Solana Phoenix Reborn, Building Heaven in Hell

Key Points

SSolana is a blockchain redesigned from first principles, with the potential to become a foundational technology alongside Bitcoin and Ethereum. Inspired by cellular network architecture, it incorporates several new technological components that synergistically maximize hardware potential, unleashing unparalleled performance levels. This positions Solana as a likely leader in the emergence of the next wave of breakthrough applications. As Solana’s on-chain economy grows rapidly, we believe SOL is poised to accumulate a monetary premium alongside BTC and ETH.

Despite the extreme power law dynamics in the smart contract platform space, the likelihood of a single ecosystem supporting every application is slim. Blockchains involve trade-offs - while many aim for similar technological end goals, path dependency plays a crucial role in determining product-market fit for different use cases. Solana has a significant opportunity to gradually weaken Ethereum’s dominance by offering differentiated, integrated solutions and fostering a substantial developer ecosystem.

Solana’s current trajectory is reminiscent of Ethereum’s post-2018 ICO crash rebirth. Although the Solana ecosystem hit rock bottom and began its recovery post-FTX collapse, SOL was still overly penalized. As technological upgrades continue to propel Solana forward, and the dynamics between enterprises and crypto-native developers accelerate, SOL’s pricing error is increasingly evident, at around 13% of Ethereum’s valuation.

This is a rare opportunity; it’s seldom we find a project capable of rivaling Bitcoin and Ethereum in scale and opening new possibilities. We know this because we specifically created Syncracy to support such epochal winners and understand how rare it is for a project to meet this criterion. However, after years of research and monitoring, and months of waiting for an attractive entry opportunity, we believe we have found such a rare opportunity in Solana – the first blockchain we’ve discovered with the potential to be a foundational platform comparable to Bitcoin and Ethereum. Consequently, in Q2 2023, Syncracy established a large SOL position.

Post-FTX collapse, Solana faced an existential crisis, purging less loyal elements from its ecosystem. Sentiment plummeted to extreme lows, creating a generational opportunity in the subsequent quarters. While the Solana ecosystem required time to stabilize post-crisis, it has now found a new base, and activity has started to rebound. The shadow of FTX is fading, and today the Solana ecosystem is stronger than ever, with developer and enterprise momentum accelerating. Increasingly evident is Solana’s industry-leading scalability and unit cost, which are becoming hard to ignore.

Indeed, Solana’s opportunity today is arguably the best it has ever been. While many smart contract platforms are advancing towards similar ultimate technical goals, it’s becoming clearer that the path there involves meaningful functional trade-offs. These trade-offs are so profound that it’s also increasingly apparent that a single technology stack cannot effectively support every application. Hence, Solana’s setting. With “integration” and “modularization” at opposite ends of the blockchain design trade-off spectrum, Solana is poised to become the industry-leading standard – the preferred integrated system of the crypto economy, complementing Ethereum as it advances further on the path of modularization.

Ahead lies boundless possibilities. Below we share our perspectives.

Solana Vision

The beginning of Solana

The story of Solana began in 2017 when its co-founder, Anatoly Yakovenko, set out to build a blockchain that could rival the performance of a single machine and overcome the scalability constraints of existing solutions. His insight was that if the software does not hinder hardware operations, it might be possible to create a blockchain whose overall performance linearly grows with hardware advancements. He believed that the key to realizing this vision was to design an efficient way of node communication, so that bandwidth would no longer be a bottleneck.

In October 2017, Anatoly had an epiphany. He realized that blockchain networks had many similarities with the cellular networks he was familiar with from his time at Qualcomm. He recalled how telecom companies overcame the bandwidth limitations of radio towers by introducing “multiple access technology,” enabling multiple phone calls over the same frequency. The core of this solution was the concept of a globally available clock, allowing towers to effectively support multiple concurrent data channels by dividing each radio frequency into time slots and assigning these slots to each phone communication.

