What Is Solana (SOL) and How Does SOL Crypto Work?

What Is Solana (SOL)?

Solana is a blockchain platform designed to host decentralized, scalable applications. Founded in 2017, it is an open-source project currently run by the Solana Foundation based in Geneva, while the blockchain was built by San Francisco-based Solana Labs.

Solana is much faster in terms of the number of transactions it can process and has significantly lower transaction fees than rival blockchains like Ethereum. The cryptocurrency that runs on the Solana blockchain—also named Solana (SOL)—soared almost 12,000% in 2021 and, at one point, had a market capitalization of over $75 billion, making it one of the largest cryptocurrencies by this measure at the time.

Despite its popularity, SOL did not escape the cryptocurrency wipeout of 2022. By Dec. 29, 2022, SOL had dropped to about $3.63 billion in market capitalization. One year later, it had recovered nearly half of its lost market cap.

History of Solana

Solana co-founder Anatoly Yakovenko's previous work experience was in the field of distributed systems design with leading technology companies such as Qualcomm Incorporated (QCOM). This experience made him aware that a reliable clock simplifies network synchronization, and when that occurs, the resulting network would be exponentially faster, with the only constraint being its bandwidth.

Yakovenko surmised that using proof-of-history would speed up the blockchain tremendously compared with blockchain systems without clocks, such as Bitcoin and Ethereum. These systems struggled to scale beyond 15 transactions per second (TPS) worldwide, a fraction of the throughput handled by centralized payment systems such as Visa (V), which see peaks of up to 65,000 TPS.

Yakavenko's proof-of-history gets past this hurdle, with every node in the network able to rely on the recorded passage of time.

Proof-of-History Concept

Yakovenko published a white paper in November 2017 describing the proof-of-history (PoH) concept. PoH allows the blockchain to reach consensus by verifying the passage of time between events, and it is used to encode the passage of time into a ledger.

In the white paper, Yakovenko notes that blockchains that were then publicly available did not rely on time, with each node in the network relying on its own local clock without knowledge of any other participants' clocks in the network. The lack of a trusted source of time (i.e., a standardized clock) meant that when a message timestamp was used to accept or reject a message, there was no guarantee that every other participant in the network would make an identical choice.

Expansion

In 2018, Yakovenko recruited five others to co-found a project called Loom. However, because of the potential for confusion with an Ethereum-based project with a similar name, they rebranded the project to "Solana," after the small beach town near San Diego, where the co-founders previously lived.

In June 2018, the project scaled up to run on cloud-based networks, and a month later, the company published a public test net that supported bursts of 250,000 TPS.

By Dec. 12, 2023, Solana had processed over 253 billion transactions at an average cost of $0.00025 per transaction.

Solana's Technology

Solana's design uses algorithms to remove performance bottlenecks caused by blockchain software. This makes it scalable, secure, and decentralized. Its architecture theoretically allows for a limit of 710,000 TPS on a standard gigabit network and up to 28.4 million TPS on a 40 gigabit network.

Solana's blockchain operates on both a proof-of-history (PoH) and proof-of-stake (PoS) consensus model. PoS permits validators (those who validate transactions added to the blockchain ledger) to verify transactions based on how many coins or tokens they hold; PoH allows those transactions to be timestamped and verified very quickly.

Solana vs. Ethereum

Solana's rapidly expanding ecosystem and versatility have inevitably drawn comparisons to Ethereum, the leading blockchain for decentralized applications (dApps):

• Smart contracts: Solana and Ethereum have smart contract capabilities, which are crucial for running cutting-edge applications like decentralized finance (DeFi) and non-fungible tokens (NFTs).
• Consensus: Solana and Ethereum both use a proof-of-stake (PoS) consensus mechanism, where validators stake their cryptocurrency as collateral for the privilege of earning rewards for assisting the blockchain. Solana improves PoS by also implementing PoH.
• Speed: Much of the buzz surrounding Solana in 2021 was due to its distinct advantage over Ethereum in terms of transaction processing speed and transaction costs. Solana processes more than 2,700 transactions per second (on Dec. 12, 2023), and its average cost per transaction is $0.00025. In contrast, Ethereum can handle fewer than 15 TPS, while average transaction fees are around $2.62.

Ethereum Upgrades

Ethereum has first mover advantage, and with its massive ecosystem, it is second only to Bitcoin in terms of market capitalization. Ethereum's 2022 upgrade, which merged its Beacon Chain and Mainnet Chain, provided the framework for its blockchain to be more scalable, secure, and sustainable. A future upgrade will introduce sharding, significantly decreasing transaction times and reducing network congestion. How Solana will fare against these improvements is yet to be seen.

The Bottom Line

Solana is a blockchain whose purpose, use cases, and capabilities rival (and possibly exceed) that of Ethereum. It is one of the more popular blockchains, and its token, SOL, commands a decent share of the cryptocurrency market.

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