The Revival Path of Solana: Analysis of Key Indicators and Driving Factors

Introduction

The Solana ecosystem has demonstrated remarkable resilience after experiencing significant setbacks. The price of $SOL plummeted 96% from its peak of $260 in November 2021 to a low of $9.6 in December 2022. However, this is not the end of Solana's journey. Over the past year, developers have persevered in building the platform, actively developing and launching innovative and high-quality protocols. As a result, the price of $SOL has shown resilience, rebounding to the current $71, and the total locked value (TVL) has also recovered from $210 million in December 2022 to $812 million.

This report will explore the key factors driving the recovery of Solana.

Features of Solana

Although this article does not delve deeply into the technical advantages and innovations of Solana, it is worth mentioning that the success of a public chain largely depends on its underlying technical architecture. Therefore, we will briefly introduce the technical characteristics of Solana and the advantages it brings.

Solana uses a Proof of History mechanism, (, which is different from the commonly used Proof of Work and Proof of Stake blockchains. This allows nodes to reach consensus on the order of events without needing to communicate with other nodes. This unique approach enables the Solana network to achieve network throughput and timeliness that distinguish it from other blockchains.

In addition, unlike Ethereum, which charges fees for each on-chain transaction and destroys a portion, the Solana network employs additional methods. It charges project developers a state rent and validators a voting fee. This strategy reduces the dependence of token prices on transaction frequency while increasing the cost of deploying smart contracts. This may reduce the prevalence of fraudulent smart contracts on the network.

Overall, Solana features high transaction throughput, low transaction fees, and fast block confirmation times.

Solana has faced criticism for its high degree of network centralization, but it has made substantial progress in decentralized infrastructure. The network has expanded its coverage by integrating more global nodes, currently operating about 3,000 nodes across 392 different data centers in 31 countries. This expansion can be assessed using the Nakamoto coefficient, which measures the minimum number of independent entities required to shut down the blockchain's operation. This coefficient is often used as an indicator of blockchain decentralization, with a higher score indicating a higher degree of decentralization. Currently, Solana scores 21 on the Nakamoto coefficient, surpassing Bitcoin and Ethereum, whose two major mining pools control a significant amount of network computing power, with Lido and Coinbase collectively staking over 42% of the global ETH. Foundry USA and Antpool control over 54% of global Bitcoin mining ), Binance's 8, Polygon's 4, and Cosmos's 7, indicating significant progress in enhancing decentralization.

Status of the Developer Community

Despite the turbulence, the number of developers in the Solana ecosystem remains at a high level, with active development progress. According to Electric Capital's developer report, the number of active developers in the Solana ecosystem in March 2023 remained at around 2,540, slightly down from the peak of 2,648 in December 2022. Most developers still stay in the Solana ecosystem despite the panic. As users of applications related to Alameda Research gradually decrease, new high-quality projects such as Jito, MarginFi, and Backpack have emerged. Since March, the number of developers working on Solana has declined. However, the developer report shows that this decline mainly occurs among part-time developers. The number of full-time developers remains relatively stable, indicating that the core development activities in the Solana ecosystem continue.

Fund Activity Analysis

Comparing the $SOL trading data exported from CoinGecko over the past year with the Solana ecosystem TVL data from DeFiLlama during the same period, it can be seen that the speed of asset outflow is slower than the decline in token price. It is particularly noteworthy that this year, multiple approvals to sell its staked $SOL assets ( are usually associated with spikes in trading volume in the chart ), while the token price shows a stable upward trend. This indicates that the Solana ecosystem is overcoming negative impacts, and the market holds a positive attitude towards the future development of the Solana ecosystem.

Now, let's take a look at the flow of these assets in the Solana ecosystem. The top two protocols by TVL are liquid staking protocols: Marinade and Jito. They both offer liquid staking services, but their profit optimization methods differ.

• Marinade Finance

Marinade's staking service provides clients with automatic management, transferring staked assets from low-performance validators to high-performance validators. As mentioned earlier, validators on Solana need to pay voting fees during operation. Whether staking 10,000 $SOL or 1,000,000 $SOL, the voting fees paid are the same, and then a portion of the voting fees is burned while the remainder is redistributed to block proposers. Therefore, large validators effectively acquire voting fees from smaller validators; this is why there can be significant differences in validator performance, and there are indeed benefits to operating together as validators.

The Marinade liquid staking protocol ( MLSP ) allocates the received $SOL to one or more validator nodes. Marinade regularly updates its list of validator nodes, selecting the best candidates based on their performance and reputation. The profits accumulated by MLSP are pooled in the deposit pool, thereby increasing the value of mSOL.

