PYMNTS Blockchain Series: What Is Solana?

Over the course of this sequence of articles, we’re going to take a look at the highest blockchains in cryptocurrency, with a purpose of serving to you make sense of the alphabet soup of so-called “altcoins” that exists past that of bitcoin’s BTC and Ethereum’s ETH.

We’ll take a look at what they’re, how they work, what they do, and what their professionals and cons are.

You’ll come out of this sequence not solely with a greater sense of what cryptocurrency is all about; you’ll perceive why the way in which a token works — the way in which its blockchain processes transactions — is essential to its success or failure as a digital asset.

So, what’s Solana?

Solana, alternate image SOL, is the present chief within the race to interchange Ethereum with a greater, sooner and cheaper blockchain. From the angle of buyers, it’s the main “Ethereum killer.”

Financial institution of America Digital Asset Strategist Alkesh Shah wrote in a shopper notice Thursday (Jan. 13) that Solana might turn out to be the “Visa of the digital asset ecosystem.”

The rationale, he mentioned, is that its “skill to supply excessive throughput, low price and ease of use creates a blockchain optimized for client use circumstances like micropayments, [decentralized finance (DeFi)], [nonfungible tokens (NFTs)], decentralized networks (Web3) and gaming.”

Let’s pause for a minute to debate the phrase Ethereum killer. What it means is that the blockchain is a great contract platform attempting to lure builders, buyers and the decentralized purposes (DApps) they construct away from Ethereum.

Bitcoin would be the first, best-known and richest blockchain, however Ethereum is well a very powerful. Launched in 2015, Ethereum introduced self-executing good contracts to the crypto {industry}. The core constructing block of each cryptocurrency and blockchain mission that seeks to be greater than a bitcoin-style forex substitute, good contracts are behind DeFi, NFTs, provide chain administration instruments — the works.

See additionally: What Is a Smart Contract?

The issue is that lots of these initiatives — particularly the profitable and well-funded ones —stay on Ethereum. And it’s getting crowded.

Quicker and Cheaper

Let’s get again to Shah’s feedback about Solana being quick, low-cost and simple.

His alternative of Visa as a comparability is telling. Probably the greatest-known cost processors is in some methods the white whale of cryptocurrency blockchains. Its transactions speeds — at the moment about 1,700 transactions per second (TPS) with the aptitude of dealing with 24,000 TPS — is the mainstream transaction velocity statistic to which blockchain builders inevitably evaluate their product.

Ethereum can deal with about 15 TPS. Bitcoin about 6 TPS. Then there’s blockspeed — the time it takes to mint a brand new block and add it to the blockchain, making it everlasting and unchangeable. Ethereum’s block time is about 10 seconds to twenty seconds; bitcoin’s is 10 minutes. That’s a very long time to attend for a retail transaction to be accomplished. And transaction charges for bitcoin are averaging $2 to $5 whereas Ethereum miners are demanding $3 to $6.

Solana has proven it might probably course of 50,000 TPS (Shah cited an “industry-leading” 65,000 TPS), and its builders declare it might probably (theoretically) be made to realize 710,000.

Getting again to the Visa comparability, Solana is at the moment processing 2,376 TPS, in accordance with Solana.com, a builders’ website. The typical price per transaction is $0.00025. Block time is 400 milliseconds. It’s by far the quickest of the Ethereum killers, and its builders haven’t any intention of being Ahabs.

SOL has additionally been a great funding. On New 12 months’s Day 2021, SOL was $1.80. On the time of writing, it’s $147.41, and on the peak of 2021’s bull market, it cracked $260.

Below the Hood

The way in which Solana works is by proof-of-stake (PoS), a consensus mechanism we’ve described in some depth — however not too technically — elsewhere.

Learn extra: What is Staking?

Suffice it to say {that a} “consensus mechanism” is the way in which that the blockchain is secured and the brand new transactions written onto it are verified as correct. Bitcoin and Ethereum do that utilizing proof-of-work (PoW), which entails a race to resolve a math puzzle and win the proper to create the brand new block, for which miners are rewarded with newly minted bitcoins and transaction charges.

The computing energy miners use to do this is the reason the 2 blockchains are accused of killing the planet with air pollution.

See additionally: Can Proof-of-Stake Solve Crypto’s ESG Problem?

Ethereum killers — and most new blockchains — use the sadly named PoS, which replaces miners fixing a puzzle with stakers who put up quantities to a bond for good habits with a view to enter a lottery to validate the subsequent block. Dangerous habits or poor efficiency lead good contracts within the blockchain “slashing” a block producer’s stake. The thought is to make it uneconomical to cheat.

However Solana does one thing completely different, or extra precisely, one thing extra. A significant a part of writing a brand new block of transactions on the finish of the blockchain is timestamping it — assume holding up a newspaper to show if you recorded a video.

A blockchain is decentralized as a result of full copies of it exist on each node — laptop — operating the blockchain app. It’s immutable as a result of every block is cryptographically tied to the blocks earlier than and after it, but additionally as a result of every node should agree on the brand new block, they usually should do it concurrently. Those that disagree are booted onto a brand new “onerous fork” of the blockchain — basically a brand new blockchain.

Solana makes use of PoS, nevertheless it additionally provides a second consensus mechanism known as proof-of-history (PoH) to the method. PoH acts like a time stamp, including a cryptographically verifiable date to the block. In different blockchain, all of the validators’ nodes should talk with one another to synchronize the state of the community, which takes time.

That’s how Solana is 400 milliseconds scalable.

Drop the Different Shoe

Solana prioritizes velocity “whereas remaining comparatively decentralized and safe,” Shah wrote. However there’s a trade-off.

“Solana prioritizes scalability, however a comparatively much less decentralized and safe blockchain has trade-offs, illustrated by a number of community efficiency points since inception,” he mentioned.

Learn additionally: Crypto’s Double-Spending Achilles Heel

We promise to not dive into technical particulars you don’t have to learn about. That mentioned, in the case of Ethereum killers like Solana, it is best to perceive what Ethereum creator Vitalik Buterin described because the Blockchain Trilemma. Principally, which means blockchains attempt to accomplish three issues: decentralization, safety and scalability. However to strengthen any two, you need to weaken the third. Bitcoin and Ethereum, for instance, are very safe and decentralized, however not so scalable.

As DeFi and NFTs took off, Ethereum’s prioritization of decentralization and safety has led to severe scalability issues. Too many transactions create a visitors jam, delaying some transactions and inflicting transaction charges to skyrocket, as validators prioritize the transactions providing the very best charge — simply as bitcoin miners do.

Ethereum has instituted some “mushy fork” fixes — mainly software program updates validators all (or largely) agree on — however the longer-term answer is Ethereum 2.0. It’s a years-long course of with a minimum of a 12 months to go, however on the finish of it, Ethereum will change to a PoS system its builders declare will have the ability to deal with 100,000 TPS.

However with ETH transactions averaging $3 to $6 — and having spiked as excessive as $70 a handful of occasions this 12 months — mission builders aren’t ready, and Ethereum killers are benefitting.

Financial institution of America’s Shah pointed on the market are greater than 400 profitable decentralized initiatives on Solana’s blockchain, which solely launched its genesis block in April.

However beating Ethereum is one factor. Proving itself a safe sufficient funds community to finest Visa is sort of one other.