Cryptocurrencies

What is Solana? The Beginner’s Guide

Solana has quickly emerged as one of the hottest smart contract platforms. It even claims to be the smartest blockchain in the market! This article explores Solana’s history and technology and provides an overview of the SOL token.

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Solana is a smart contract platform

Let’s first put Solana in the right category among cryptocurrencies. We like to divide the crypto market into three unique categories: currencies, platforms, and tokens.

Bitcoin is the leader of the currency category. Other cryptos in this group include Litecoin and Monero. Currencies have no other significant uses cases than transferring and preservation of value.

Platforms are operating systems for smart contracts and decentralized applications (Dapps). Ethereum is still the clear number one platform, but the challengers have long included Cardano, Polkadot, and  Elrond.

Tokens are always minted on an existing platform. They are mostly either utility or governance tokens. Well-known tokens include Chainlink, Uniswap, and Aave.

Solana is a perfect example of a smart contract platform. It competes directly with Ethereum, Binance Smart Chain, Cardano, to name a few.

SOL is the native token of Solana. It is used in staking and paying transaction fees on the platform.

History of Solana

Although Solana’s SOL token entered the market in the spring of 2020, the project has been under construction for much longer. Solana’s whitepaper was released in November 2017.

Project creator Anatoly Yakovenko was initially unconvinced by Bitcoin and showed little interest in Ethereum. Yakovenko said he got the idea for Solana’s high-performance Proof of History solution while in a “caffeine-saturated sleep mode.”

Solana’s team members have previously worked for Apple, Intel, Google, Twitter, and Microsoft, among others. Before founding Solana, Yakovenko himself worked for a long time at Qualcomm software company and he was also on Dropbox’s payroll.

Solana arranged a small ICO in March 2020. Most of the approximately $25 million in funding came from private investors. Solana’s backers include several VC firms including Foundation Capital, Abstract Ventures, and Multicoin Capital.

SOL-token has been one of the hottest cryptocurrencies in 2021 increasing its value by almost 30x at the time of writing this article. This popularity has certainly been influenced by the high transaction fees on the Ethereum platform, which have priced small investors out of the DeFi market.

What is noteworthy is that Solana is still in the so-called ‘Mainnet Beta’ phase, so the project is still very much in its early stages.

Solana’s Proof of History

How does Solana work? Solana is technically a very innovative and ambitious project. It forms a new block in less than half a second and is capable of 65,000 transactions per second. It can do all this without sharding technology or layer-2 solutions.

Solana’s transactions are very cheap compared to other blockchains. The cost of one transaction is on average only $0.00001! Of course, as a platform cryptocurrency, Solana also supports smart contracts.

Solana manages to scale its blockchain so fast with time stamping the transactions. Similar methods are also used by Google and Intel, for example, to optimize the performance of their data centers.

However, unlike Google or Intel’s centralized servers, Solana has managed to build a decentralized version of the timestamp (decentralized clock), using the SHA-256 encryption algorithm and Verifiable Delay Function, which are also familiar from Bitcoin. This clock allows Solana’s nodes to confirm transactions without needing to communicate with each other.

When this Proof of History is combined with the Proof of Stake consensus, the end result is an extremely fast blockchain. Solana claims to solve (in a reasonably successful way) the so-called blockchain trilemma, i.e. being decentralized, secure, and scalable at the same time.

Check the video below for more information about Proof of History.

In order to understand this system better, blockchains can be thought of as a network of radio masts. If two radio thrusts emit the same frequency signal at the same time, the end result is noise. If, in turn, they schedule the signal to be sent alternately, the network will become much faster and more efficient.

Bitcoin and other blockchains operate in a slightly similar way to these noise-generating radio thrusts. They can form a new block with each other at the same time as the old radio thrusts sent the signals at the same time.

This is also known as the consensus of the longest chain. If the Bitcoin blockchain creates two blocks at the same time, the longest chain, i.e. the one with longer proof of work behind it, will win.

This wastes resources as transactions in the abandoned block must be processed again to a new block. If the Bitcoin network would synchronize with a clock where all transactions would be timestamped, this problem would not exist.

Solana’s operations are also enhanced by the so-called Solana Clusters. These are groups of validator nodes that focus on maintaining a specific application. These can include a decentralized cryptocurrency exchange (DEX), a lending app, or even a virtual world.

