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What is Solana and SOL?

July 22, 2022
5
min

As a next-generation blockchain network, Solana has made strides in improving on Ethereum. Learn how Solana will face a crucial test as it labors to attract projects and users.

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When Ethereum was introduced in 2015, it was hailed as a breakthrough in computer science. Unlike Bitcoin, the first cryptocurrency, Ethereum wasn’t designed to be a digital form of money but rather a network that let programmers build decentralized applications, or dApps, on the internet. 

By 2020, Ethereum was so jammed with users that it struggled to expand and accommodate the traffic. Transactions became exorbitantly expensive on the Ethereum blockchain, the database that supports the network, and processing speeds were sluggish. 

Enter the Solana crypto network. It was designed to do the same thing Ethereum does but faster and at much lower cost. It’s what technologists call a scaling solution, meaning it grows to meet demand. 

Now Solana supports hundreds of projects ranging from cryptocurrency exchanges to gaming sites to decentralized finance, or DeFi, ventures. It’s one of a number of alternative blockchains called Ethereum killers. 

What is Solana and SOL?

Solana is a next generation blockchain network that competes with Ethereum. Along with rivals such as Cardano and Algorand, Solana is what’s known as a Layer 1 because it improves on Ethereum’s base program. 

Similar to Ethereum, Solana enables users to set up smart contracts on its network. These are software programs that automatically manage transactions and agreements on blockchains, which are decentralized digital ledgers that are open to the public on the internet. Solana also enables users to create dApps on its blockchain the same way Ethereum does.

Solana also utilizes a token, SOL, to facilitate transactions and transfer assets across its network. The price of SOL is a proxy for how investors view Solana’s value in the crypto market the same way the Ether token is a barometer for Ethereum.

Solana differs from earlier cryptos in significant ways. First, it’s much faster. Solana says it has the ability to process 750,000 transactions per second, but typically runs at around 2,500 per second. Ethereum can handle 15 transactions per second. Just for comparison, the Visa credit card system processes 17,000 transactions per second.

Solana is also cheaper: The average transaction fee on Solana is just $0.00025 while Ethereum-based transactions have an average cost of $15. 

How was Solana developed?

Solana was founded in 2017 after Anatoly Yakovenko, a Ukrainian-born software engineer educated at the University of Illinois, published a white paper laying out the workings of a programming technique called Proof-of-history (PoH). 

Yakovenko said the problem with Bitcoin and Ethereum was that computers making up their respective blockchains didn’t “trust” each other. Overcoming this barrier is what slows down transaction processing on their networks. Yakovenko had experimented with using cryptographic clocks in computers to get them to work together in networks when he was an engineer at Dropbox and Qualcomm. 

So Yakovenko hit on the idea of programming computers to trust one another by agreeing on time. Working with his colleague and fellow software engineer Greg Fitzgerald, Yakovenko synchronized computers using clocks. This broke through the barrier hampering Bitcoin and Ethereum and accelerated processing speeds across Solana’s network. Solana launched the SOL token in March 2020, and two months later created its first set of transactions, called a block. 

It was the first blockchain to use PoH as a “consensus mechanism,” a means of processing transactions and adding them to a public digital ledger. True to its origins, the Solana blockchain timestamps every action that takes place on the network.

How does Solana work? 

Bitcoin and Ethereum use a consensus mechanism called Proof-of-work (PoW) to process transactions and maintain their respective blockchains. This method relies on miners racing to solve elaborate mathematical questions and “hash,” or mine, new blocks in exchange for rewards in the form of new tokens. 

Solana not only uses its PoH approach, but it also utilizes another method called Proof-of-stake (PoS) to manage its chain. Instead of using a contest between miners, PoS is driven by token holders who collaborate by staking their coins together to validate new blocks on the chain. 

As a result, Solana is highly energy efficient; a single Bitcoin transaction uses 2.7 million times the energy of a Solana transaction. Just like Ethereum, Solana uses a foundation, which can be thought of as a parent company, to govern the workings of its system. The total supply of SOL is more than 508 million coins, and there is a circulating supply of 343 million coins tradeable in the marketplace, which is almost three times as many Ether.

What kind of projects use Solana?

There’s an array of ventures in crypto that have opted to build on Solana instead of Ethereum or Bitcoin:

  • Digital wallets: A number of wallet providers have used Solana to let users store and manage coins and non-fungible tokens, or NFTs.
  • Decentralized Finance: Solana supports a number of so-called DeFi platforms that provide services such as trading on crypto exchanges and lending.
  • NFT marketplaces: Several online emporiums for NFT art and avatars have set up shop on Solana. 
  • Web3 Apps: Ventures designed to take advantage of the decentralized distribution offered by blockchains are building on Solana. These include music streaming startups and workplace collaboration apps.

What are the downsides to Solana?

For all its efficiency, the blockchain has disadvantages:

  • Outages: Solana went down five times in the first half of 2022 because of bugs in its programming, with the production of new blocks stopped for hours at a time. This has been a blow to confidence in the network’s resilience. 
  • Ethereum 2.0: The Ethereum community is transitioning to a new model that relies on Proof-of-stake instead of Proof-of-work. This shift, which is called The Merge, is expected to make Ethereum far more efficient and drastically reduce the so-called gas fees that have made the network so expensive to use.  
  • Layer 2s: Cognizant of the need to be more efficient, the Ethereum community has supported the development of a new breed of turbocharged blockchains called Layer 2s. These networks are built on top of Ethereum. They pose a challenge to Layer 1s like Solana.

The bottom line

When it comes to technology, there is always a next iteration: a newer, better, more improved version no matter how innovative the original may be. As a next-generation blockchain network, Solana has made strides in improving on Ethereum, which is itself a leap past Bitcoin. And Solana’s development of a new type of consensus mechanism, PoH, is a major innovation in computer science around decentralized networks.

Yet Solana, along with other Layer 1 blockchains, must demonstrate they have the same resilience and dependability as Ethereum if they want to establish themselves as true alternatives. With Ethereum poised to make its biggest upgrade ever, Solana will face a crucial test as it labors to attract projects and users.

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