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

Introduction

After the collapse of Alameda Research and FTX, the Solana ecosystem experienced a significant decline. The value of $SOL plummeted by 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 remained steadfast in their commitment to the platform, actively developing and launching innovative and well-designed 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 analyze the factors leading to the recovery of Solana.

Features of Solana

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 levels of 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 a portion, the Solana network employs additional methods. It charges project developers state rent and validator voting fees. This strategy reduces the dependency of token prices on transaction frequency while increasing the cost of deploying smart contracts. This may decrease the prevalence of fraudulent smart contracts on the network.

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

Solana has faced criticism for network centralization, but it has made substantial progress in decentralizing its infrastructure. The network has expanded to more global nodes, currently operating approximately 3,000 nodes across 392 different data centers in 31 countries. This expansion can be assessed using the Nakamoto coefficient, which evaluates the minimum number of independent entities required to shut down the blockchain operation. This coefficient is often used as an indicator of a blockchain's level of decentralization, with a higher score indicating a higher degree of decentralization. Currently, Solana's Nakamoto coefficient stands at 21, exceeding Bitcoin and Ethereum's 2, Binance's 8, Polygon's 4, and Cosmos's 7, demonstrating significant progress in enhancing decentralization.

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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 about 2,540 in March 2023, slightly down from the peak of 2,648 in December 2022. Most developers remain in the Solana ecosystem despite the panic. As the number of users of Alameda Research-related applications gradually decreases, 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 indicates that this decrease is mainly concentrated among part-time developers. The number of full-time developers remains relatively stable, indicating that core development activities within the Solana ecosystem continue.

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Capital Activity Analysis

When we export the trading data of $SOL from CoinGecko for the past year and compare it with the Solana ecosystem TVL data from DeFiLlama for the same period, we can find that the asset outflow rate is slower than the decline in token price. It is particularly noteworthy that this year, when FTX and Alameda Research were allowed to sell their staked $SOL assets multiple times, ) was usually associated with the peak trading volume in the chart (, while the token price showed a stable upward trend. This indicates that the Solana ecosystem is overcoming the negative impact of FTX's bankruptcy, and the market holds a positive attitude towards the future development of the Solana ecosystem.

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

• Marinade Finance

Marinade's staking service provides clients with automatic management of staking assets from low-performance validators to high-performance validators. As mentioned earlier, validators on Solana need to pay voting fees while operating. Regardless of whether you stake 10K $SOL or 1m $SOL, the voting fee paid is the same, then part of the voting fee is burned, and the remaining portion is redistributed to block proposers. Therefore, larger validators actually obtain voting fees from smaller validators; this is why validator performance can vary greatly, and pooling funds is indeed beneficial when operating as a validator.

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 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 bids for transaction sequences they believe are profitable. Then, a third-party block engine runs complex simulations to identify the highest value transaction combinations. These bids are then allocated to validators and token holders ) JitoSOL (, thereby increasing the rewards for token holders.

They each have hundreds of millions in TVL, and it is difficult to determine the exact number as liquidity protocols may be counted multiple times in the TVL due to their own capabilities. Let's return to their impact on the revival of Solana.

In September 2023, FTX was authorized to sell its crypto assets, including $SOL, which is reportedly worth $1.16 billion. These $SOL tokens were partially removed from old staking agreements and FTX exchange wallets after a month of liquidation, and were gradually sold to new holders who staked them in the aforementioned liquid staking agreements. When the price of Bitcoin surpassed $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 liquid staking agreements come into play, offering attractive yield enhancement methods with approximately 7%-9% APY. This trend further propelled the steady rise of the $SOL token.

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Application and On-chain Activity Analysis

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

As you can see, most activities on the Solana blockchain mainly involve 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 misconstrued as a lack of successful applications within the Solana network. On the contrary, it highlights the diversity of Solana. Notable projects such as Jito, STEPN, and Drift, while important, do not solely define the usage of the Solana network.

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, Solana had a total of approximately 825 million transactions, which is about 24 times that of Ethereum's 34 million. Despite such a large volume of transactions, the total Gas consumption was 62,735 $SOL, approximately 4.3 million dollars, with an average of about 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 that of Solana's transaction fees.

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Market Development and Technological Advancement

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 solutions with Solana. In Visa's announcement, Visa stated that the reason for choosing this integration is that "the Solana blockchain network features 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 decreased from $25,300 to $113. In comparison, the costs on Ethereum and Polygon are $33.6 million and $32,800, respectively. Helium, which migrated 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 incurred 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 have made 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 capabilities. As the second client for Solana, it aims to reduce risks associated with a single client and prevent network downtime. Its goal is to process over 1 million transactions per second.

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FTX/Alameda Research Liquidation

This aspect has been briefly mentioned earlier in the section about recent capital activities. However, it is important to note that the liquidation process of FTX/Alameda Research is extensive and ongoing. It is undoubtedly wise to cautiously anticipate and be aware of 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 is limited to $50 million per week, with the possibility of permanently raising the weekly limit to $200 million following further court orders. The liquidation process will be overseen by the crypto company Galaxy Digital.

According to the Solana Foundation report, the Solana Foundation and Solana Labs sold 58 million $SOL to Alameda Research & FTX Trading. About 10% of these tokens have been unlocked, 7.5 million will be unlocked in March 2024, 61.85K will be unlocked in May 2024, and the rest will be unlocked linearly on a monthly basis until 2028. Besides the significant unlocking in March next year, the impact of this liquidation on the $SOL price should be relatively mild.

According to the FTX bankruptcy report from August 2023, FTX still holds $1.162 billion worth of $SOL, approximately 55.76 million $SOL. We do not know how Galaxy Digital will facilitate this liquidation, but if these $SOL tokens are liquidated without waiting for the tokens to unlock, any impact will be limited, as these tokens are essentially not circulating in the market.

Conclusion

The notable revival of Solana can be attributed to the synergistic effect of multiple factors that have collectively contributed to its renewed vitality. Firstly, the network's unique technical architecture facilitates high transaction throughput and low fees, distinguishing it from other blockchains. In addition, despite the market downturn, the resilience and growth of its developer community highlight the strong ecosystem fostered by Solana. Capital activities, including sustained interest from investors, have also played an important role. Furthermore, technological advancements such as the launch of Jito-Solana Client, state compression, Neon, and Firedancer.