Solana (SOL) Cryptocurrency: How does it work?

Summary

Solana (SOL) Cryptocurrency: How does it work? Solana is a blockchain network focused on fast transactions and high throughput to encourage mass consumer adoption of cryptocurrency and blockchain. It utilizes several innovations to improve speed, including Proof of History (PoH) and parallelized transactions. Users can pay transaction fees and interact with smart contracts using SOL, the network’s native token.

Introduction

Solana (SOL) Cryptocurrency: How does it work? Scalability is one of the biggest challenges in blockchain technology. As networks grow, they often face limitations in terms of transaction speed and confirmation times. Solana aims to tackle these limitations without compromising security or decentralization.

Founded in 2017 by Solana Labs’ Anatoly Yakovenko, the Solana blockchain adopts a new method of verifying transactions. Bitcoin and some other projects suffer from slow transaction times, high fees, and heavy energy usage. Solana uses many innovations, such as PoH and parallelization, to efficiently process thousands of transactions per second (TPS). 

How Does Solana Work?

Solana is a third-generation proof-of-stake (PoS) blockchain that has implemented many unique innovations to facilitate high throughput, fast transactions, and low fees: 

• Proof of History (PoH): A method of verifying time without a conventional timestamp.

• Parallelization: The ability to process multiple transactions at any given time.

• Tower Byzantine Fault Tolerance (BFT): A PoH-optimized version of Practical BFT.

• Turbine: A block propagation protocol.

• Gulf Stream: A mempool-less transaction forwarding protocol.

• Sealevel: Parallel smart contracts run-time.

• Pipelining: A transaction processing unit for validation optimization.

• Cloudbreak: A horizontally-scaled accounts database.

These features create a high-performance network with 400ms block times and processing thousands of TPS. To put this into perspective, Bitcoin’s block time is around 10 minutes, and Ethereum’s roughly 15 seconds.

SOL holders can stake their tokens as part of the blockchain’s PoS consensus mechanism. With a compatible crypto wallet, you can bet your tokens with validators who process the network’s transactions. A successful validator can then share rewards with those who have staked their tokens. This reward mechanism incentivizes validators and delegators to act in the network’s interest. As of December 2022, Solana has 2,034 validators and a Nakamoto coefficient 31.

What Makes Solana Unique? 

The single-minded focus on keeping transactions cheap, plentiful, and ready for widespread adoption has led to many unique innovations:

Proof of History

Keeping track of the order of transactions is vital for cryptocurrencies. Bitcoin does this by bundling transactions into blocks with a single timestamp. Each node has to validate these blocks in consensus with other nodes. However, this process results in significant waiting time for nodes to confirm a block across the network. So, Lana takes a different approach called Proof of History (PoH).

Solana events and transactions are all hashed using the SHA256 hash function, which takes an input and produces a unique and highly difficult-to-predict output. Solana takes the result of a transaction and uses it as input for the next hash, so the order of the transactions is now built into the hashed output.

This hashing process creates a long, unbroken chain of hashed transactions. This results in a clear, verifiable order of transactions that a validator can add to a block without a conventional timestamp.

Hashing also requires a certain amount of time to complete, meaning validators can easily verify how much time has passed. By ordering transactions in a chain of hashes, validators process and transmit less information per block. Using a hashed version of the latest state of transactions significantly reduces block confirmation time.

PoH is not a consensus mechanism but, instead, a way of shortening the time spent confirming the order of transactions. When combined with PoS, selecting the next validator for a block is much easier. Nodes need less time to validate the order of transactions, meaning the network chooses a new validator more quickly.

Low cost

Solana has meager fees, with the average transaction costing $0.00025. Low prices can remove some of Web3’s most significant barriers to entry since gas fees on other chains can add substantial costs to a single purchase. 

Energy efficiency

Because Solana’s nodes need much less time and fewer resources to validate transactions — and because it does not require mining like proof-of-work (PoW) networks — the network has emerged as one of the most energy-efficient blockchains.

The Solana Foundation, the non-profit dedicated to securing and supporting the Solana network, releases regular third-party audits on Solana’s energy impact and how it compares to other blockchain projects and their average household usage. The most recent report, published in September 2022, highlighted the following energy usage statistics:

What Is SOL?

SOL is Solana’s native utility token, which the network burns as part of its deflationary model. Users need SOL to pay transaction fees when making transfers or interacting with smart contracts. SOL holders can also become network validators. Like Ethereum, Solana allows developers to build smart contracts and create projects based on the blockchain.

SOL uses the SPL protocol; SPL is the Solana blockchain’s token standard, similar to ERC-20 on Ethereum. The SOL token has two prominent use cases:

1. Paying for transaction fees incurred when using the network or smart contracts.

2. Staking tokens as part of the PoS consensus mechanism.

Decentralized applications (DApps) building on Solana create new use cases for SOL and other tokens built using the SPL standard.

The Solana Ecosystem

The Solana ecosystem has grown massively since the launch of its mainnet-beta in 2020. As of December 2022, 21,255 GitHub developer repositories were using Solana, which supports eight million active users.

Solana (SOL) Cryptocurrency: How does it work? Traditional economic giants have also announced their integration with Solana. Moreover, these include Discord (which allows users to link their profiles and Solana Wallets) and ASICS (which uses the Solana Pay payments rail to allow customers to purchase a limited-edition shoe design).

Solana’s Web3 use cases increased, such as:

• NFTs: Fast transaction times and low fees have spurred the blossoming of a robust Solana NFT ecosystem. More than 22.7 million NFTs have been minted on Solana by over 150,000 creators as of December, and the Meta properties, Facebook, and Instagram support Solana NFTs. Several notable Solana NFT projects include the Degenerate Ape Academy, Okay Bears, and Solana Monkey Business.

• Payments: Solana (SOL) Cryptocurrency: How does it work? The Solana Pay protocol has powered an ecosystem of frictionless, permissionless payment structures that can settle payments in seconds. In addition, with the recent announcement of Stripe’s fiat-to-crypto on-ramp, 11 of the 16 projects mentioned as launch partners were built on Solana.

• Games: As of December, there are currently 15 games that are live and playable using Solana, with 37 expected by March 2023.

• DeFi: Solana’s fast transaction times make it ideal for decentralized finance (DeFi), and Solana DeFi projects raised over $150 million in 2022. So, notable projects include the community-run order book OpenBook and Jupiter Aggregator.

• DAOs: New tooling has led to a surge of decentralized autonomous organizations (DAOs) on Solana, leading to 8,489 DAO proposals and 34,484 total votes. 

• Mobile: With the June reveal of Saga, the first mobile phone to use the Solana Mobile Stack, the Solana ecosystem has led the way in mobile-first crypto development. So, the first Saga devices shipped to developers in December 2022.

What’s Next?

The 2022 Breakpoint conference by the Solana Foundation highlighted many projects to follow in the coming months and years, including:

• Firedancer: Jump Crypto is developing new open-source Solana core software, including a second validator client that can process 1.2 million TPS in a test environment as of November, expanding Solana’s throughput even further.

• Mobile: Saga devices will be available to the general public in 2023. In addition, Solana Mobile will also launch a Solana DApp Store, a fee-free Web3-focused store for DApps, in January 2023.

• Network upgrades: Many upgrades have been implemented to improve the network’s performance, including QUIC, stake-weighted quality of service, and free markets. So, Solana Labs co-founder Anatoly Yakovenko has also laid out his vision for improving the network.

Closing Thoughts

After appearing on the blockchain scene in 2020, Solana matures into a robust, sustainable ecosystem. It has become famous for projects and users and seems poised to grow.