Solana and SOL: The Overnight Sensation

Solana has had its ups and downs, but is it here to stay? How is it different from Ethereum? What are Solana’s advantages and disadvantages? In this article, we will reveal the mystery of Ethereum’s biggest rival.

What Is Solana?

Solana is a decentralized blockchain network built to support decentralized applications with its own cryptocurrency SOL.

Solana is known to be Ethereum’s biggest long-term rival, sometimes referred to as the "Ethereum killer." This is also one of the reasons why Solana gained the level of attention it received shortly after the initial launch.

Solana's impressive history

In April of 2019, Solana went online. At the time of launch, SOL was trading at less than $1 per coin. In just over two years, Sol reached an all time peak in November 2021 of around $259 per coin (with a market cap valued at $75 billion).

Compared with Bitcoin, Ethereum, and Cardano, some of its strongest competitions, Solana’s growth in such a short period of time is more than remarkable. With this rise, Solana has secured a spot in the top 10 cryptocurrencies on the market as of the end of 2021.

Unique and improved technology

Solana gained its popularity through unique and improved technology. For reference, Bitcoin uses a proof-of-work (PoW) algorithm. Ethereum 1.0 also adopted this method, but later on, Ethereum 2.0 changed to a much faster, more secure, and environmentally friendly algorithm: proof-of-stake (PoS). Solana not only equips the PoS method but also the proof-of-history (PoH) algorithm.

On its official website, Solana claims to be the fastest blockchain in the world capable of processing 50,000 transactions per second with low fees. For reference, Etherum can only handle around 13 transactions per second.

How Does It Work?

Solana does not use proof-of-work (PoW)

Proof-of-work is the authentication system that Bitcoin and Ethereum 1.0 use.

In PoW, miners compete to find the solution for a complex mathematical application. Only if the equation is solved before anyone else, that miner is rewarded for their work. It is not a bad approach, but it does have a few flaws that are hard to overcome.

High energy consumption

The first concern is the energy wasted during the mining process. To mine a Bitcoin, a miner needs special, highly functional computers to complete the task. The equipment is not your typical desktop. They are expensive and energy-consuming. To make the matter worse, PoW requires miners to race every miner in the world to solve the equation. Sounds inefficient and wasteful, doesn’t it?

Favors large investments

Because of this never-ending competition model, miners usually acquire more than one set of equipment to increase their chances of earning the reward. This leads to our second issue: the PoW favors the rich. The more money you have in your pocket, the better chance you have to receive the reward.

To solve this problem, miners usually form groups to combine their technological power. It seems harmless, but the grouping behavior can cause security concerns in the network.

Security concerns

The third problem people have with PoW is security. To override the network, the miners need to control 51% of all nodes in the operation, which is 51% of all mining power. In the case of a potential hacker, it may be hard to pool together that much power.

However, grouping behavior made it possible. Miner groups vary in size. Some of these miner groups are international, professional, and quite large. There are even mining firms in operation with the pure goal of mining coins from PoW platforms. There is no official regulation regarding mining groups. As more and more individual miners exit the PoW platforms, these dedicated groups take a greater percentage of the total mining power. If a certain number of groups or firms combine into one, they could control over 51% of nods, endangering the whole network.

Solana does utilize proof-of-stake (PoS)

Many cryptocurrency experts prefer proof-of-stake (PoS) to PoW. It is faster, safer, more efficient, and certainly more environmentally friendly.

In PoS, there is no traditional miner. Each individual willing to take part in the transaction validation is called a validator. Before they are able to start, they put down a certain amount of coins as a deposit upfront. These deposits will later be deducted if a validator is proven to validate false transactions.

Validators in the PoS algorithm will each be assigned a block in the blockchain to work on. The system randomly chooses a validator to which the next block will be handed. The block you are assigned is unique and only accessible to you. You will no longer need to race anyone for the final prize.

Less competition

Since the system decides who gets the next block, does it mean everyone has an equal chance? Well, no. That has to do with your deposit. The more deposits you put down, the more likely you are to be chosen. Think of it as a raffle ticket draw, the more tickets you buy, the better chance you have to win. The relation between the amount of deposit you put in and the chance of being selected is linear, meaning if you put 10 times more deposit in than me, you have a 10 times better chance to be selected.

