The Revival of the Solana Ecosystem: Analysis of Key Indicators and Driving Factors

Introduction

The Solana ecosystem has shown remarkable resilience after experiencing a heavy blow. The price of $SOL plummeted 96% from its peak of $260 in November 2021 to a low of $9.6 in December 2022. However, over the past year, developers have persevered and actively developed innovative protocols. As a result, the price of $SOL rebounded to $71, and the total locked value also rose from $210 million in December 2022 to $812 million. This report will analyze the key factors contributing to Solana's recovery.

Features of Solana

Solana adopts a unique proof of history mechanism that allows nodes to reach consensus on the order of events without communicating with each other. This enables the Solana network to achieve network throughput and timeliness that other blockchains cannot reach.

Compared to Ethereum, the Solana network also charges project developers for state rent and validator voting fees. This reduces the dependence of token prices on transaction frequency while increasing the cost of deploying smart contracts, which may reduce the prevalence of fraudulent smart contracts on the network.

Overall, Solana has advantages such as high transaction throughput, low transaction fees, and fast block confirmation times.

Solana has also made significant progress in decentralization. Currently, there are about 3,000 nodes distributed across 392 different data centers in 31 countries worldwide. The Nakamoto coefficient is a measure of the degree of decentralization of a blockchain, and Solana's score is 21, surpassing Bitcoin and Ethereum's 2, Binance's 8, Polygon's 4, and Cosmos's 7, indicating substantial advancements in enhancing decentralization.

Developer Community Status

According to the data report, the number of active developers in the Solana ecosystem remained at about 2,540 in March 2023, slightly below the peak of 2,648 in December 2022. Most developers have stayed in the Solana ecosystem despite the turmoil. As the user base of certain related applications has gradually decreased, high-quality projects such as some new projects have emerged. Since March, the number of developers in Solana has declined, mainly due to a reduction in part-time developers, while the number of full-time developers has remained relatively stable, indicating that the core development activities of the Solana ecosystem are ongoing.

Fund Activity Analysis

Comparing the trading data of $SOL and the TVL data of the Solana ecosystem over the past year, it can be observed that the outflow of assets is slower than the decline in token prices. Notably, when $SOL assets that are staked are repeatedly approved for sale, ( is usually associated with peaks in trading volume in the charts ), while token prices show a stable upward trend. This indicates that the Solana ecosystem is overcoming certain negative impacts, and the market holds a positive outlook on the future development of the Solana ecosystem.

Now let's take a look at the flow of these assets 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 differ.

Marinade's staking service provides clients with automatic management, transferring staked assets from low-performance validators to high-performance validators. Validators on Solana need to pay voting fees, regardless of whether they stake 10K $SOL or 1m $SOL, the voting fee paid is the same. Therefore, larger validators effectively obtain voting fees from smaller validators, which is why validator performance can vary greatly, and being concentrated together as validators does indeed have its advantages.

Jito positions itself as the first staking product on Solana that includes MEV rewards. Jito Lab developed the first third-party validator client on Solana, the Jito-Solana Client. Its architecture is designed to effectively capture MEV profits within the Solana network. Traders submit bids for transaction sequences they believe are profitable, and then a third-party block engine runs complex simulations to identify the highest value transaction combinations. These bids are subsequently allocated to validators and token holders (JitoSOL), thereby increasing the rewards for token holders.

Both of these protocols hold hundreds of millions of dollars in TVL. Let's return to their impact on the Solana recovery.

In September 2023, the court allowed the sale of crypto assets including $SOL, which is said to be worth $1.16 billion alone. After a month of liquidation, some of these tokens were removed from old staking protocols and certain exchange wallets, and were gradually sold to new holders who are now staking them in the aforementioned liquid staking protocols. 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 and wait for appreciation. This is where those liquid staking protocols come into play, offering around 7%-9% APY, which is an attractive yield enhancement method. This trend further drove 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 maintained a healthy and active state 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 activities on the Solana blockchain mainly involve transactions, which is similar to the trends observed with Ethereum and BSC. Unlike Polygon or Base, which are largely influenced by one or two applications, the on-chain activities of Solana showcase a more diverse ecosystem; this should not be misunderstood as a lack of successful applications on the Solana network. Instead, it highlights the diversity of Solana. Some important projects, such as certain DEXs, a running application, and a trading platform, are significant, but they do not solely define the usage of the Solana network.

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 trading volume, the total Gas fee consumed was only 62,735 $SOL, approximately 4.3 million dollars, with an average transaction cost of about 0.005 dollars. In contrast, Ethereum's total Gas consumption for the month was 126.7K, approximately 268.4 million dollars, with an average transaction cost of 7.89 dollars, which is 1578 times the transaction fees of Solana.

Market Development and Technological Advancements

In August, a certain e-commerce giant integrated Solana Pay as a new payment option to change its business model. In September, a certain credit card giant also expanded its settlement solutions with Solana. The company stated in the announcement that the reason for choosing Solana is that "the Solana blockchain network features high transaction throughput and low-cost scalability, making it a good candidate for payment and a certain company'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 2000 times. Through state compression technology, the cost of minting 1 million NFTs dropped from $25,300 to $113. In comparison, the costs on Ethereum and Polygon are $33.6 million and $328,000 respectively. A project that migrated to Solana in April benefited greatly from this technology. During the migration process, 900,000 hotspots on the network were minted as NFTs. Without the compression technology, this would have incurred a cost of over $260,000, but with the compression technology, the cost during migration was only $122.

Neon

In July, Solana's EVM compatibility solution Neon was finally launched on the mainnet. Subsequently, the Solidity smart contract compiler Solang was also 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 company for the Solana blockchain, aimed at improving network efficiency and transaction processing capacity. As the second client for Solana, it aims to reduce the risks associated with a single client and prevent network outages. Its goal is to process over 1 million transactions per second.

Liquidation of a Company

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

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

According to the report from the Solana Foundation, the Solana Foundation and Solana Labs have sold a total of 58 million $SOL to a certain company. 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 remaining will be unlocked linearly each month before 2028. Aside from the significant unlock in March next year, this liquidation should have a relatively mild impact on the price of $SOL.

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

Conclusion

The significant recovery of Solana can be attributed to the synergistic effects of several factors. Firstly, its unique technical architecture enables high transaction throughput and low fees, setting it apart from other blockchains. Moreover, despite the market downturn, the resilience and growth of its developer community highlight the strong ecosystem fostered by Solana. Capital activity, including sustained interest from investors, has also played an important role.

Technological advancements such as the launch of a certain client, state compression, a certain EVM-compatible solution, and a new client have significantly improved Solana's efficiency and scalability. The impact of a certain company's bankruptcy is gradually diminishing. These factors not only demonstrate Solana's ability to innovate and adapt in a dynamic blockchain environment but also highlight the growing trust and interest of developers and investors, making Solana a leading competitor in the blockchain space.