Puesta del Solana

*Little Compton, RI

We are hard fought on whether we should be right than lucky when selecting cryptocurrency networks to invest in. The frustrating hindsight begs the question, should we invest our time researching the intricacies of the network, its founders, roadmaps, functionality, etc. or FOMO into what the Uber driver has the "inside scoop" on? Solana's meteoric rise in 2021, which saw appreciation in garbage USD terms of $3 to its peak of $258 in early November, had little to do with fundamental changes or success in network functionality. The increase in notoriety is largely linked to successful marketing to institutional investors of their NFT platform and stablecoin bridges. As the irrational exuberance wanes, lets review how feasible it is for Solana to be the best all things crypto, while simultaneously remaining fast, cheap, and secure.

Solana is the brainchild of former Qualcomm engineer Anatoly Yakavenko, who like several others, were attempting to combat the lack of scalability that plagues Ethereum resulting in massive fees. The final Solana development team continued to expand with other Qualcomm colleagues. Consensus of the network is achieved through Proof-of-Stake (PoS) which is supported by its own unique Proof-of-History (PoH). The prophecy that is Ethereum 2.0 is based on a switch from the energy intense Proof-of-Work (PoW) to a proportional voting system through PoS. Every network to earn the "Ethereum Killer" moniker features PoS with a vapid twist. Through several venture capital funding rounds culminating in $20m, Solana finally moved from beta to main-net in March 2020.

*The mitochondria is the power house of the cell

Painting the broad picture of any crypto network is extremely difficult. The main staring point for gathering information is the white-paper or the outline of a proposed network attributes detailing governance, users, use cases, operations, and costs. We have heard the sales pitch of every network; X seeks to revolutionize Y by utilizing this underlying technology, but it is only academic theory. Next are the places the development team communicates with the retail supporters, Reddit, Discord, Twitter; are choc full of hardened supporters with little to no technological experience. Any negative sentiment about a coin they support is automatically FUD (fear, uncertainty, doubt). Generally the best source of drawbacks of a network come from two groups, developers from other networks and anti-coiners (journalists with an understanding of cryptocurrencies who expose fraud that would be prosecuted in any other industry). These two groups are consistently banned for asking too many questions. They also have the distinct advantage of actually using the networks they criticize along with analytical tools available to sift through the blockchain. Remember, a key feature of blockchain is its transparent nature. Anyone can view account balances and transactions. For example you can punch in the address of one of my Nano nodes:

nano_3g6ue89jij6bxaz3hodne1c7gzgw77xawpdz4p38siu145u3u17c46or4jeu

into a block explorer https://nanocrawler.cc/. to see it holds the minimum balance of Ӿ .01 to remain active.

In April 2020, Justin Bons, from Cyber Capital in the Netherlands, was one of a number of people who pointed out the circulating supply of Solana was much larger than previously indicated. The Solana development team told their community that beyond the inflationary capped release schedule, there were 8.2m coins in circulation. Unfortunately, the community was able to locate 13m more Solana coins in a public wallet which should of only held 1.7m. After confusion and disarray the Solana team released a Medium article detailing that the 13m coins were provided to a "market maker" (FTX, an exchange owned by Sam Bankman-Fried, mentioned in our Financial Services Committee post). They promised to retrieve the coins and burn them. FTX was reluctant, sending only 3.3m back. Solana decided to pull the old switcheroo, they issued 8m new coins from their treasury for burning in order to create the illusion that they fulfilled their promise. At the end of the day 16m coins were in circulation, almost double the original goal post.

Nevertheless the network continued onward. The marketing team took advantage of every major headline in crypto. "Looking for High Quaility NFT's? Solana Has All the Emaciated Apes Flying Helicopters" or "Fight the Fed with Your Own Digital Dollar!" Solana was regarded as the one stop shop for every aspect of crypto. The powder keg erupted for all early adopters to earn ROI's in the thousands. As with anything else, the hyperbole is only shrouded as far as competition in the industry is known. There are plenty of other platforms to mint NFT's.