Because there is less competition, PoS eliminates a lot of problems PoW has been struggling with. In PoS, there is no need for special equipment to get the job done. Most validators are able to operate on a smooth-running desktop or even a laptop.

Although you can argue the deposit system still favors people who can invest more upfront, validators have better control over how likely they will be able to receive and validate a block. Moreover, the mining equipment generally costs you anywhere from $10,000 and up. For more affordable coins like Solana, you can put down a large deposit by saving thousands of dollars on buying multiple mining devices.

Lower environmental impact

Without the presence of mining computers that operate day and night, PoS allows significant energy saving. In the case of mining, energy waste is the side effect of PoW. Validators in PoS consume energy only when they are assigned a block and validating the solved block. Environmental protection has been a big revolution in all industries in the past few years. As blockchain technology advances, the energy-saving aspect is one of the reasons the general population now favors PoS.

Improved security

PoS is not only favorable for the validators, but it also is for investors and users because of its improved security. First of all, the validators are less incentivized to prove a false transaction because their initial deposit would be deducted with each false approval. Transaction fees are not typically high on a single transaction, but the network would deduct a significant amount of deposit as punishment. It makes false approval just not worth it. Plus, once the deposit is down to zero, the validator is locked out of future opportunities.

PoS also made hacking next to impossible regardless of the population of validators. In PoS, rather than controlling 51% of all nodes to override the network, you must hold over 51% of all coins in the network to validate false transactions. There are roughly 300 million SOL coins in circulation right now each traded at over $200 as of today. The amount of money power required to override the network is next to impossible.

Although hackers can theoretically generate transaction fees by unlimitedly approving false transactions with the coins they have in hand, they must take into account the time required to just break even, let alone make a profit on the hack. Later on when they dump the coins back into the market, the huge amount of coins flowing back to the circulation tips the supply and demand equilibrium, depreciating the coins. They will end up with much less return than the initial investment in the hack.

Across the board, PoS nearly wipes any chance to breach the system.

Solana also uses proof-of-history (PoH)

Proof-of-history (PoH) is the key component that differentiates Solana from its competitors and makes it the fastest blockchain on earth today. Solana popularized this technology, and it has pointed a new direction in the inner workings of cryptocurrency.

PoH is a method to encode time directly into the blockchain. PoH is simply a timestamp in the network. It’s like your online banking statement, but much more accurate.

PoH uses a cryptograph called verifiable delay functions (VDF). The VDF is solved using an exact set of sequential steps. Since one step must be completed before another step comes in place, it makes it easy to measure how long each step takes.

In PoH, each block producer in the blockchain has a scheduled time by which they can generate the next block. Procedures have no way to cheat the system because the output from the last block producer will be the input of the next one. Thanks to VDF, the time it takes to apply each step in the process is stamped and easily verifiable by the public. The system will verify whether the producer has waited for a sufficient amount of time before they receive the next message. The message may arrive out of order as well, but the PoH timestamps allow the system to reorder them. This speeds up the process.

With the communication and confusion eliminated, the encoded PoH lifts the weight of blockchain processing because there is no more need to reach a consensus on the time sequence. It allows the blockchain to process faster, so your transactions will be approved faster.

Pros of Solana

Rapid growth

SOL’s growth since its initial publication has been nothing short of remarkable. It was the 6th biggest cryptocurrency at the end of 2021. SOL penetrated the market faster than most of its competitors in the same life cycle.

SOL’s performance is still predicted to be high even after reaching the historic high in November 2021. The reason being it is designed to scale with developments from the blockchain sector.

Lower fees

Oftentimes, holding cryptocurrency requires many transactions. When that is the case, transaction fees play a big part in investors’ decisions on whether or not to invest in a specific coin. In PoS, the transaction fees paid to the validators are called gas fees.

With larger block size and higher block time, SOL ensured itself an unbeatable advantage on fees charged. For investors making smaller crypto transactions, a lower fee can mean the difference between making a profit or suffering a loss. SOL is able to operate on such low fees because, according to its whitepaper, it heavily relies on the Solana ecosystem and value creation. Meaning that Solana will not need to depend on fees now and in the future.

Quick transactions

Solana is quite a sensation due to the use of PoH. It guaranteed the smooth running of the operation and the timely user experience. For investors who are looking for unique competitive advantages, Solana hits the mark.