Shortly after, in November 2017, Anatoly published a white paper introducing “Proof of History” (PoH) – a mechanism to maintain time among untrusted computers. While seemingly simple on the surface, having a global clock before consensus has profound implications. Unlike other blockchains where validators negotiate the passage of time among themselves, each Solana validator maintains its clock. This independently verifiable global clock simplifies network synchronization and unleashes Solana’s ability to almost simultaneously process transactions as they arrive. With PoH, Anatoly laid the foundation for a novel blockchain that can more efficiently propagate data between nodes, bringing him closer to realizing his vision of a blockchain whose software scales with the speed of the hardware.

Block unicorn notes:

• Multiple access technology allows multiple devices to use the same frequency, assigned to different times and communicators, to avoid interference.

• Proof of History (PoH) can be understood as a mechanism demonstrating the sequence and timing of events or data. In the context of Solana, PoH’s innovation lies not just in recording timestamps but in providing an efficient way for network nodes to easily reach consensus without frequent communication. It’s like each node has its clock, operating in different time slots to avoid chaos and conflict, enhancing the overall performance of the blockchain system.

Solana Architecture Overview

As mentioned earlier, Proof of History (PoH) is a key feature in Solana’s architecture. Technically, PoH operates by running a recursive SHA-256 algorithm, where each output hash marks the passage of time, as it requires validators to spend time generating the result. Validators continuously run Solana’s PoH algorithm on one of their CPU cores, allowing each to independently track the passage of time and almost instantly execute every transaction that arrives.

This process of timestamping within the block plays a crucial role in Solana’s throughput expansion capability. PoH enables block producers to execute and propagate transactions as if they were being streamed. Unlike other blockchains, block producers do not need to wait to create and forward complete blocks, as PoH timestamps provide a canonical order. With a predefined order already propagated, downstream nodes can receive transactions in the correct sequence, even if they arrive in a disorderly manner; they can start executing and approving transactions without needing to receive the complete block data. For users, this means they can receive soft confirmations of their transactions faster (approximately 400 milliseconds) compared to blockchains that simultaneously combine time and state.

Transactions begin their lifecycle with Gulfstream – a transaction forwarding protocol that enables RPC nodes to directly forward incoming transactions to block producers, eliminating the need for a memory pool. Once block producers receive transactions, they schedule the execution using a multi-threading scheduling algorithm. This is where Solana’s Sealevel runtime (Solana Virtual Machine) comes into play. In Solana, programs are stateless, with states stored in separate accounts. This separation allows for embarrassing parallelism in Solana, as transactions don’t have to be processed in sequence when they touch the same contract, only when they write to the same account. The multi-threading scheduling algorithm enables block producers to detect which transactions are written to the same account. Those not writing to the same account are processed in parallel, while those writing to the same account are executed sequentially. After execution, block producers timestamp all transactions processed simultaneously with a PoH tick (known as an “entry,” Solana’s unit of time) and then break these entries into “shreds” to send to downstream consensus validators.

Block unicorn notes:

• RPC (Remote Procedure Call) technology is akin to calling someone to do a task for you, such as having your mother wash your clothes or cook for you, allowing you to resolve issues without directly handling them.

Once block producers execute these transactions, they use a mechanism called “Turbine” to propagate transactions downstream – a data propagation protocol inspired by BitTorrent, designed to maximize throughput per unit bandwidth. At a high level, Turbine organizes downstream validators into subgroups called “neighborhoods.” The topology is akin to a tree, with upstream neighborhoods providing data to downstream ones and neighboring neighborhoods sharing data. Solana assigns validators to these neighborhoods based on their weight, with the highest-weighted validators occupying the upper neighborhoods (closer to the leader) and the lowest-weighted validators in the lower neighborhoods. The result is a significant reduction in validators’ overhead – minimizing the number of direct peer-to-peer connections and the need to transmit duplicate data packets, thereby achieving more efficient bandwidth utilization and higher transaction throughput.

Block unicorn notes:

• Neighborhoods in Solana can be understood as “communities,” organized based on validators’ weight, similar to how members in a community might be grouped or organized based on certain criteria. This organizational structure in Solana helps improve network efficiency and optimize data propagation.

