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

Introduction

The Solana ecosystem has experienced significant setbacks following the collapse of Alameda Research and FTX. The value of $SOL plummeted 96% from its peak of $260 in November 2021, dropping 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 remained committed to the platform, actively developing and launching innovative and well-designed protocols. As a result, the price of $SOL has shown resilience, rebounding to today's $71, and the total locked value (TVL) has also recovered from $210 million in December 2022 to $812 million.

This report will explore the factors contributing to the recovery of Solana.

Features of Solana

Although this article will not delve into the technical advantages and innovations of Solana, it is worth recognizing 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 employs a historical proof mechanism, rather than 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 different network throughput and timeliness compared to other blockchains.

In addition, unlike Ethereum, which charges a fee for each on-chain transaction and burns a portion of the fees, the Solana network employs an additional approach. It charges project developers a state rent and validator voting fees. 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 the characteristics of high transaction throughput, low transaction fees, and fast block confirmation times.

Solana has been criticized for its network centralization, but it has made substantial progress in decentralizing its 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 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 the degree of decentralization of a blockchain, with a higher score indicating greater decentralization. Currently, Solana scores 21 on the Nakamoto coefficient, surpassing Bitcoin and Ethereum's 2, Binance's 8, Polygon's 4, and Cosmos's 7, demonstrating significant progress in increasing decentralization.

Developer Community Status

After the bankruptcy of FTX, the number of developers in the Solana ecosystem remains high, with active development progress. According to Electric Capital's developer report, as of March 2023, the number of active developers in the Solana ecosystem is around 2,540, slightly down from the peak of 2,648 developers in December 2022. Most developers still remain in the Solana ecosystem despite the panic. As the users of applications related to Alameda Research gradually decrease, new high-quality projects like Jito, MarginFi, and Backpack have emerged. Since March, the number of developers working on Solana has declined. However, the developer report indicates that this decline mainly occurs 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 past year's $SOL trading data from CoinGecko and compared it with the Solana ecosystem TVL data obtained from DeFiLlama during the same period, it is evident that the asset outflow rate is slower than the decline in token price. Notably, this year when FTX and Alameda Research were allowed to sell their staked $SOL assets multiple times, it was often associated with spikes in trading volume in the charts, and the token price showed a stable upward trend. This indicates that the Solana ecosystem is overcoming the negative impacts of FTX's bankruptcy, and the market holds a positive outlook on the future development of the Solana ecosystem.

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

Marinade Finance

Marinade's staking service provides clients with automated management, transferring staked assets from low-performance validators to high-performance validators. As mentioned earlier, validators on Solana need to pay voting fees while operating. Whether staking 10K $SOL or 1m $SOL, the voting fee paid is the same, and then part of the voting fee is burned, while the remaining portion is redistributed to block proposers. Therefore, larger validators actually acquire voting fees from smaller validators; this is why there can be significant differences in validator performance, and merging funds pools does indeed have benefits when operating as a validator.

The Marinade liquidity 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 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 effectively capture MEV profits within the Solana network. Traders submit sequences of trades they believe are profitable as bids. 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 ), thereby increasing the returns for token holders.

They each hold hundreds of millions of dollars in TVL, and it is difficult to determine an accurate figure because liquidity protocols may be counted multiple times in TVL due to their own capabilities. Let's return to their impact on the recovery of Solana.

In September 2023, FTX was authorized to sell its crypto assets, including $SOL said to be worth $1.16 billion. These $SOL tokens were partially removed from old staking agreements and FTX exchange wallets after a month of liquidation, gradually sold to new holders, who are now staking them into the aforementioned liquid staking agreements. As Bitcoin's price 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 attractive yield enhancement methods with approximately 7%-9% APY. This trend further contributed to 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 exceeds that of any other blockchain, with the majority of on-chain transactions coming from the following protocols.

( The Solana burner is quite an interesting project. It allows users to burn useless NFTs and scam 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 $SOL comes from, when an account is created on Solana, the network requires a small storage fee to open the account. By burning tokens, the account can be closed, and the storage fee can be recovered. )

As you can see, the activity on the Solana blockchain mainly involves transactions, similar to the trends observed with Ethereum and BSC. Unlike Polygon or Base, which are primarily 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 within the Solana network. On the contrary, it highlights the diversity of Solana. Notable projects like Jito, STEPN, and Drift are important, but they do not singularly define the usage of the Solana network.

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

The Solana network has advantages in speed and cost-effectiveness. To illustrate this, 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, about 24 times that of Ethereum's 34 million. Despite such a huge transaction volume, the total Gas consumption was 62,735 $SOL, approximately 4.3 million dollars, averaging around 0.005 dollars per transaction. In contrast, Ethereum's total Gas consumption for the month was 126.7K, equivalent to about 268.4 million dollars, with an average transaction cost of 7.89 dollars, which is 1578 times the transaction fees on Solana.

Market Development and Technological Advancements

In August, e-commerce giant Shopify integrated Solana Pay as a new payment option to transform commerce. In September, credit card giant Visa also expanded its settlement solution with Solana. In Visa's announcement, they stated that the reason for choosing this integration is that "Solana's blockchain network has characteristics such as high transaction throughput and low-cost scalability, making it a good candidate for payment and Visa's stablecoin settlement pilot." 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 more than 2,000 times. With state compression technology, the cost of minting 1 million NFTs dropped from $25,300 to $113. In comparison, the costs for Ethereum and Polygon were $33.6 million and $32,800, respectively. Helium, which migrated to Solana in April, benefited greatly 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 it, 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 was launched on the testnet. Firedancer is a new third-party validator client developed by Jump Trading for the Solana blockchain, aimed at improving network efficiency and transaction processing capacity. As the second client for Solana, it is designed to reduce the risks associated with a single client and prevent network downtime. Its goal is to process over 1 million transactions per second.

FTX/Alameda Research Liquidation

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

In September 2023, a U.S. court signed an order allowing FTX to sell its crypto assets. The liquidation plan limits $50 million per week, which can be permanently increased to $200 million per week upon further court order. The liquidation process will be overseen by the crypto company Galaxy Digital.