The PoH allows Solana to process about 50,000 transactions per second. Ethereum puts it in perspective, and can only process 15-45 transactions per second. This big comparative advantage against its rival drew attention from Ethereum users to invest in SOL instead. Not only do they wish to invest in a profitable investment, but they also seek advantages in investments that will last longer. To make another comparison, Visa processes roughly 24,000 transactions per second.

Cons of Solana

More centralized than other crypto networks

Cryptocurrency sells on the idea of decentralization which represents security, flexibility, and transparency in the mind of investors. However, Solana is one of the more centralized networks in the industry. According to Solana’s website, there are over 1,000 independent validators in the network. If you compare it with a bank chain or other big cryptocurrencies out there, Solana is still relatively centralized.

Solana is currently staking new validators, but the hardware setup fee can cost up to $5,000-6,000. This puts worries in the users’ minds, “will Solana walk out of semi-centralization soon”?

Lack of transparency

Solana has also been pointed out for a lack of transparency. The Solana team has not yet announced enough new projects to satisfy investors who are constantly wandering between Solana and Ethereum. Worse, the team is not fully transparent about some aspects of their operations and its future forecasts for projects.

Future is uncertain

Solana was granted the success it has today because of the newer inner working method it adapts. However, we still need to somewhat question the future of SOL. Solana is just a little over 2.5 years old, which is considered less mature in the business cycle. Cryptocurrency itself is only a decade old, but earlier coins provide investors more security because they have seen the high and low of a 5 or 7-year cycle. Solana is still fast-growing but a young name.

Moreover, one of the biggest attractions of SOL is the PoH. Cryptocurrency is a newborn area where technology and better ways of working are constantly developing. One day in the future, PoH will be utilized by other coins and a newer way of working will come. By that time, will SOL be able to secure its position? SOL doesn’t check all the marks as the perfect cryptocurrency, but investors are constantly looking into the future thinking one day one coin might do just that.

How to Buy It

Investors can purchase SOL through exchanges. There are two types of exchanges available for cryptocurrency. One is centralized exchanges, the other one is decentralized exchanges. Because most decentralized exchanges are more difficult to navigate, require wallets, and are typically used for coin-to-coin trade rather than cash purchases, we will focus on how to get SOL in your pocket through centralized exchanges.

1. Find an exchange that fits your needs

Some big exchanges with SOL are Coinbase, Binance, and Uphold. There is no right or wrong choice, but the features and fees charged vary from exchange to exchange. With the fees differing, the cost of your investment or transactions can differ. You just need to look for the feature or the fee rate that best fits your investment needs.

2. Set up an account

The account setup process usually requires the same information as your brokerage account to verify your identity. In most cases, you will need a valid government-issued ID and Social Security Number. Based on your geographic location and exchange of choice, you may need additional information such as address or proof of income/employment. To set up a payment method, you can use credit cards, debit cards, or direct bank accounts.

3. Choose a wallet

Wallets for coins can be categorized into hot wallets and cold wallets.

What is a hot wallet? Hot wallets are anything that requires the internet to access such as mobile apps, software, or online accounts. The advantage of a hot wallet is you can access and manage it easily, the disadvantage being security issues. Anything that requires internet access can potentially be vulnerable to data leaks.

What is a cold wallet? Cold wallets are the old-fashioned method that doesn’t require internet access. They can be a USB drive, hardware, or a piece of paper with information.

How do they compare? Hot wallets are considered more user-friendly, while cold wallets are considered more secure.

Some may decide to store their coins in the wallets provided by the exchange. It can be a good idea for a small number of coins or coins frequently used in trade. It is not recommended to store a large volume of coins with the exchange. The centralized exchanges can be more vulnerable to a data breach or systematic issues which may affect your investment.

4. Now you can purchase SOL

Once your wallet is set up, you are all set to purchase SOL. To be noted, the price of each coin can differ slightly from exchange to exchange for a very short period of time depending upon the live demand and supply or the exchange.

Takeaways

The “Ethereum killer” revealed its true power in 2021. With the PoH algorithm, Solana’s near future will be exciting. However, as a new shining star, there is a lot that investors need to consider before purchasing the coins. Ultimately, you should make the decision based on your personal need for investment.

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