In summary, these technological components pioneered by Solana collectively work towards realizing Anatoly’s vision of a blockchain whose software can scale with hardware speed. By making fuller use of available hardware, Solana achieves significantly higher scalability compared to previous blockchain designs, without being constrained by hardware requirements. The result is a truly innovative system that expands the design space of the crypto economy.

Solana paper

1）

Solana, with its outstanding scalability and unit cost, is set to become a long-term share winner in on-chain economic activities over the next few years. This is because while competitors are still constrained by performance limitations, Solana continues to consolidate its leading position through a series of upcoming upgrades.

As discussed in the architectural overview section, Solana boasts several new technological components that work together to maximize the potential of the available hardware in nodes, achieving an exceptionally high level of performance. With recent upgrades like state compression—a mechanism that significantly reduces the cost of application storage—Solana now also possesses the best unit economics in the industry for a range of on-chain transactions, with data results that are impressive. Currently, Solana offers the highest transaction throughput at 5,500 TPS, and this is expected to soon reach 55,000 TPS with the upcoming Firedancer client release. Moreover, state compression has already reduced the cost of minting NFTs on Solana by 1,000 times, and many teams are attempting to apply these advantages to other use cases. As Solana leverages further hardware advancements, these performance metrics are expected to compound over time—a unique feature that enables Solana’s performance to double every two years without further upgrades. Most importantly, Solana achieves this performance not by simply raising hardware requirements, but through genuine innovation in software design. The result is that Solana achieves one to two orders of magnitude higher throughput per dollar spent on hardware.

All this occurs against the backdrop of competitors facing performance limitations in the foreseeable future. Despite the Ethereum Rollup ecosystem beginning to demonstrate its strength, often processing more transactions than Ethereum itself, its recent reality is still unsatisfactory. The challenge is that Rollups are still limited by the Ethereum main chain, and upgrades won’t substantially help in the short term. The highly anticipated EIP-4844 upgrade (expected in Q1 2024) will offer only about 0.375 MB of data availability capacity per block, translating to roughly 275 transactions per second (using basic DEX swaps) for the entire Ethereum Rollup ecosystem. Danksharding, which may not enter the mainnet until 2025 or later, will offer only about 1.3 MB of data availability capacity per block, equivalent to about 3,250 transactions per second for the entire Ethereum Rollup ecosystem. These figures are not only significantly lower than Solana’s current levels, but they might also be insufficient to meet mainstream activity levels.

While some Rollup options can bypass Ethereum’s limitations, they all involve significant trade-offs concerning security. The most popular method to achieve higher throughput involves third-party data availability providers like Celestia and EigenDA, offering one to two orders of magnitude more Rollup data availability capacity than existing solutions. However, introducing these solutions in specific Rollup setups introduces new counterparty risks for applications and users. Instead of relying solely on Ethereum’s security, Rollups outsource much of their security to new, untested networks.

Although the theoretically final form of Rollups offers strong security guarantees, most Rollups today are still in what Vitalik refers to as “Stage 0”—the fully supportive stage. Currently, leading Rollups on Ethereum are effectively run by their operators. Optimistic Rollups lack permissionless fraud proofs, and even when fraud proofs are available, they may not work as intended. ZK Rollups often rely on off-chain data availability committees to scale throughput beyond the basic level. Almost all Rollups have upgradable contracts, usually set up through multisig arrangements, and without time delays. Many Rollups have a single sequencer and lack an escape hatch for users to withdraw their assets in case of operator malfeasance. All these issues may be resolved in the coming years, and we certainly believe they will, but at some point, it is worth questioning: Is this technology stack as secure and decentralized as Rollup proponents claim, compared to Solana, or is this a typical example of a double standard?

In summary, with its current performance levels, the Solana ecosystem is fertile ground for innovation. Over time, we observe a strong correlation between blockchain design space flexibility and the potential for breakthrough applications—given Solana’s advantages in cost, speed, and composability, this is undoubtedly a feature of Solana. With Solana, it is now possible to develop various high-traffic and consumer-oriented applications that are impossible to run in resource-constrained environments like Ethereum. This is a gain for the crypto economy, enhancing the industry’s likelihood of achieving mainstream adoption.

