered to be. In the event of a natural disaster, for example, if only one node remains, the blockchain can be replicated and operated normally. Solana currently has between 2,200 and 2,300 nodes in operation, making it the fourth largest blockchain after Bitcoin, Ethereum, and Cardano, indicating a high level of decentralization. Another important metric is the Nakamoto Coefficient, which measures the number of nodes needed to control a network. Solana's Nakamoto Coefficient is 30, which is high compared to other blockchains.

The Nakamoto coefficient is linked to the second factor of decentralization, which is inclusivity. Inclusivity measures how easy it is to become a node, with the biggest variable being cost. Unfortunately, Solana's inclusivity is somewhat disappointing due to the higher initial deployment and operational costs required to become a Solana validator compared to other blockchains. In order to reach BEP (break even point) in the validator business, block rewards must exceed the sum of 1) hardware deployment costs and 2) the value of $SOL purchased to participate in staking. However, the initial investment required to generate a net profit for a Solana validator is very high. For example, it took approximately $1M to start a validator business when the price of 1 $SOL was close to $150 in late 2021. This is mainly due to the following reasons:

• Stake-weighted QoS rewards are proportional to the staking rate, meaning that insufficient revenue is generated if the staking rate is too low. Therefore, a high staking rate is necessary.
• Solana's low transaction fees, which generate additional revenue (excluding block rewards), are significant. Moreover, 50% of these fees are burned. Hence, a high staking rate is required to receive meaningful rewards.
• The consensus process between validators involves signaling, which incurs a small cost for participating validators in the form of a network transaction (vote transaction). This cost is a fixed amount of $SOL per second, and it's calculated as n^2 bandwidth since n packets need to be sent to n nodes.
• The hardware requirements for Solana are high (see the figure below).

Although the high performance of Solana results in relatively high hardware setup costs, the cost tends to decrease over time due to Moore's Law. Some argue that Moore's Law has ended, but according to AMD's 2022 announcement, it is still in effect, albeit with a slowdown since 2019.

B. Misconception #2: Despite High Network Activity, the Demand for $SOL Does Not Significantly Increase

The argument is that despite high network activity (even with a large number of transactions), the transaction fees on Solana are so low that it does not significantly increase the demand for $SOL, ultimately leading to an increase in $SOL's value. This argument holds true to a certain extent. Solana's transaction fee is extremely low, approximately 5,000 lamports per signature (where 1 lamport = 0.0000000001 SOL). As a result, even if you only own 1 $SOL, you can execute tens of thousands of transactions. In other words, there is no need to hold a substantial amount of $SOL, even if you use the Solana network frequently. However, I believe that $SOL is likely to increase in value for three reasons:

• Mass adoption: While high fees may create a short-term surge in demand for tokens, users who cannot afford them will eventually leave the network, negatively impacting long-term scalability. Conversely, low fees can facilitate mass adoption by making tokens readily accessible to everyone. If $SOL were to become the reserve currency for hundreds of millions or even billions of people, it could emerge as a store of value.
• Staking Demand: Stake weighted QoS is expected to increase the demand for staking in order to claim blockspace, while simultaneously reducing the supply of $SOL. Although the current staking rate stands at 71%, there is still significant potential for improvement.
• Lastly, the introduction of a local fee market by Solana in 4Q22, which offers users the choice of prioritized fees, is a significant step towards addressing this issue. Presently, the fee bump rate is approximately 30%, with a daily fee bump of around 40B lamparts. However, this figure is expected to increase exponentially as priority fee support is integrated into RPC nodes and wallets.

4. Closing Thoughts

Solana is rapidly establishing itself in the blockchain market by charting its own path, based on a vision of a globally synchronized state machine that achieves consensus at lightning speed. Despite its highly decentralized and monolithic structure, Solana is currently one of the most scalable blockchains available. The ultimate aim is to have multiple concurrent block producers in the future, which is projected to boost scalability by several orders of magnitude, and Solana may even become the first monolithic blockchain to technically solve the blockchain trilemma without sharding or L2. This is how Solana is poised to emerge victorious in the L1 blockchain competition.

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