What Is Solana (SOL) and How Does SOL Crypto Work?

What Is Solana (SOL)?

Solana is a blockchain platform designed to host decentralized, scalable applications. Founded in 2017, it is an open-source project currently run by Solana Foundation based in Geneva, while the blockchain was built by San Francisco-based Solana Labs.

Solana is much faster in terms of the number of transactions it can process and has significantly lower transaction fees than rival blockchains like Ethereum. The cryptocurrency that runs on the Solana blockchain—also named Solana (SOLUSD) and using the ticker symbol SOL—soared almost 12,000% in 2021 and at one point had a market capitalization of over $66 billion, making it the fifth-largest cryptocurrency by this measure at the time.

Despite its popularity, SOL did not escape the cryptocurrency bloodbath of 2022. By Oct. 3, 2022, SOL had dropped to about $11.71 billion in market capitalization. It also fell to ninth place in market capitalization. Learn more about Solana and what makes it unique among thousands of imitators.

Proof-of-History Concept

Solana co-founder Anatoly Yakovenko published a white paper in November 2017 describing the proof-of-history (PoH) concept. PoH is a proof for verifying order and passage of time between events, and it is used to encode trustless passage of time into a ledger.

In the white paper, Yakovenko notes that blockchains that were then publicly available did not rely on time, with each node in the network relying on its own local clock without knowledge of any other participants' clocks in the network. The lack of a trusted source of time (i.e., a standardized clock) meant that when a message timestamp was used to accept or reject a message, there was no guarantee that every other participant in the network would make the exact same choice.

PoH gets past this hurdle, with every node in the network able to rely on the recorded passage of time in the ledger on the trustless basis that is key to blockchain functioning.

Solana History

Yakovenko's previous work experience was in the field of distributed systems design with leading technology companies such as Qualcomm Incorporated (QCOM). This experience made him aware that a reliable clock simplifies network synchronization, and when that occurs, the resulting network would be exponentially faster, with the only constraint being its bandwidth.

Yakovenko surmised that using proof-of-history would speed up the blockchain tremendously compared with blockchain systems without clocks, such as Bitcoin and Ethereum. These systems struggled to scale beyond 15 transactions per second (TPS) worldwide, a fraction of the throughput handled by centralized payment systems such as Visa (V), which see peaks of up to 65,000 TPS.

Beginnings

Yakovenko's initial implementation began in a private codebase and in the C programming language. At the behest of his former Qualcomm colleague Greg Fitzgerald, Yakovenko subsequently migrated the entire codebase to the Rust programming language.

In February 2018, Fitzgerald began prototyping the first open-source implementation of Yakovenko's white paper and subsequently made the first release of the project, demonstrating that 10,000 signed transactions could be verified and processed in just over half a second. Shortly thereafter, Stephen Akridge—another of Yakovenko's Qualcomm colleagues—demonstrated that throughput could massively improve by offloading signature verification to graphic processors.

Expansion

With these project milestones under their belts, Yakovenko recruited Fitzgerald, Akridge, and three others to co-found a company called Loom. However, because of the potential for confusion with an Ethereum-based project with a similar name, the company/project rebranded to Solana, after the small beach town near San Diego where the co-founders lived when they worked for Qualcomm.

In June 2018, the project scaled up to run on cloud-based networks, and a month later, the company published a 50-node, permissioned, public test net consistently supporting bursts of 250,000 TPS.

As of September 2022, Solana has processed over 100 billion transactions at an average cost of $0.00025 per transaction.

Solana's Technology

Solana's architecture aims to demonstrate a set of software algorithms that eliminate software as a performance bottleneck when combined with a blockchain. The combination enables transaction throughput to scale proportionally with network bandwidth.

Solana's architecture satisfies all three desirable attributes for a blockchain: it's scalable, secure, and decentralized. Its architecture describes a theoretical upper limit of 710,000 TPS on a standard gigabit network and 28.4 million TPS on a 40-gigabit network.

Solana's blockchain operates on both a proof-of-history (PoH) and proof-of-stake (PoS) consensus model. PoS permits validators (those who validate transactions added to the blockchain ledger) to verify transactions based on how many coins or tokens they hold; PoH allows those transactions to be timestamped and verified very quickly.

Solana vs. Ethereum

Solana's rapidly expanding ecosystem and versatility have inevitably drawn comparisons to Ethereum, the leading blockchain for decentralized applications (dApps):

• Smart contracts: Solana and Ethereum have smart contract capabilities, which are crucial for running cutting-edge applications like decentralized finance (DeFi) and non-fungible tokens (NFTs).
• Consensus: Solana and Ethereum both use a proof-of-stake (PoS) consensus mechanism, where validators stake their cryptocurrency as collateral for the privilege of earning rewards for assisting the blockchain. Solana improves PoS by also implementing PoH.
• Speed: Much of the buzz surrounding Solana in 2021 was due to its distinct advantage over Ethereum in terms of transaction processing speed and transaction costs. Solana can process as many as 50,000 TPS, and its average cost per transaction is $0.00025. In contrast, Ethereum can only handle less than 15 TPS, while average transaction fees are around $1.68.

Ethereum Upgrades

Ethereum has first mover advantage, and with its massive ecosystem, it is second only to Bitcoin in terms of market capitalization. Ethereum's major upgrade, which merged its Beacon Chain and Mainnet Chain, provided the framework that will allow its blockchain to be more scalable, secure, and sustainable. A future upgrade will introduce sharding, significantly decreasing transaction times and reducing network congestion. How Solana will fare against these improvements is yet to be seen.