What is Solana ($SOL)? The Complete Rundown on How Solana Works

If you've followed the crypto industry for any amount of time, then you will have heard of Solana. Solana tokens caught fire in the exuberance of 2021's bullrun, when Solana crypto tokens increased in price by an improbable 17,500%. Solana was in the middle of every conversation about crypto in 2021, and rightfully so. But what is Solana, actually? Let's find out.

What is Solana?: A Primer

Solana (Ticker: $SOL) is a cryptocurrency developed to work similarly to and build on the successes of smart contract platform Ethereum. The cryptocurrency takes its name from a small town along the coast of California.

Solana was launched in 2017 by former Qualcomm executive and software developer Anatoly Yakovenko as a robust, open-source, high-speed, high-performance and permissionless layer-1 blockchain platform.

The main value proposition of Solana isn't merely to ape Ethereum, though; Solana iterates on Ethereum and boosts scalability and transaction throughput more efficiently than other blockchains while keeping lower transaction fees.

Solana uses an innovative consensus mechanism combining proof-of-history (PoH) with a variant of a proof-of-stake (PoS) consensus mechanism known as the lightning-fast synchronization engine.

Thanks to the unique consensus mechanism that Solana employs, the blockchain platform can process over 700,000 transactions per second (TPS) without requiring layer 2 scalability solutions.

Not surprisingly, Solana's blockchain architecture supports a thriving, vibrant ecosystem of decentralized finance (DeFi) protocols, decentralized exchanges, and non-fungible tokens (NFTs).

Solana was first introduced in 2017, at the height of the initial coin offering (ICO) boom. This was followed by the release of Solana's internal testnet in 2018. After several successful testnet phases, the Solana mainnet was launched in 2020.

What is Solana's Unique Value Proposition?

Solana was developed by Solana Labs in order to solve the Blockchain Trilemma. The latter refers to a theory where decentralized networks can only offer two out of three benefits at any given time, while sacrificing one, with respect to decentralization, scalability, and security. That is, blockchain developers can only have two of each property in every decentralized network while sacrificing one simultaneously.

One of the key properties that distinguish Solana from other smart contract platforms is its hybrid consensus mechanism. Its unique combination of proof-of-stake and proof-of-history sacrifices decentralization in favor of speed.

In general, blockchains favoring decentralization tend to be slower because they require more nodes to verify and timestamp transactions (Bitcoin comes to mind). On the other hand, blockchains that favor scalability can support higher transaction throughput and scale better the more transactions per second they can process.

Solana attempts to solve the trilemma by relying on a smaller amount of servers. Solana's design chooses one "leader" node based on the proof-of-stake consensus mechanism to sequence messages between nodes. This reduces workload across nodes, leading to higher throughput without having to rely on a central time source.

Moreover, Solana creates a transaction chain by hashing the output of a transaction and using it as the input of the subsequent transaction. That's where the "history" in proof-of-history comes in. PoH enables greater scalability, which consequently increases the blockchain's efficiency.

How Does Solana Work?

Solana distinguishes itself from other blockchain ecosystems and smart contract platforms because of its hybrid PoS/PoH consensus mechanism. Mainly, Solana processes crypto transactions and timestamps them as they happen rather than appending each block on the blockchain. It's a sequence of computations that proves that an event has happened on the network. Think of it as a cryptographic clock timestamping every transaction that takes place on the network with a respective data structure.

In essence, PoH creates timestamps to show when blocks were formed and confirms the time between two transactions. This organizes transactions recorded on Solana to be processed as they occur.

Solana resolves the issue of sequencing events while offering immediate transaction completion. This offers immediate completion for all transactions while resolving the issue of sequencing events which in turn allows the Solana blockchain to achieve a level of high performance that benefits all sorts of decentralized apps (dapps) on its platform.

Solana uses SHA-256 (Secure Hash Algorithm), a proprietary cryptographic function that outputs a 256-bit value similar to what Bitcoin uses. The Solana network samples the count and SHA-256 hashes periodically to provide real-time data based on the group of hashes included on CPUs.

Subsequently, Solana validator nodes can use this set of hashes to record specific pieces of information created before a specific hash index was generated. The transaction timestamp is also generated after the latter is inserted. All nodes on the Solana network need to have cryptographic clocks to monitor events in order to achieve high throughput and block creation time rather than waiting for other validator nodes to verify transactions.

Solana's native utility token enables value transfer besides securing the viability of the blockchain through staking Solana tokens. Solana launched its mainnet in 2020, which saw soar all the way to becoming the fifth-largest cryptocurrency by total market capitalization by 2021. It has since striven to become one of the top 10 cryptocurrencies since.

Token holders can also stake Solana to validate transactions on the PoS side of Solana's consensus mechanism to receive rewards in Solana. Solana holders can also use their tokens to participate in governance measures.

Solana vs. Ethereum: Which Smart Contract Platform is Better?

Ever since taking the crypto world by storm in 2020, Solana has received mad props for its speed and high performance, having been dubbed the "Ethereum Killer" as it rose in popularity and emerged as a real competitor for the preeminent smart contract platform.

Solana has been compared a lot to Ethereum. So, what distinguishes Solana from the latter?

One of the key differences between Solana and Ethereum is its processing speed. Solana can purportedly handle as much as 50,000 transactions per second, compared to pre-Merge Ethereum's measly 15 TPS. That is some serious throughput. Solana is eons faster than Ethereum, besides being significantly more affordable to use–with transaction fees costing a minute fraction of what they would on the latter. However, after the launch of Ethereum 2.0, Solana and Ethereum are more at par with each other.