• Jito Network

Jito positions itself as the first staking product on Solana that includes MEV rewards. Jito Lab developed the Jito-Solana client, which is the first third-party validator client on Solana. The architecture of the Jito-Solana client is designed to efficiently capture MEV profits within the Solana network. Traders submit sequences of trades they believe to be profitable for bidding. Then, a third-party block engine runs complex simulations to identify the highest value combinations of trades. These bids are subsequently allocated to validators and token holders ( Jito SOL ), thereby increasing rewards for token holders.

Each of them holds hundreds of millions of dollars in TVL, and due to the inherent capabilities of liquidity protocols, it may lead to double counting of TVL, making it difficult to determine an accurate figure. Let's return to their impact on the recovery of Solana.

In September 2023, it was approved to sell its crypto assets, including $SOL worth 1.16 billion. These $SOL tokens were partially removed from old staking agreements and exchange wallets after a month of liquidation, and were gradually sold to new holders, who are now staking them into the aforementioned liquidity staking agreements. When the price of Bitcoin broke $30,000 on October 23, the market continued to heat up. Typically, when the market is booming, people are reluctant to simply hold assets and wait for appreciation. This is where those liquidity staking agreements come into play, providing an attractive yield enhancement method with an annual yield of about 7%-9%. This trend further drove the steady rise of $SOL tokens.

Application and On-chain Activity Analysis

In addition to the optimistic expectations for Solana's price, the Solana ecosystem has also remained healthy and active during this period. Solana's daily trading volume consistently far outpaces any other blockchain, with the majority of on-chain transactions coming from the following protocols.

(Sol Incinerator is a rather interesting project. It allows users to destroy useless NFTs and scam tokens in exchange for a small amount of $SOL, with each NFT or token destruction earning between 0.002SOL and 0.01SOL. If you are curious about the source of $SOL, when an account is created on Solana, the network requires a small storage fee to open the account. By destroying tokens, the account can be closed, and the storage fee can be reclaimed. )

As you can see, the activities on the Solana blockchain primarily involve transactions, similar to the trends observed on Ethereum and BSC. Unlike Polygon or Base, which are mainly influenced by one or two applications, the on-chain activity of Solana showcases a more diverse ecosystem; this should not be misunderstood as a lack of successful applications on the Solana network. On the contrary, it highlights the diversity of Solana. Well-known projects like Jito, STEPN, and Drift, while important, do not solely define the usage of the Solana network.

(Pyth, as a millisecond-level oracle, has not generated a large number of interactions on the Solana blockchain because its main data flow is collected and determined on Pythnet --- an AppChain launched by the Pyth team based on the Solana codebase. The Pyth Network chose to build on Solana because the network can process thousands of transactions per second with fast finality. Moreover, Solana's 400-millisecond slot time allows Pyth Network price feeds to update faster than most other layer one technologies.)

The Solana network has speed and cost advantages. To illustrate this better, almost all public blockchains are faster and cheaper compared to Bitcoin and Ethereum. However, data from Spire.fyi shows that in the past month, the total number of transactions on Solana was approximately 825 million, which is about 24 times Ethereum's 34 million transactions. Despite such a huge transaction volume, the total gas fees consumed were 62,735 $SOL, approximately 4.3 million USD, averaging about 0.005 USD per transaction. In contrast, Ethereum's total gas consumption for the month was 126.7K, roughly 268.4 million USD, with an average transaction cost of 7.89 USD, which is 1578 times the transaction fees on Solana.

Market Development and Technological Advancement

In August, e-commerce giant Shopify integrated Solana Pay as a new payment option to revolutionize commerce. In September, credit card giant Visa also expanded its settlement solutions with Solana. In Visa's announcement, Visa stated that the reason for choosing to integrate Solana was that "the Solana blockchain network features high transaction throughput and low-cost scalability, making it a good candidate for payments and Visa's stablecoin settlement pilot." In addition to being accepted by traditional markets and forming partnerships with internet giants, the Solana network has also made commendable progress in technology and applications over the past year.

• State Compression

In April, Solana introduced state compression, a new data storage method that can reduce the cost of minting NFTs by more than 2000 times. With state compression technology, the cost of minting 1 million NFTs dropped from $25,300 to $113. In comparison, the costs on Ethereum and Polygon were $33.6 million and $32,800, respectively. Helium, which migrated to Solana in April, has greatly benefited from this technology. During the migration, 900,000 hotspots on the Helium network were minted as NFTs. Without compression technology, this would have incurred a cost of over $260,000, but with this technology, the cost during migration was only $122.