The Road to Revival of Solana: Analysis of Key Indicators and Driving Factors

Introduction

At the end of 2022, the Solana ecosystem experienced a significant setback. The price of $SOL plummeted by 96% from its peak of $260 in November 2021 to $9.6 in December 2022. However, this was not the end of the Solana journey. Over the past year, developers have been tirelessly dedicated to building the platform, actively developing and launching high-quality innovative protocols. As a result, the price of $SOL has shown resilience, rebounding to the current $71, and the total locked value (TVL) has also recovered from $210 million in December 2022 to $812 million.

This report will explore the various factors contributing to the recovery of Solana.

Features of Solana

Although this article does not aim to delve into the technical advantages and innovations of Solana, it is worth mentioning that the success of a public chain largely depends on its underlying technical architecture. Therefore, we briefly describe Solana's technical features and the advantages they bring.

Unlike common proof-of-work and proof-of-stake blockchains, Solana uses a proof of history mechanism. This allows nodes to reach consensus on the order of events without needing to communicate with other nodes. This unique approach enables the Solana network to achieve network throughput and timeliness that are different from other blockchains.

In addition, compared to Ethereum's charge for each on-chain transaction and the destruction of a portion of the fees, the Solana network adopts an additional method. It charges project developers state rent and validators voting fees. This strategy reduces the dependence of token prices on transaction frequency while increasing the cost of deploying smart contracts. This may decrease the prevalence of fraudulent smart contracts on the network.

In summary, Solana features high transaction throughput, low transaction fees, and fast block confirmation times.

Solana has faced criticism for its network centralization issues, but has made substantial progress in decentralized infrastructure. The network has expanded its reach by integrating more nodes globally, currently operating around 3,000 nodes across 392 different data centers in 31 countries. This expansion can be assessed using the Nakamoto coefficient, which measures the minimum number of independent entities required to shut down blockchain operations. This coefficient is commonly used as an indicator of the degree of decentralization in a blockchain; a higher score indicates a higher level of decentralization. Currently, Solana's Nakamoto coefficient stands at 21, surpassing Bitcoin and Ethereum's 2 (two mining pools control most of the network's computing power, with Lido and Coinbase collectively staking over 42% of the world's ETH. Foundry USA and Antpool control over 54% of Bitcoin mining globally), Binance's 8, Polygon's 4, and Cosmos's 7, demonstrating significant progress in enhancing decentralization.

Developer Community Status

After the bankruptcy of a certain trading platform, the number of developers in the Solana ecosystem remains high, with active development progress. According to a developer report from a certain organization, the number of active developers in the Solana ecosystem was approximately 2,540 in March 2023, slightly down from the peak of 2,648 in December 2022. Most developers remain in the Solana ecosystem despite the panic. With the gradual loss of users in certain applications, new high-quality projects such as Jito, MarginFi, and Backpack have emerged. Since March, the number of developers in Solana has decreased. However, the report indicates that this reduction mainly occurs among part-time developers. The number of full-time developers remains relatively stable, indicating that the core development activities of the Solana ecosystem continue.

Capital Activity Analysis

Comparing the $SOL trading data and TVL data of the Solana ecosystem over the past year, it can be observed that the outflow of assets is slower than the decline in token prices. Notably, this year, when certain institutions were repeatedly permitted to sell their staked $SOL assets (usually associated with spikes in trading volume as shown in the charts), the token price has shown a stable upward trend. This indicates that the Solana ecosystem is overcoming certain negative influences, and the market holds a positive outlook on the future development of the Solana ecosystem.

Now, let's take a look at the flow of these assets within the Solana ecosystem. The top two protocols by TVL are liquid staking protocols: Marinade and Jito. They both offer liquid staking services, but their profit optimization methods differ.

• Marinade Finance

Marinade's staking service automatically transfers staked assets from low-performing validators to high-performing validators for customers. As mentioned earlier, Solana's validators need to pay voting fees. Whether staking 10K $SOL or 1m $SOL, the voting fee paid is the same, with part of the voting fee being burned and the remainder redistributed to block proposers. Therefore, large validators effectively acquire voting fees from small validators, which is the reason for the significant performance differences among validators, and centralized operations as validators do indeed have their advantages.

The Marinade liquid staking protocol ( MLSP ) allocates the received $SOL to one or more validator nodes. Marinade regularly updates its list of validator nodes, selecting the best candidates based on performance and reputation. The profits accumulated by MLSP are accumulated in the deposit pool, thereby increasing the value of mSOL.

• Jito Network

Jito positions itself as the first staking product on Solana that includes MEV rewards. Jito Lab developed the Jito-Solana client, which is the first third-party validator client on Solana. The architecture of the Jito-Solana client is designed to effectively capture MEV profits within the Solana network. Traders submit bids for transaction sequences that they believe are profitable. A third-party block engine then runs complex simulations to identify the highest value transaction combinations. These bids are then allocated to validators and token holders (JitoSOL), thereby increasing the rewards for token holders.

