What is Solana (SOL)? Definition & How it Works

Investing
Updated: 13th Sep 2021
Written by Sean Graytok
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September 13, 2021
Written by Sean Graytok

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Solana has become the fastest-growing ecosystem in crypto. But what is it? And how does it work?

This article will define Solana and describe how it’s different from other blockchains like Bitcoin and Ethereum.

What is Solana?

Solana is a high-performance decentralized blockchain that was created in 2017 by Anatoly Yakovenko.

It added a Proof of History (PoH) consensus mechanism to the classic Proof of Stake (PoS) consensus to result in faster and lower-cost transactions.

Better transaction speeds, costs, and scalability have attracted many developers to the Solana ecosystem, resulting in hundreds of projects getting built on top of its blockchain.

These range from DeFi exchanges to NFT projects and music streaming platforms. There are billions in USD equivalent value locked into the Solana ecosystem.

Solana’s native token SOL is the blockchain’s medium of exchange. These tokens can be sent to nodes in exchange for running an on-chain program or validating its output.

Users must buy SOL if they want to purchase a Solana-based NFT or use any Solana-based project for that matter.

>> More: Best Crypto Exchanges

Understanding Solana

Solana accomplishes fast and cheap transactions by adding the PoH mechanism — essentially a time component — to the network’s architecture.

This technique keeps time between computers that do not trust one another. Agreeing on time allows transactions to be 10,000 times faster than systems that don’t have clocks.

From Solana’s website: “a reliable clock makes network synchronization very simple. When synchronization is simple, the resulting network can be blazing fast, bound only by network bandwidth.”

Bitcoin and Ethereum are decentralized blockchains that do not have clocks, limiting their ability to scale beyond 30 transactions per second (TPS). Decentralized? Yes. Fast? No.

Visa (V) is a centralized system that can process 65,000 TPS. Decentralized? No. Fast? Yes.

Solana exists in the middle of this Venn diagram, combining the ‘good’ of Bitcoin and Ethereum (decentralization) with the ‘good’ of Visa (speed).

This is what Anatoly means by “high-performance,” and one reason why Solana — as a layer one blockchain — might be better suited to become a global payment system.

How Does Solana Work?

Solana is a decentralized blockchain that uses Proof of History and a type of Proof of Stake to validate new blocks of transactions.

Specialized computers around the globe use a program to reach a consensus on the validity of transactions made in the Solana ecosystem.

Each computer is called a “node,” and a network of nodes is called a “cluster.”

The Solana protocol designates a “leader” in a given cluster to process transactions for a certain amount of time, remove the bad ones, and then add entries to the ledger with a sequential PoH timestamp, or “hash.”

The designated leader rotates around the cluster randomly, based on the weighted SOL each validator stakes.

Staking SOL incentivizes validators to not act maliciously because the value of the SOL staked is significantly greater than the SOL rewards they would receive from confirming blocks.

If the network reaches consensus that a block has invalid transactions, the SOL that the validator staked will get “slashed” or removed from circulation.

Anyone that owns SOL can delegate their SOL to a validator and receive a shared reward. Validators that stake more SOL have a higher probability of being the leader, which results in a higher likelihood of earning transaction fees and protocol-based rewards.

This dynamic further encourages validators to behave because rational delegators are going to stake their SOL with validators that have a higher chance of receiving rewards.

The relationship between delegators and validators creates a “Bonded Proof of Stake” (BPoS) consensus mechanism, allowing Solana to keep all of its activity on a single shard (unlike Eth2) and maintain high throughput.

Solana validators don’t have to communicate with other validators on the ordering of blocks because each Solana validator maintains its own clock by utilizing Proof of History.

PoH enables Solana validators (who are not the current leader) to determine the validity of transaction blocks faster than other blockchains.

PoH + BPoS enables Solana to scale faster and makes it more centralized than slower blockchains that require more validators or use a Proof of Work consensus mechanism.

As previously mentioned, Solana exists in the middle of the Ethereum and Visa Venn diagram — seeking enough decentralization without sacrificing speed.

Is Solana better than Ethereum?

Solana transactions are faster and cheaper than transactions made on Ethereum’s network.

This has resulted in Solana processing more transactional volume than Ethereum, even though Ethereum has been around longer.

However, there are significantly more developers in the Ethereum community, resulting in a reinforcing cycle that attracts more developers and creates even more Ethereum-based projects.

A recently proposed upgrade to the Ethereum blockchain, called the Ethereum Improvement Proposal (EIP) 1559, will also make Ethereum faster and cheaper, among other things.

Solana does not have to ‘kill’ Ethereum for it to be successful. Cross-chain interoperability allows for developers to build on both Solana and Ethereum, using Solana to execute transactions and Ethereum for settlement.

Solana Facts

#1. Solana is the fastest blockchain globally that can support a theoretical peak capacity of 65,000 transactions per second.

#2. In terms of today’s transaction speeds, Solana is 10,000 times faster than Bitcoin, 4,000 times faster than Ethereum, and around 2.5 times faster than Visa.

#3. Of the 500 million SOL tokens initially minted, 293 million remain in the circulating supply, or the amount circulating in the market or in public hands. The rest are locked up in DeFi or have been ‘burnt’ (or permanently destroyed) as a deflationary mechanism.

#4. Solana is backed by two of the most well-known figures in crypto, Sam Bankman-Fried of FTX and Silicon Valley’s top venture fund a16z.

#5. Solana’s ecosystem consists of 400+ projects spanning DeFi, NFTs, Web3, and more.

#6. The average cost per transaction on the Solana blockchain costs $0.00025 compared to approximately $3 on Bitcoin and roughly $8-40 on Ethereum.

#7. SOL traded around $3 in September 2020 and surged as $214 one year later, representing a 7,033% gain.

#8. Lamports are to SOL as Sats are to BTC. A lamport is a fractional native token to Solana that has a value of 0.000000001 SOL.

Bottom Line: What Is Solana?

The crypto space moves fast, and Solana is the perfect example of that — no pun intended.

SOL might go up, and it might go down. But the potential for the underlying tech cannot be ignored.

This article is for informational purposes only. It is not intended to be investment advice.

Resources:

Sean Graytok
Sean Graytok
Sean is a student of the financial and technology industry. He is interested in the people and companies who are driving the innovation that will change our future.