Ultimately, Ethereum is not a panacea, and the crypto economy is better off acknowledging this reality. A world with several blockchain infrastructures is more resilient than one with a single point of failure.

2）

While many smart contract platforms are moving towards similar technical endgames, path dependencies play a key role in determining product-market fit for different use cases - Solana’s integrated design provides a simpler and more efficient structure relative to modular stacks. A cost-effective development environment makes it more likely to win over the growing developer base of the crypto economy in the coming years.

In Vitalik’s visionary “Endgame” article, he discusses potential ways to scale blockchain while maintaining decentralization. He proposed that while many such paths exist, the end goals are starting to look very similar: centralized block production, decentralized verification, and strong anti-censorship protections. It doesn’t matter whether a blockchain starts with integration or modularity. The key issue is that it is not possible to scale a blockchain with low validator hardware requirements, so cheap verifiability needs to be ensured. This way, even if validator requirements are high, users can still verify and keep the chain secure.

Two years later, Vitalik’s prediction seems increasingly likely to come true, with many projects springing up in the Ethereum and Solana ecosystems to make this future a reality. However, while many leading blockchains are heading toward a similar endgame, there are meaningful compromises in the paths these blockchains initially choose.

Ethereum

Ethereum’s origins can be traced back to Blizzard Entertainment’s nerfing of Vitalik’s role in World of Warcraft (WoW). This experience was of critical significance to Vitalik because it gave him his first personal experience of “the horrors that centralized services can bring.” This experience had a profound impact on the design of Ethereum; as a result, Ethereum was conceived as a minimal-trust world computer. Settlement guarantees became a crucial design goal – something that grew out of Bitcoin’s minimum trust currency argument. Trusted neutrality—that Ethereum does not discriminate against or favor any particular person—became a guiding principle.

Since settlement guarantees are critical to Ethereum, the developer community has adopted a philosophy of ideological decentralization. The rationale is that while ideological decentralization leads to slower evolution, it creates greater stability and predictability. Along similar lines, the Ethereum community has adopted a hardware philosophy centered on end-user verification. The rationale is that if more users can run full nodes and oversee the system, Ethereum will be more decentralized, providing stronger settlement guarantees.

The combination of Ethereum’s ideological decentralization and hardware philosophy leads to ecosystem modularity to solve the scalability trilemma. Today, execution is increasingly pushed to hardware-demanding rollups that leverage Ethereum for settlement and data availability. The idea is that Ethereum can keep hardware requirements low and focus on security, while Rollup can outsource security to Ethereum and optimize for higher performance. This division of roles creates a simultaneous benefit as Ethereum’s underlying infrastructure begins to stabilize for the innovations that underpin its minimum-trust computing.

Ethereum’s commitment to trusted neutrality from day one is critical to its mission of launching currency and financial applications—one of the most challenging yet critical features of any smart contract platform’s development. Currency premium (the asset’s utility as a unit of account, medium of exchange, and store of value) not only provides the highest valuation multiples for blockchain’s native assets, but this may be the key to the blockchain’s ability to secure itself over the long term while maintaining overall sovereignty. The only way to be safe. Blockchains like Ethereum have round-robin security arrangements where validators are paid in assets issued by the blockchain. Since a sovereign blockchain, by definition, cannot rely on payments in currencies other than validators (such as U.S. dollars), its underlying assets must have intrinsic value. Perhaps the best way to ensure that this underlying asset is valuable enough to protect the blockchain from any perceived global adversary is to make it one of the most valuable assets in the world: currency.

However, Ethereum’s approach is not without compromises. While Ethereum enabled this vital currency and financial applications by emphasizing security, this came at the expense of being unable to launch higher-throughput, more cost-sensitive applications. Furthermore, while modularity increases developer flexibility, promotes greater security, and creates new monetization opportunities for applications, the associated costs that arise from such a multi-chain economy warrant scrutiny. Once again, while there is a good chance that Ethereum will resolve these performance issues in the future, this will take several years, providing ample opportunity for another system to move along a different path to gain market share.