Fraud and hype, these aspects were not the smoking gun for Barrow Downs to leave Solana by the wayside. We take issue with the operation of the network. Solana touted transactions per second (TPS) on the network as high as 52,000. Currently the network processes around 2,300 TPS each day. For reference Visa claims to handle 24,000 TPS, but generally handles around 4,000 TPS at peak times and 2,700 TPS on average. Bitcoin outside of the lightning network will facilitate 7 TPS. This puts Solana at the top of the upper echelon for high throughput protocols. Compared to Bitcoin's 7 TPS, 52,000 TPS sound unbelievable, however it may not be far off from the truth if it were put to the test. Recall that in PoS systems there are no miners, but validators who vote with their coins to create the next block.

How does Solana achieve high TPS? Validators running the beefiest mainframe computers imaginable. While most networks have nodes that could be run on an old laptop, Solana has very taxing requirements. A bitcoin or nano node could be supported by a Lenovo computer for $40 per month and still function normally. Solana's validators must fit a 128GB memory minimum with 500GB of disk space. Picture several servers on racks next to your desk. This runs the participant $1k-$2k per month for electricity plus staking the Solana coin itself, which is necessary to have a chance at earning the substantial validator fees. The total cost given the current price of $90 could range to $9m for 1m Solana coins in addition to the electricity costs. The high startup cost leads us to what Barrow Downs is most critical of, centralization.

The high capital barrier to entry is the beginning of a number of issues that centralization can cause. The people involved in distributing and receiving potential rewards are those who stumbled on the project early on, in Solana's case, VC groups. If you peruse https://solanabeach.io/validators the top 19 validators who achieve a quorum "Superminority" to decide the legitimacy of transactions, are primarily comprised of investment groups with a few exchanges sprinkled in. This spread of the Solana's incentives being held among few groups creates opportunities for a moral hazard where they could skew the payouts to themselves. Although this has not happened, it eventually compounds the internal imbalance to an external security threat.

*Proof-of-History visualized

We mention Solana has a hat on a hat for consensus. The PoS mechanism is supported by another selection tool called Proof-of-History. What PoH does is select a validator to act as a "leader" in the validation process. They broadcast the transactions in advance and allow other validators to confirm the broadcasted information was correct. This "leader" is selected from the "Superminority" pool in advance; usually it is the developer's validator node. In a decentralized system like Bitcoin, all nodes transcribe a copy of the transactions and check with one another. It lacks a waiting period to listen to a single entity. So what were to happen to the network if the "leader" were unable to broadcast?

There have been numerous outages on the Solana network dating back to summer 2021. Allegedly, a simple DDoS attack (Distributed Denial of Service) is to blame. Since the "leader" identifies themselves, an attacker only needs to disrupt that computer to halt or slow the network. The development team has made no comment as to what the issue may be, however supporters of the network have argued someone is spamming a smart-contract connected to the network, but this argument does not hold water given the proposed high TPS. Regardless, Bitcoin lost 18.1% of its hash rate because of civil unrest in Kazakhstan, yet no disruption to the service occurred.

Solana has a number of approaches they could take to solve these issues. Solana could increase the weight of lesser node validators to balance the selection process at the cost of the VC's, but why would they surrender a free revenue stream. They'll likely hop to another project when Solana loses steam. Adding voting power to the lesser nodes would also slow the processing time. With less capital to invest, these validators operate weaker nodes than those in the "Superminority." In the unlikely event a spam attack was the culprit, they would most likely increase transaction fees like networks such as Fantom choose to do. There is never a clear solution when the rosy goggles come off. "Ethereum Killers" usually fade into obscurity when the market inevitably pushes them to adapt similar characteristics as Ethereum. Same product, different name, no substantial history (faith). To date only Nano has successfully mitigated spam attacks. With no available fee to raise they had to create a new consensus.

Many will tell you centralization does not matter. After all the "D" in Solana stands for decentralization. Without distancing ourselves from centralization, we are merely choosing new digital banks. Due to the rampant red flags involved with some networks, we may miss investment opportunities on the upside. But we will never be caught on the inevitable downturn.