Solana employs a combination of consensus mechanisms to hasten transaction confirmation, making it one of the fastest smart contract platforms in the business that has the potential to compete and find utility outside the crypto echo chamber.

And, compared to other tokens that use the proof-of-work (PoW) consensus mechanism that requires tremendous amounts of computational power like Ethereum 1.0 did, Solana's hybrid PoS/PoH consensus is substantially more ecologically sustainable. These differences gave rise to the "Ethereum Killer" narrative that Solana rode all the way to the top of the bullrun in 2021.

What Are the Disadvantages of Solana?

No crypto project is all rainbows and butterflies. Each one has its pros, cons, and flaws. Solana is no different.

For instance, while Solana can undoubtedly go toe-to-toe with practically any smart contract platform on the planet, it is extremely vulnerable to centralization. For instance, there aren't as many Solana validator nodes, leaving the task of validating transactions to the hands of a select cabal of nodes that have the capital and computing resources to run one. Rough estimates peg that a validator would need as much as $1 million worth of Solana tokens to stake just to break even.

Moreover, the Solana mainnet is technically still a beta version, which leads to the presence of errors, bugs, and vulnerabilities on the platform.

That's not to mention the circumstances surrounding Solana's initial token allocation. According to crypto think tank Messari, 48% of Solana's initial token allocation is held by insiders comprising the Solana Labs devs, team, and crypto VC firms. Another 13% of SOL tokens were allocated to the Solana Foundation.

Solana currently has well over 3,400 validators spread across six continents, but more than one-third of the cumulative stake is held by only 31 validators. And despite there being 9 million holders, the top 100 holders alone control as much as 31% of the total supply.

Due to its mainnet beta status and its rise in popularity, Solana has been subject to multiple outages throughout its existence. This includes a September 2021 denial of service attack on the Raydium protocol, a 48-hour outage in January 2022 that "rekt" Solend lending protocol users, and a code bug that stopped block production on the Solana network in June 2022.

However, Rome wasn't built in a day, and it takes a tremendous amount of time and effort to secure the stability of a blockchain–much less one that is still technically in its beta phase. Solana isn't the only one that has experienced outages, but the frequency with which it has been the subject of such service interruptions has seen it become an easy target for criticism and FUD.

Nevertheless, Solana still comprises one of the largest crypto ecosystems and is set on the right path toward long-term sustainable growth and global adoption.

What Are Some of Solana's Partnerships?

The Solana ecosystem is home to a constantly growing universe of DeFi protocols, NFT projects and marketplaces, lending and borrowing protocols, decentralized exchanges, and a host of web3 dapps.

For instance, Solana has partnered with NFT marketplace OpenSea to offer Solana-based NFTs on the latter. Audius, a decentralized music community protocol, has chosen Solana as its blockchain of choice. Yet another Solana-based platform, HEIR, has partnered with basketball superstar Michael Jordan to release His Airness' debut NFT collection on the Solana blockchain.

Lastly, Solana has also partnered with Arweave to provide permanent data storage for Solana's massive amounts of data, such as transaction histories and NFT metadata, so that the data can always be pulled as needed. These are just a select few of Solana's partnerships, which will undoubtedly grow in the future.

Is It Possible to Buy Solana (SOL) Token in Fractional Amounts?

Solana is available in fractional amounts referred to as "lamports." A lamport represents a value of 0.000000001 SOL. Lamports were named after Leslie Lamport, a computer scientist known for his work in distributed systems that served as one of Solana's main influences.

How Many Solana (SOL) Tokens are Currently in Circulation?

Ever wonder how many Solana tokens are presently circulating? Solana has a total supply of approximately 534 Million SOL tokens. The total circulating supply, on the other hand, is sitting at just over 362 million SOL tokens. Roughly 60% of Solana coins are controlled by the Solana Foundation and Solana's founders, with only 38% out of the supply available for the community.

Solana tokens can be purchased on most centralized exchanges such as Binance, Coinbase, Huobi, and KuCoin, among others.

Key Takeaways

Solana clearly has tremendous potential waiting to be unleashed. With its performance, speed, and low fees, it has successfully positioned itself as the preeminent alternative to Ethereum. Moreover, Solana has gained plenty of developer and community mindshare given the fact that its ecosystem has grown immensely over a period of just three years.

With the advent of Solana Pay, a digital payments platform built on Solana, the platform could possibly become the next frontier for merchants and customers to engage in instant, free, and seamless transactions in the future.

Solana is in the process of maturing, but it has a long way to go before it matches Ethereum's sizeable market capitalization. That's not to mention the continued crypto winter that we find ourselves in at the moment, with the collapse of "too-big-too-fall" crypto firms like dominos all in a row – with no bailouts in sight.

Nevertheless, Solana has proven itself as a viable long-term cryptocurrency investment that offers multiple avenues for passive income by staking or by investing in DeFi protocols to earn more SOL tokens.

That said, nothing is ever a sure shot in the crypto industry–the fact is that crypto is inherently and extremely volatile, and plenty of seemingly high-potential projects have gone to 0. It goes without saying that you should only invest funds you can afford to lose. Solana ticks all the boxes of a viable long-term play, but only invest if you have the appetite for the wild swings that are built into the crypto industry.

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