Solana

Solana’s origin story begins with Anatoly’s day trading experience, where he realized that his trades were being front-run by high-frequency trading firms. This experience was pivotal for Anatoly, as it highlighted the potential of blockchain to ensure fairer information dissemination between users and exchanges. This led to a key design goal for Solana: to enable fair and inexpensive access to a global state, thus conceptualizing Solana as a globally programmable order book, synchronizing at the speed of light. Performance was deemed crucial, positioning Solana primarily as a technology platform, diverging from the currency-centric narratives that guided earlier blockchain designs. The guiding principle was that software should not hinder hardware capabilities; Solana aims to fully utilize all computational and bandwidth capabilities available in modern multi-core computers to maximize system performance.

Given the critical importance of performance, the developer community adopted a pragmatic, engineering-oriented culture. While more radical than Ethereum, this approach accepts greater instability in exchange for faster product evolution. Similarly, the Solana community embraces a philosophy around practical decentralization of hardware, believing not all nodes are equal and that the number of nodes is a lagging indicator of product-market fit.

There are two reasons for this. First, actively monitoring the network for complex node operators enhances security more than simply counting passive user participation. Second, the increase in node numbers over time is more dependent on the demand to run nodes, not just the low cost of running them. The more activities hosted on Solana, the more individuals, companies, and organizations are incentivized to operate nodes. This philosophy seems to have positively impacted Solana today.

Solana’s pragmatic philosophy argues that while it might not achieve nuclear-grade decentralization, it could cover 99% of functionalities users ultimately need, maintaining a single-stack architecture. This integrated approach is crucial for launching Solana as a mainstream application platform focused on speed and cost, albeit currently at the expense of critical currency and financial applications. However, Anatoly believes this might not be an issue, as settlement is just a function and a byproduct of maintaining state synchronization. If Vitalik’s ultimate goal is correct, Solana could achieve sufficient censorship resistance in the long run, where the scale of economic activity will be a key differentiator in the underlying asset of smart contract platforms.

Solana has several levers to pull in this aspect. Apart from being used for transactions (Gas payments) and accounting (NFT pricing), SOL is the primary store of value within the Solana economy. As a proof-of-stake asset, SOL directly benefits from fees generated by on-chain activities and MEV. Although Solana aims to keep user fees per transaction low, it compensates by increasing transaction volume and expanding the dimensions of its fee market. SOL is not just the rate of charge for the Solana economy but also its least risky asset, making it the purest form of collateral within its financial system.

Despite Ethereum often being praised for its sound monetary policy, Solana may not be far behind in credibility. Solana’s supply schedule might be more predictable than Ethereum’s, which has changed its issuance schedule three times. It’s important to remember these attributes are mostly products and lagging indicators of product-market fit.

In a broader view, Solana’s integrated design could be key to accelerating its economic growth. Integrated systems offer a simpler, more cost-efficient development environment compared to modular stacks. Integrated systems abstract away all low-level foundations and economic complexities required for trust-minimized computation, allowing developers to focus on their core products. In contrast, modular stacks exponentially increase developer complexity and often involve unrewarded tasks like cross-chain deployments. Modularization not only increases developer complexity but also incurs immeasurable user experience costs due to incompatibility and immature abstraction mechanisms between different layers. This means developers on Solana can spend more time and resources perfecting their applications and user adoption paths, compared to their modular counterparts who need to spend relatively more time on infrastructure.

Most importantly, carrying all logic and data on a single layer minimizes the time and cost involved in cross-contract (or composable) transactions, fundamental to financial transactions in the crypto economy. Economies built on multiple chains inevitably incur hidden costs like delays, slippage, cognitive burdens, and additional fees. As the number of participants in modular stacks increases over time, these costs may become more evident. Today, modular stacks involve Rollup chains, settlement layers, third-party bridges, external data availability providers, cross-domain MEV solutions, decentralized sequencers, and watchtower/proving networks, each demanding a share. At some point, it’s worth asking whether a multi-rollup economy is justified, considering the most common reason for launching a specific app Rollup is “dedicated block space,” a problem Solana’s parallel execution environment and native fee market explicitly addresses without extra cost.

