The Road to Solana's Revival: Analysis of Key Indicators and Driving Factors

Introduction

The Solana ecosystem has demonstrated remarkable resilience after experiencing significant setbacks. From a peak of $260 in November 2021, it plummeted to a low of $9.6 in December 2022, with the value of the SOL token dropping by 96%. 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 a series of innovatively designed protocols. As a result, the price of SOL has shown resilience, rebounding to its current price of $71, and the total locked value (TVL) has recovered from $210 million in December 2022 to $812 million.

This report will analyze the various factors contributing to the recovery of Solana.

Features of Solana

Although this article does not focus on discussing the technological advantages and innovations of Solana, we need to recognize that the success of a public chain largely depends on its underlying technical architecture. Therefore, I will briefly describe the technical features of Solana and the advantages it brings.

Solana adopts the Proof of History ( mechanism, which is different from the common 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 are different from other blockchains.

In addition, unlike Ethereum, which charges a fee for each on-chain transaction and burns part of the fees, the Solana network employs an additional method. 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.

In summary, Solana has characteristics such as high transaction throughput, low transaction fees, and fast block confirmation times.

Solana has been criticized for network centralization issues, but has made substantial progress in decentralized infrastructure. The network has expanded its coverage by integrating more nodes globally, currently operating around 3,000 nodes across 392 different data centers in 31 countries. This expansion can be assessed using the Satoshi coefficient, which measures the minimum number of independent entities required to shut down the blockchain operation. This coefficient is commonly used as an indicator of the degree of decentralization of a blockchain, with higher scores indicating a greater degree of decentralization. Currently, Solana scores 21 on the Satoshi coefficient, surpassing Bitcoin and Ethereum, where the two mining pools control a large portion of the network's computing power. Lido and Coinbase collectively stake over 42% of the global ETH. Foundry USA and Antpool control over 54% of global Bitcoin mining ), alongside Binance's 8, Polygon's 4, and Cosmos's 7, demonstrating significant progress in enhancing decentralization.

Developer Community Status

After the bankruptcy of FTX, the number of developers in the Solana ecosystem remains high, with active development ongoing. According to Electric Capital's developer report, the number of active developers in the Solana ecosystem was around 2,540 in March 2023, slightly down from the peak of 2,648 in December 2022. Most developers still remain in the Solana ecosystem despite the panic. As users of applications related to Alameda Research gradually decrease, new high-quality projects like Jito, MarginFi, and Backpack are emerging. Since March, the number of developers working on Solana has declined. However, developer reports indicate that this decline is primarily among part-time developers. The number of full-time developers remains relatively stable, indicating that core development activities within the Solana ecosystem continue.

Capital Activity Analysis

When we exported the SOL trading data from the data platform for the past year and compared it with the TVL data of the Solana ecosystem obtained from the same platform, we found that the outflow of assets is slower than the decline in token prices. Notably, this year, when a certain trading platform and a certain investment institution were allowed to sell their staked SOL assets multiple times, ( was usually associated with spikes in trading volume ), while token prices showed a steady upward trend. This indicates that the Solana ecosystem is overcoming the negative impact of bankruptcy events, and the market holds a positive attitude towards the future development of the Solana ecosystem.

Now, let's take a look at where these assets have flowed within the Solana ecosystem. The top two protocols by TVL are liquidity staking protocols: Marinade and Jito. Both offer liquidity staking services, but their profit optimization methods are quite different.

• Marinade Finance

Marinade's staking service provides customers with automated management, transferring staked assets from low-performance validators to high-performance validators. As mentioned earlier, validators on Solana need to pay a voting fee while operating. Whether you stake 10K SOL or 1 million SOL, the voting fee paid is the same, and then a portion of the voting fee is burned while the remaining part is redistributed to block proposers. Therefore, large validators actually obtain voting fees from small validators; this is why validator performance can vary greatly, and operating as a concentrated validator indeed has advantages.

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 generated by MLSP accumulate 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 effectively capture MEV profits within the Solana network. Traders submit bids for sequences of trades they believe to be profitable. 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 (JitoSOL), thus increasing the rewards for token holders.

They each have hundreds of millions of TVL, and it is difficult to determine an accurate number since liquidity protocols may be double-counted in the TVL due to their own capabilities. Let's return to their impact on the recovery of Solana.

In September 2023, a certain trading platform was authorized to sell its crypto assets, among which SOL was reportedly worth $1.16 billion. These SOL tokens were partially removed from old staking agreements and trading platform wallets after a month of liquidation and gradually sold to new holders, who are now staking them in the aforementioned liquid 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 waiting for appreciation. This is where those liquid staking agreements come into play, offering an annual yield of about 7%-9%, making it an attractive yield enhancement method. This trend further propelled 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 in a healthy and active state during this period. The daily trading volume of Solana consistently exceeds that of any other blockchain, with the main on-chain transactions coming from the following protocols.

(Sol Incinerator is a rather interesting project. It allows users to burn useless NFTs and fraudulent tokens in exchange for a small amount of SOL, with each NFT or token burned yielding between 0.002 SOL and 0.01 SOL. If you're wondering where these SOL come from, the network charges a small storage fee when creating an account on Solana to set up the account. By burning tokens, the account can be closed, and the storage fee can be recovered. )

As you can see, the activities on the Solana blockchain mainly involve transactions, which is 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 activities of Solana showcase a more diverse ecosystem; this should not be mistaken for a lack of successful applications on the Solana network. On the contrary, it highlights the diversity of Solana. Notable projects like Jito, STEPN, and Drift, while important, do not solely define the usage of the Solana network.

(Pyth, as a millisecond oracle, has not generated a large number of interactions on the Solana blockchain because its main data stream is collected and finalized on Pythnet - Pythnet is the AppChain launched by the Pyth team based on the Solana codebase. The Pyth Network chose to build on Solana because the network can handle thousands of transactions per second with fast finality. Additionally, Solana's 400-millisecond slot time allows Pyth Network price feeds to be updated faster than most other Layer 1 technologies. )

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

Market Development and Technological Advances

In August, e-commerce giant Shopify integrated Solana Pay as a new payment option to transform its business model. In September, credit card giant Visa also expanded its settlement program with Solana. In Visa's announcement, Visa stated that the reason for choosing to integrate Solana is that "the Solana blockchain network has characteristics such as high transaction throughput and low-cost scalability, making it a good candidate for payment and Visa stablecoin settlement pilots." In addition to being accepted by traditional markets and establishing 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 over 2000 times. With state compression technology, the cost of minting 1 million NFTs dropped from $25,300 to $113. In contrast, the costs on Ethereum and Polygon are $33.6 million and $32,800, respectively. The migration of Helium to Solana in April 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 resulted in a cost of over $260,000, but with compression technology, the cost during migration was only $122.

• Neon

In July, Solana's EVM-compatible solution Neon was finally launched on the mainnet. Subsequently, the Solidity smart contract compiler Solang was introduced. These developments make it easier for developers to write Ethereum applications on the Solana platform.

• Firedancer

In October, Firedancer went live on the testnet. Firedancer is a new third-party validator client developed by a certain company for the Solana blockchain, aimed at improving the efficiency and transaction processing capabilities of the network. As the second client for Solana, it aims to reduce the risks associated with a single client and prevent network downtime. Its goal is to process over 1 million transactions per second.

Asset Liquidation of a Certain Institution

This aspect has been briefly mentioned in the earlier section regarding recent capital activities. However, it is important to note that the liquidation process of certain institutions is extensive and ongoing. It is wise to cautiously predict and pay attention to the potential risks associated with Solana tokens.

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