Building Block: Solana
Solana is a leading smart contract blockchain designed for high performance and low transaction costs.
Exhibit 1: Solana is the second largest asset of Smart Contract Platforms Crypto Sector
The Token
SOL is the native token of the Solana network, and ownership of the SOL token represents a piece of ownership in the ecosystem (Exhibit 2). The SOL token is used for (i) powering decentralized applications (dApps), (ii) paying transaction fees, (iii) providing network security via staking, and (iv) facilitating network governance. The Solana protocol systematically “burns” (destroys and removes from circulation) 50% of SOL used for transaction fees.
Exhibit 2: SOL token basics
The Network and Technology
The Solana network also stands out for novel applications of the technology, including a Web 3.0-ready mobile phone (Solana Mobile), a payments application (Solana Pay), and “token extensions” that can bring additional functionality to standard Solana tokens (e.g., related to confidentiality). Overall, the Solana technology stack has delivered a compelling user experience that has attracted a vibrant community of users and developers.
Exhibit 3: Solana stands out for high network performance and low cost
Use Cases
Decentralized Finance (DeFi): Automated market makers, lending and borrowing platforms, asset management software, and payments
Web 3.0: Decentralized physical infrastructure applications (e.g., Helium), data privacy web browsers, and open-architecture video games
NFTs: Minting platforms, marketplaces, and community engagement tools
Factors to Consider
The protocols within Grayscale’s Smart Contract Platforms Crypto Sector all offer infrastructure for decentralized applications, but they make different design choices and optimize for other variables. Solana optimizes for performance: fast block times, low latency, and relatively low transaction costs. The network is designed to operate as fast as modern hardware will allow and to scale as hardware improves over time (i.e., with Moore’s Law for processing speed and with Nielsen’s Law for internet bandwidth). Other networks, like Ethereum, trade off performance for potentially greater decentralization and network liveness.
It is briefly worth noting that the network has also demonstrated a high degree of resilience in the past. The failed crypto exchange FTX had been involved in the project, as a significant token holder and application developer. However, Solana’s community of users, developers, and industry partners remained active after the FTX bankruptcy, helping to set up Solana for its more recent success. If the network’s innovative design and friendly user experience can continue to draw in new users, we believe, the Solana ecosystem should have a bright future.
Solana faces several possible risks specific to the network, which include, but are not limited to:
Competing Networks: Solana faces competition from other blockchains with smart contract functionality, such as Ethereum and Near.
Economics and Valuation: Despite a high volume of transactions, Solana network fee revenue remains lower than Ethereum’s fee revenue (although it is higher when scaled to market capitalization).
Level of Centralization: Running a Solana validator has relatively high hardware and bandwidth requirements, which may result in network concentration, either in the number of validators and/or their distribution across data centers.
[2] Source: Coin Metrics. 30 days ending June 16, 2024.
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