The Innovative Path of Cryptocurrency: The Possibly Underestimated Solana

Author: Zhu Weisha

Satoshi Nakamoto opened Pandora's box, releasing hope and demons. What is hope? What is a demon? Graham once said, "In the short term, the stock market is a voting machine, but in the long term, it is a weighing machine." Fourteen years since the advent of Bitcoin, the leading projects in cryptocurrency have withstood the test of time, and their prices certainly reflect the value of the projects. Analyzing the gains and losses of these projects can provide insights for those still on the journey.

Possibly Undervalued Solana

Anatoly Yakovenko, a Ukrainian-American and former Qualcomm engineer, released the Solana white paper in November 2017—"Solana: A New Architecture for High Performance Blockchain." In early 2018, Anatoly teamed up with his old friend Raj Gokal to co-found Solana. It was designed to compete with Ethereum and went live in 2020. Initially, it did not attract market attention and enthusiasm, as the cryptocurrency market was no longer in its early stages, and the successful projects from the past stood as mountains in front of the newcomers.

Solana is characterized by its focus on technological innovation. For technology, users do not understand, investors do not understand, and even those in the crypto circle do not understand; they do not have a flashy cryptocurrency background, such as Charles Hoskinson's ADA, which ranks 8th in market capitalization, or Gavin Wood's Polkadot (DOT), which ranks 13th. Both are of Ethereum lineage and are naturally popular. Solana was founded by a group of seasoned Silicon Valley veterans, who are viewed as alternatives in the crypto circle, so no one is willing to take that risk.

Who has this vision? Those who see potential in them are certainly not ordinary people. Sam Bankman-Fried, the founder of the FTX exchange, saw their potential. Regardless of Sam's current situation, one must admire his insight and courage. Sam brought attention to Solana's advantages, such as its transaction speed. With Sam's full support, Solana reached a price of $243.1 on November 4, 2021. Success and failure are intertwined; after the aggressive FTX system declared bankruptcy, the Solana blockchain, which was fully supported by it, suffered a heavy blow. Its token SOL price plummeted, falling to $9.75 on December 29, 2022; the total value locked (TVL) on-chain dropped nearly 98% from its historical peak; well-known NFT projects DeGods and y00ts left them; once a promising contender to be the "Ethereum killer," Solana found itself in a very difficult position. As of September 9, 2023, it ranked 9th on Coinmarketcap with a market cap of $8 billion, fortunately still alive, with no major issues, and has survived.

Solana's Price Reflects Market Panic

Generally speaking, negative news can trigger an overreaction in the market. Solana's fundamentals have not changed; all its flaws have been fully exposed, and it should be considered safe. In the eyes of Ethereum's Vitalik, Solana is a "good project." At the end of June 2023, in response to Paradigm co-founder Matt Huang's question about "what do you think of U.S. cryptocurrency policy?" he said, "I feel sad that Solana and other projects have been hit like this. It shouldn't have been this way. If Ethereum ultimately 'wins' by being kicked off exchanges by all other blockchains, that is not a glorious way to win, and in the long run, it may not even be a victory. Because the real competition is not other chains, but the rapidly expanding centralized world that is pressing down on us as we speak. I wish all good projects can achieve fair outcomes." At the time, Vitalik was only 29 years old, and there was no hint of schadenfreude; his broad-mindedness and demeanor are also remarkable.

Solana's price also reflects the market sentiment generated by regulation. Compared to the similarly regulated blockchain Cardano (ADA), Solana is also undervalued. Figure 1 shows the historical price trend of Solana (SOL), while Figure 2 shows the price trend of Cardano (ADA). The two trends are very similar; comparing the small peak on the left side before the rise in 2021, ADA is now above that small peak, while SOL is below it. To reach ADA's position, SOL would need to rise at least another 100% to $40. Although SOL has some debts with FTX, it does not significantly impact Solana's operations.

Figure 1: Solana Price Trend
Figure 2: Cardano (ADA) Price Trend

From the data, Solana is more than twice as good as Cardano, and readers can compare for themselves. In other words, either Solana is undervalued, or Cardano is overvalued. For more on Cardano, please refer to the fifth article in this series, "ADA: A Zombie Chain Sustained by Hype" (chainless.hk).

Solana Tests the Maximum Capability of Blockchain Structure

Solana's biggest problem is downtime. In 2022, it experienced 11 major network outages and 3 minor ones, with another occurring in February 2023. The main reason for the downtime can be traced back to the design of Proof of Stake (PoS). As a blockchain system, Bitcoin is based on peer-to-peer technology, which can be simply understood as each node having equal status. However, the PoS method introduces leader nodes, meaning that the status of nodes can temporarily become unequal. To achieve speed, Solana places all the pressure on the leader nodes, and when the capacity of the leader nodes is exceeded, downtime occurs. It has high performance requirements for node machines; different models have different capacities to handle traffic pressure, making downtime unpredictable. After Ethereum launched PoS, it also experienced a similar incident where blocks could not be finalized, but it was not a complete downtime. Ethereum has a traffic pool design that provides buffering capacity; if confirmation cannot be achieved at that moment, it can simply skip it, whereas Solana lacks this design, leading to significant pressure on the leader nodes. The biggest issue is that most of the traffic is communication overhead. @DBCrypt0 commented that validator communication messages account for 90%-95% of total overhead, "So when Solana claims they reached 4000 TPS (transactions per second), less than 10% of that is actual transactions on the network."

I strongly agree with the viewpoint expressed in the article "Analysis of Solana's Scalability Mechanism: An Extreme Attempt to Sacrifice Usability for High Efficiency" published by "Catcher Venture Research": "To some extent, Solana's transaction processing capacity of 500~1000 transactions per second has reached the peak of public chains. Under the three premises of having many nodes, no sharding, and supporting smart contracts, it is fundamentally difficult for new public chains to surpass Solana's TPS level, unless they allow only a small number of nodes to participate in consensus or degrade to centralized servers. As long as there are many nodes participating in consensus, it is difficult to achieve a higher verifiable TPS than Solana" (https://new.qq.com/rain/a/20220609A05EUK00). Here, usability refers to security, so as long as it is a blockchain structure project, Solana's speed is a mountain that is hard to surpass.

Their views are similar to mine. I believe that in public chain innovation, there are not many major innovations left. Most projects that are grafted onto Ethereum as layer two are centralized. How to create projects that align with cryptocurrency principles within a centralized framework is a question for the next cryptocurrency race. Solana has already passed this stage, and this issue is not within Solana's consideration; it needs to consider how to integrate with commercial applications.

Solana's Attempts

Despite the downtime issues, Solana's payment applications involve real transactions, making congestion difficult. It can rival the speed of Visa credit cards; if used as a backend for Visa, it would lower costs, speed up settlement, and greatly simplify Visa's management, while allowing users to control their assets. In the future, Visa cards may face a crisis; a small card with too little content cannot withstand competition from products like Alipay, and PayPal combined with stablecoins reflects this competitive trend. Payments represent a large market, and commercial transactions require payments. We see Solana's payment integrated into e-commerce platforms like Shopify, which is a very good start. They come from centralized companies and understand modern marketing better than those in the crypto circle. In the operation of similar projects in the crypto circle, they have advantages not only in technology but also in marketing concepts.

The downtime issue is not difficult to solve; additionally, they do not fully understand incentives and economic models. With slight adjustments, it could be a whole new world.

Starting with payments is an advantage of cryptocurrency and also Solana's advantage; stepping out of the crypto circle opens up vast possibilities.