They each hold hundreds of millions of dollars in TVL, and it is difficult to determine the exact number due to the self-capacity of liquidity protocols potentially leading to double counting of TVL. Let's return to their impact on the recovery of Solana.

In September 2023, an institution was authorized to sell its crypto assets, including $SOL, reportedly worth $1.16 billion. These $SOL tokens were partially removed from old staking agreements and certain exchange wallets after a month of liquidation, and were gradually sold to new holders, who are now staking them in the aforementioned liquid staking agreements. On October 23, when Bitcoin's price broke $30,000, the market continued to heat up. Typically, when the market is booming, people are reluctant to simply hold assets waiting for appreciation. This is where these liquid staking agreements come into play, offering an attractive yield enhancement method with an annualized yield of around 7%-9%. This trend further fueled the steady rise of $SOL tokens.

Application and On-chain Activity Analysis

In addition to the optimistic outlook on the price of Solana, the Solana ecosystem has also maintained a healthy and active state during this period. The daily trading volume of Solana consistently far exceeds that of any other blockchain, with the main on-chain transactions coming from the following protocols.

(Sol Incinerator is quite an interesting project. It allows users to destroy useless NFTs and fraudulent tokens in exchange for a small amount of $SOL, with each NFT or token destroyed yielding between 0.002 SOL and 0.01 SOL. If you want to know the source of these $SOL, a small storage fee is charged by the network when creating an account on Solana. By destroying tokens, users can close their accounts and recover the storage fees.)

It can be seen that the activities on the Solana blockchain mainly involve transactions, which is similar to the trends observed on Ethereum and BSC. Unlike Polygon or Base, which are primarily influenced by one or two applications, Solana's on-chain activity showcases a more diverse ecosystem; this should not be misunderstood as a lack of successful applications on the Solana network. On the contrary, it highlights Solana's diversity. Well-known projects like Jito, STEPN, and Drift, while important, do not solely define the usage of the Solana network.

(As a millisecond-level oracle, the reason Pyth has not generated a large number of interactions on the Solana blockchain is that its main data streams are collected and determined on Pythnet --- this is an AppChain launched by the Pyth team based on the Solana codebase. Pyth Network chose to build on Solana because the network can process thousands of transactions per second with fast finality. Additionally, Solana's 400-millisecond slot time allows Pyth Network price feeds to update faster than most other layer one technologies.)

The Solana network has advantages in speed and cost-effectiveness. To illustrate this, almost all public blockchains are faster and cheaper compared to Bitcoin and Ethereum. However, data from a certain platform shows that the total number of transactions on Solana in the past month was approximately 825 million, which is 24 times that of Ethereum's 34 million transactions. Despite such a large transaction volume, the total Gas consumed was 62,735 $SOL, equivalent to about $4.3 million, with an average transaction cost of around $0.005. In contrast, Ethereum's total Gas consumption for a month was 126.7K, amounting to approximately $268.4 million, with an average transaction cost of $7.89, which is 1578 times the transaction fees on Solana.

Market Development and Technological Advancement

In August, e-commerce giant Shopify integrated Solana payments as a new payment option to change its business model. In September, credit card giant Visa also expanded its settlement solutions with Solana. In Visa's announcement, the reason for choosing Solana was that "the Solana blockchain network features high transaction throughput and low-cost scalability, making it a good candidate for payment and Visa stablecoin settlement pilots." In addition to being accepted by traditional markets and establishing partnerships with internet giants, the Solana network has also made commendable progress in technology and applications over the past year.

• State Compression

In April, Solana introduced state compression, a new data storage method that can reduce the cost of minting NFTs by over 2000 times. With state compression technology, the cost of minting 1 million NFTs dropped from $25,300 to $113. In comparison, the costs on Ethereum and Polygon are $33.6 million and $32,800, respectively. Helium, which migrated to Solana in April, benefited greatly from this technology. During the migration, 900,000 hotspots on the Helium network were minted as NFTs. Without compression technology, this would have incurred a cost of over $260,000, but with compression technology, the cost during migration was only $122.

• Neon

In July, Solana's EVM-compatible solution Neon was finally launched on the mainnet. Subsequently, Solang (a Solidity smart contract compiler) was introduced. These developments make it easier for developers to write Ethereum applications on the Solana platform.

• Firedancer

In October, Firedancer went live on the testnet. Firedancer is a new third-party validator client developed by an organization for the Solana blockchain, aimed at improving network efficiency and transaction processing capabilities. As the second client for Solana, it is designed to reduce risks associated with a single client and prevent network disruptions. Its goal is to process over 1 million transactions per second.

Clearing Situation of Certain Institutions

This aspect was briefly mentioned earlier when discussing capital activities. However, it is worth noting that the clearing process of these institutions is extensive and ongoing. To be cautious,