SOLANA: The end of an era or not?

2022年12月15日

Hello everyone! This is our second idea in a fundamental project analysis (the first one about Aptos is right here). This idea will tell you about the Solana project in terms of product, competitive advantages, team, tokenomics, and prospects. If you understand the project from all angles, including its essence and goals, as well as the fundamental approach and metrics, you will be able to enter the project more consciously and profitably.

THE PROJECT and IT'S TOKEN
Solana - SOL token

What is the project?
Layer 1 blockchain based on the Proof-of-Stake (PoS) and Proof-of-History (PoH) consensus systems. The project was founded in 2017 and was officially launched in 2020.

PRODUCT PART

Key mechanics

• The Proof-of-History algorithm is designed to synchronize the blockchain and transactions. The higher the throughput, the faster the blockchain synchronization rate. PoH is a method for reducing time costs, not a consensus algorithm.
  
• Tower Byzantine Fault Tolerance (TBFT) is a consensus algorithm that is based on Proof-of-Stake that uses PoH to reduce computational resources and time costs.
  
• Turbine is a transaction transfer protocol that shortens the time it takes to transfer data between validators..
  
• Gulf Stream is a transaction transfer protocol that does not use mem-pools because validators are detected in advance.
  
• Sealevel is a parallel execution of transactions and signature verification.
  

Strengths

• High throughput due to a combination of PoH and TBFT, as well as the Gulf Stream and Sealevel.
  
• High scalability due to Turbine
  

Weaknesses

• When there is a high load on the Solana network, the blockchain stops processing transactions and becomes inactive due to a lack of mem-pool. For example, when a large number of mint bots were launched, which sent transactions to the blockchain very quickly, the network was unable to handle transaction processing and went into an inactive state.
  
• Not a reliable level of decentralization – the nodes vote for the block and pass the votes on to the leaders. Leaders collect votes and sign the block themselves. The issue is that in other networks, validators (leaders) validate blocks, and then nodes decide whether or not they agree with the validator's action.
  

BUSINESS PART

How does the product make money?
The situation is comparable to Aptos and other blockchains. Investing in projects from their ecosystem and the most promising projects from other ecosystems are currently the main sources of income for Layer 1 blockchains, aside from collecting investments.

How can a product make money in the long run?
Selling your infrastructure to third-party companies like web2 or TradFi is the best way to make money with blockchain. However, at the moment, there are several limitations to this:
1. Unreliable technical solutions
Solana has proven that it can stop its work at any moment.
2. Weak regulation
Because there is no clear regulation, any company that decides to integrate into blockchain must accept the risk of pressure from their country's regulators.
3. Lack of business logic
It's still unclear why large corporations should use blockchain infrastructure and what benefits this solution will provide.

TEAM
Anatoly Yakovenko – Co-founder, ex Dropbox, Mesosphere, Qualcomm
Raj Gokal – Co-founder, ex Omada Health, General Catalyst Partners

FUNDS AND INVESTORS
Solana has had 9 rounds of investments, total fees ~315m USD
The main investors:

• Tor Kenz Capital
  
• Buck Stash
  
• Collab + Currency
  
• Alameda Research
  
• Memetic Capital
  
• Blockchange Ventures
  
• CoinFund
  
• Genesis One Capital
  
• Multicoin Capital
  
• CoinShares
  

TOKENOMICS
1. Total number of tokens: SOL deflationary token, unlimited maximum number
2. Current circulation: 363,963,170 SOL
3. Current market capitalization: 5.1b USD

All member groups will receive their tokens in the first half of 2023, and token issuance will be limited to Staking Rewards. On the one hand, this is a good thing because SOL will become a fully marketable asset whose value is determined solely by supply and demand, and the issuance will only benefit network contributors. On the other hand, it is bad because Solana has currently lost the DeFi niche due to the network's poor performance and NFT due to the extremely low value of the SOL token. If Solana as a blockchain does not find its niche and users, the SOL token will not have a sufficient level of demand; additionally, the amount of SOL supply will increase every year due to the growing issue of Staking Rewards.


CONCLUSION

What to expect in the future?
Solana, as a project, is basically finished. In 2020-2021, it was an advanced blockchain on which innovative products were released. Solana had the backing of Alameda and FTX, preventing the SOL token from falling below $3 in 2021.

Solana experienced an NFT-boom in the fall of 2021, when the token price reached over $100, and many users became wealthy (or very rich as a result of Solana). However, in November 2021, the crypto-winter began, affecting all market assets. However, the crypto-winter began in November 2021, affecting all market assets. This year, SOL lost more than 90% of its value, lost many NFT users (no one wants to earn $20-30 and spend many hours of time grinding), lost the DeFi sector (users don't want to wait for Solana network to work and process transactions again, developers find more profit to run their application on L2 EVM network), and lost the support of their main sponsors – Alameda and SBF (these guys have enough problems right now). Along with the death of the previous cycle's market narratives, one of the cycle's brightest projects is likely to have died as well.

Solana and the SOL token have two chances to recover their positions:
1. To attract new investors and real-world businesses that will use Solana's infrastructure. It is unlikely because Solana has already demonstrated weaknesses in their solutions, and it is unclear whether they can address those weaknesses. Furthermore, there are more advanced and promising solutions on the market (Aptos (here is a link to our article about Aptos on TV), SUI, Starknet, Scroll, Shardeum), investment and use of which will yield greater long-term benefits.
2. To develop or attract new projects and audiences. It is also unlikely because EVM networks are more likely to be chosen by developers and users due to their larger user base, network activity, and potential.

Our output: long or short
In the short run, SOL token will follow the market, but will rise slower and fall faster than others.
In the long run, Solana resources are limited, the market is becoming increasingly competitive, and Solana and SOL are no longer of product and business interest. The project has run its course; SOL will most likely be among the top 50/100 projects in terms of capitalization, but Solana's golden days are over.

P.S
In any case, your trading strategy, investment and trading planning horizon are significant to make decisions and these decisions are up to you! Don't forget about risk management; the market is volatile, and you must successfully arrive at the right long-term forecasts without losing all of your capital. Keep in mind that many participants in the crypto market undervalue or overvalue projects and assets, and the true evaluation occurs only after the appropriate events occur.

Thank you for reading!
Feel free to share your thoughts about SOL in comments