In conclusion, when faced with the choice of where to build, developers must consider where they prefer to construct. Remember, there are no absolute best solutions, only trade-offs.

3）

The smart contract market offers the largest Total Addressable Market (TAM) in the crypto economy. It follows a power law distribution, where a few entities occupy the majority of the share, and the majority are concentrated in a minority of the share. The combination of ecosystem attributes and blockchain attributes consolidates top leaders, enabling them to continue winning most of the attention and economic activity. By providing highly differentiated, integrated solutions and guiding a sufficiently large developer ecosystem, Solana has a tremendous opportunity to become one of these entrenched participants.

Smart contract platforms are crucial to the crypto economy. At their core, they are block space markets on the blockchain - spaces on the blockchain that can store information and run code. Users pay fees to access this block space, where all economic activities on that blockchain are settled. This block space will one day support the global currency, finance, and commerce. Indeed, as smart contract platforms continue to grow their “GDP,” their economies could eventually surpass those of dominant sovereign nations. In this regard, considering that the foundational assets of these smart contract platforms are the most deeply integrated and widely held assets within their economies, they are likely to become the world’s reserve currencies in the long term.

Although the smart contract platform market is highly concentrated around Ethereum today, the market structure could continue to evolve towards a more oligopolistic monopoly due to Ethereum’s limitations in the number of use cases it can support. It is important to clarify that we are not implying that Ethereum will not continue to be a dominant player in the market. However, competitors have the opportunity to erode Ethereum’s share and expand the market by offering highly differentiated solutions and guiding a sufficiently large developer ecosystem. Although many still lack the development tools and middleware to support application layer innovation and experimentation, as incentives to build on these chains grow, so too will the motivation to solve their remaining development challenges.

From a technical perspective, the smart contract platform market is fully competitive, with all code being open source. However, competitors can fork the code, but they cannot replicate the emerging attributes of a smart contract platform. Ecosystem attributes such as developer talent, applications, liquidity, and integrations, along with blockchain attributes like monetary premium, security, resources, and track record, make smart contract platforms almost unforkable. Once a protocol becomes a standard, strong network effects emerge - a thriving ecosystem quickly accumulates, allowing the winners to maintain their victory. Code can be replicated, but communities cannot.

These attributes are worth exploring in depth. Ecosystem attributes, like developer talent, applications, integrations (bridges, exchanges, wallets, etc.), and on-chain liquidity, are key factors underpinning the economic potential of smart contract platforms. Each smart contract platform faces a daunting cold start problem, not only needing to kickstart these attributes but also to do so in a sustainable manner. Once a chain reaches a critical mass in developer adoption and on-chain activity, it can experience a powerful flywheel effect, setting the stage for years of economic growth. A deep pool of developer talent leads to more useful applications, which leads to greater economic activity, in turn leading to greater network revenue, sparking greater investor interest, and providing more capital for developers to build in the ecosystem.

Blockchain attributes, such as security, track record, resources, and monetary premium, might be even more powerful. For instance, despite scalability constraints, Ethereum remains the far leading smart contract platform, mainly because it was the first to market - this allowed Ethereum to develop the best security, a long track record of overcoming adversities, and create a monetary premium for its underlying asset ETH, as we mentioned earlier, one of the most important attributes a blockchain can achieve. Overall, these blockchain attributes reinforce the flywheel effect of ecosystem attributes - most developers will always choose the platform that offers them the greatest financial opportunity and strongest sustainability guarantee, making the most economically meaningful blockchain the most logical choice.

Given the trade-off between integration and modularization discussed in the previous section, an integrated blockchain is very likely to substantially erode Ethereum’s market share, and as the undisputed leader in the field of integrated blockchains, Solana is very likely to become a player in the smart contract platform landscape. This market structure is not unprecedented in history - the most recent example in the computing field is the competition between Android and iOS in the mobile domain over the past decade. The question is not whether there will be more than one winner - clearly, a single technology stack will not be able to effectively support every application. The question is whether the current participants are all reasonably priced to reflect this opportunity and whether new winners will emerge.