Solana is a Proof of Stake blockchain

As a Proof of Stake blockchain, Solana gets its safety from the staking of the SOL token. Part of the reason for Solana’s scalability is that, unlike Ethereum, for example, there are no minimum requirements to become a validator node. At the time of writing this in April 2021, there are approximately 600 validators on Solana’s network. You can also delegate your SOL tons to validator nodes and earn staking rewards.

The validator nodes perform all the tasks necessary for the operation of the blockchain: they secure transactions, preserve the history of transactions, and form new blocks. Nodes alternate as block creators. One node can form a maximum of four nodes in a row (it takes a total of 1.6 seconds to build four blocks).

The more SOL tokens you stake, the higher chances you have for becoming a block creator.

Nodes that work against protocol lose their staked tokens (slashing). Solana’s goal is to make this slashing 100 %, so those nodes that do not comply with the rules would lose all the tokens they make.

Solana’s eight innovations

If we dive into Solana’s technology little more closely, it can be seen to consist not only of Proof of History and Proof of Stake, but also of seven different innovations:

  1. Tower BFT: Proof of History -Optimized version of the Practical Byzantine Fault Tolerant Consensus Method.
  2. Turbine protocol makes data sharing between amplifying nodes more efficient, adding the transfer speed depending on the situation. Turbine works similarly to BitTorrent, a decentralized communication protocol that allows file sharing over a peer-to-peer network.
  3. Gulf Stream allows transactions to be validated in advance before the next block is formed. Thanks to Gulf Stream, Solana can reach over 50,000 transactions per second.
  4. Sealevel is Solana’s smart contract environment, capable of operating tens of thousands of smart contracts at the same time. It is also compatible with Ethereum. In traditional smart contracts, only one contract at a time can modify the status of the blockchain. This can be illustrated, for example, by the example of burning CDs: a song cannot be listened to at the same time as it is burned to a disc. However, in Solana’s smart contract environment, read and write functions can be performed at the same time.
  5. Cloudbreak is a database that enables Solana to scale without sharding technology.
  6. Archivers is a solution used by Solana for distributed blockchain data management. These “archivers” do not participate in the formation of consensus, but the network occasionally ensures from them that they store the data in an appropriate manner.
  7. Pipelining is a protocol that enhances transactions in a slightly similar way that washing clothes can be done more efficiently in the laundry room if the washing machine, dryer, and mangle are all in use at the same time.

The most well-known application using Solana is Serum, a decentralized cryptocurrency exchange with a subscription book model.

serum

Serum is backed by Sam Bankman-Fried, a billionaire and the founder of the FTX exchange, so there is probably a lot of financial support for Solana as well.

Solana’s SOL token

SOL token secures the Solana ecosystem. It is used to pay transaction fees on Solana’s network. These fees are burned, which means they are removed from the circulation.

SOL staking also eliminates tokens from circulation, which could be seen as having a positive impact on the token’s valuation. The less supply, the better (for an investor). SOL tokens have annual inflation of 8%, which, however, gets lower every year, eventually reaching 1.5%.

The maximum number of SOL tokens is 489 million, of which approximately half is in circulation. Contrary to expectations, the price of SOL survived the first week of January 2021, when 80 % of previously locked tokens were released into the market. The market ignored this, and SOL would shoot up dramatically from January onwards.

The reason why the maximum number of SOL tokens is just under 489 million, and not exactly 500 million, is because the number had to be artificially lowered. The Solana community had discovered a mysterious Solana wallet with 13.5 million SOL tokens.

Most of these consisted of a loan from Solana Foundation to an unknown entity that had provided liquidity to Binance. However, Solana Foundation had not mentioned any of this in the first place.

Solana has a good chance of being one of the top 10 cryptocurrencies. However, competition between smart contract platforms is fierce and Solana is already sitting with a high valuation at 14th place.

Solana’s price did not care much for the big correction in the crypto market in mid-April. It has continued its steady rise week after week. If you want to build a strong SOL position, you have to wait for a proper dip.

Solana price and how to buy SOL

The easiest way to buy SOL is from Binance, which also has the best liquidity and replacement pairs SOL/USDT, SOL/BTC, SOL/BNB, and SOL/BUSD. You can make a fiat deposit using a SEPA bank transfer or a credit card.

Buy SOL from Binance

Note: U.S. citizens must use Binance US. You can also buy Solana from popular exchanges such as Coinbase and FTX.

You can store SOL tokens in Ledger’s cold wallet or TrustWallet mobile wallet.

Solana’s official website can be found at solana.com and their Twitter is @solana. Statistics on the number of Solana validators and staked tokens can be found at solanabeach.io.

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