Ethereum has some competition. What you need to know about the skyrocketing cryptocurrency writes Stan Schroeder on Mashable.
Solana, a cryptocurrency that launched to relatively little fanfare in April 2020, has recently been on a tear. Its price rose from roughly $1.50 in January 2021 to more than $208 at writing time, making it the sixth-largest cryptocurrency in the world with a market cap of $61 billion.
So what is Solana? And is its outstanding rise in price warranted? Read on.
What is Solana?
Solana is a blockchain platform for decentralized apps. It’s an open-source project maintained by the Geneva-based Solana Foundation, and built by developers at San Francisco-based Solana Labs.
Solana rivals Ethereum, which is currently the largest decentralized apps platform, by promising faster operation and lower transaction fees. It is a PoS (proof of stake) blockchain, which makes it more environmentally friendly than PoW (proof of work) blockchains such as Bitcoin. Its native cryptocurrency is also called Solana and has the ticker SOL.
What’s so great about PoS? In a decentralized blockchain system, a lot of computers (nodes) validate transactions. A bad actor might want to add a bunch of nodes in order to take control of the network. You can thwart that by making computers running the network work hard by solving a math puzzle, which in turn makes it costly to attack the network. That’s proof of work; it’s effective but the network can end up consuming a lot of electricity.
Another way to do this is to make the validator nodes on the network have something at stake; in Solana’s case, they need to stake SOL tokens. And while validators on the Solana network also consume power to operate, their power usage is far lower than that of, say, Bitcoin miners.
Both PoW and PoS mechanisms reward validators or miners for their efforts; Bitcoin miners get BTC, and on Solana, validators are rewarded in SOL. It’s worth noting that on Solana, end-users don’t have to run a validator node to earn rewards; they can delegate their stake to a validator who will pass the rewards on to them for a fee.
Bitcoin’s PoW mechanism also functions as a sort of clock for the network, making sure all nodes on the network can agree on the correct order of transactions. In PoS systems, this isn’t as easy to achieve, so Solana also uses a technology called Proof of History, which it claims helps the network more efficiently determine the time of transactions. This and other innovations, Solana claims, make it more secure and perform better than other blockchains.
Most modern blockchains use some form of PoS. But Solana’s biggest competitor is Ethereum, which still relies on PoW – though it’s in the process of switching to PoS.
For a technical overview of how Solana works, check out the video above or the documents on Solana’s website.
From the end user’s perspective, Solana is a place where you can use SOL to interact with various decentralized apps. Most of those are tied to finance, such as platforms that let you lend or borrow money, trade crypto, or invest in various assets. But there are also apps that let you buy and sell NFTs or even find a dating partner. Check out some of the apps that are available on Solana here.
Why is it better than other cryptocurrencies and blockchains?
All of the above sounds a lot like Ethereum, and indeed, Solana is most easily described as an advanced Ethereum competitor. There are a lot more apps on Ethereum, so why switch?
Ethereum has long been plagued by high fees for transactions, which sometimes skyrocket into hundreds or even thousands of dollars, especially at times of high network congestion. Solana has a larger theoretical throughput — meaning it can handle more transactions per second than Ethereum — so the fees are currently extremely low, typically costing 0.000005 SOL, or about $0.001.
In practice, once you have a wallet that can hold SOL and Solana-based tokens, such as Phantom or Sollet, you can interact with the numerous apps there. You can trade one token for another on a decentralized exchange such as Raydium, or you can buy an NFT on the Solanart marketplace. Whatever you do on Solana, you’ll pay the small fee mentioned above, which sounds pretty good compared to Ethereum.
It can’t all be good, right?
Solana is technically still in beta. This isn’t uncommon for blockchain projects, nearly all of which are experimental in at least some regard. But it’s worth noting that a project is in beta if you’re going to invest, or build an app on the platform.
Solana pays a price for its speed: the validator requirements (validators are computers that help run the Solana network) are very high. While anyone can theoretically run a validator node on Solana, the high cost of building, running, and maintaining such a machine will drive away many users. This theoretically makes the network less decentralized, as more power is concentrated in the hands of fewer users.
This could cause other issues. For example, validator nodes that aren’t powerful enough to handle the network activity could cause slowdowns or instability, and that does occasionally happen on Solana.
Finally, Solana simply isn’t as battle-tested as Ethereum, which has been live since 2015. There could still be undiscovered bugs or issues that could affect the performance or the security of the network.
Why is Solana pumping?
Solana’s price rise has been astounding. Someone who has participated in the Solana ICO (initial coin offering — a way to crowdfund a project by selling project tokens) was able to buy SOL for $0.22. The price per SOL is now $208 — a 95,000 percent increase.
To be fair, other promising Ethereum competitors, including Cardano, Polkadot, Dfinity, Terra, Polygon, and Avalanche, have also increased in price tremendously over the past year or so. But Solana’s rise has been something special.
One reason for the growth is the fact that Solana has the backing of popular cryptocurrency exchange FTX, which has launched several Solana-based projects. Alameda Research, the same firm that backs FTX, is one of the biggest investors in Solana, alongside Andreessen Horowitz and Polychain.
Another obvious reason are the transaction fees, which are lower than those on most competitors.
Then there’s the TVL (total value locked), a metric that counts how much value has been locked into projects on the Solana ecosystem. According to DefiLlama, a website that tracks decentralized finance projects, Solana is currently the third-largest chain in terms of TVL, with a total of $7.9 billion locked into the projects on its networks.
Where do I start?
To do something on the Solana network, you’ll need to buy some SOL, and you’ll have to transfer it to a Solana wallet such as Phantom. If you’re starting from scratch, the easiest way to do that is to transfer some cash to FTX, buy the SOL there, and then transfer it directly to Phantom (not all exchanges support direct withdrawal of funds to Solana, but FTX does). Additionally, you can also buy and withdraw some other coins that are supported on the Solana network — USDT is one example, and FTX supports direct withdrawals to Solana addresses.
If you’ve got funds on other networks, such as Ethereum, and you want to move them to Solana, your best bet might again be to just withdraw them to an exchange like FTX, and send to Solana from there. But you can also use something called a bridge, which is an app that will take your coins on the Ethereum side and spit them out on the Solana side (or vice versa). One such bridge is Wormhole, though you will be charged fees for this conversion, and using a bridge is not without risk — if anything goes wrong during the transfer, you could lose your funds.
What’s next for Solana?
Solana is but one competitor in a world of decentralized app platforms, each with its strengths and weaknesses. It shows a lot of promise, has a burgeoning app ecosystem, and continued support from FTX and some of the biggest venture capitalists in the space. It has a long way to go to catch up with Ethereum, but it’s well-positioned to grab a decent share of the decentralized apps market. Anyone who’s interested in decentralized apps and the blockchain space should at least dip their toes and try Solana out.