4）

The current trajectory of Solana is reminiscent of Ethereum’s rise after the collapse of the ICO boom in 2018. Despite the Solana ecosystem hitting rock bottom after the FTX collapse and now on a path to recovery, SOL has been overly punished. With continued technological upgrades driving Solana forward, the momentum of enterprises and crypto-native developers is accelerating, making SOL undervalued in market capitalization, at about 13% of Ethereum’s.

It may be forgotten today, but Ethereum’s journey to dominance was not smooth sailing. It first went through a massive speculative phase known as the “ICO craze” in 2017, where over 90% of projects failed to generate any significant economic value, with many failing to deliver at all. This led many to lose faith in Ethereum and the potential of smart contract applications.

In retrospect, this speculative frenzy was crucial for Ethereum’s success, as it brought the network into focus and garnered the attention of Ethereum developers and investors. This was vital for attracting mission-driven contributors, who, despite the declining sentiment around Ethereum in 2018 and 2019, continued to innovate on Ethereum. Their efforts eventually paid off. After years of building key financial infrastructure, the innovation of “liquidity mining” in 2020 sparked renewed interest in Ethereum among institutions and developers, with users now discovering a rich and practically useful application economy - the DeFi revolution helped consolidate Ethereum’s position as the leading smart contract platform in the crypto economy.

Today, Solana finds itself in a similar position to Ethereum post-ICO boom. The recent bull market was characterized by a massive wave of speculation on Solana, pushing its fully diluted valuation to about $140 billion. This boom was primarily driven by FTX’s involvement in guiding the application ecosystem and providing liquidity for Solana tokens. However, over 90% of applications built on Solana were nearly replicas of those on Ethereum, with little organic use, heavy deployment of hired capital, and terrible token supply schedules, leading to a collapse in activity, prices, and developer commitment, further exacerbated by the collapse of FTX.

In the quarters following the removal of FTX’s influence, the ecosystem has successfully detached from FTX’s shadow. Today, with new developer optimism and the rise of new community leaders with stronger moral values, the missionaries have regained control of Solana. With the emergence of new use cases, system uptime issues potentially a thing of the past, and unique DeFi primitives being built, Solana’s likelihood of success in the coming years has greatly increased.

Similar to Ethereum taking six years to reach escape velocity, we believe Solana is evolving in the same direction, albeit at a faster pace. Despite only having a three-and-a-half-year history, Solana’s recent enterprise and ecosystem dynamics position it for potential breakthrough use cases in the next cycle. On the enterprise side, Solana’s recent integrations with Visa and Shopify indicate that, despite last year’s events, it still commands attention in institutions. Continued support and validation from Visa and Shopify could create significant downstream network effects when other enterprises look to explore crypto initiatives in partnership with Visa or Shopify.

In the crypto economy, Solana’s sentiment continues to improve, with many significant product announcements in the past few quarters. Eclipse recently announced its SVM Rollup mainnet, which, while not directly beneficial to Solana itself, reduces the risk for developers launching applications on Solana and increases the number of contributors to the Solana ecosystem. Similarly, Maker’s founder Rune proposed forking Solana’s codebase to launch Maker’s upcoming chain. This proposal is not only a significant validation of the Solana tech stack but also a sign of an expanding Solana contributor ecosystem from one of the most respected builders in Ethereum.

This evidence is also reflected in the data, with the latest generation of Solana DeFi protocols, aptly named “DeFi 2.0,” driving financial activities on the Solana chain to heights not seen since the bull market. The trading volume of Solana’s decentralized exchanges (DEXs) is growing at the fastest monthly rate ever, surpassing the peak of the 2021 bull market. The total value locked (TVL) - the best proxy for user trust in the chain’s core financial infrastructure - has nearly quintupled since the beginning of the year, now standing at $1.5 billion. Most importantly, the efficiency of Solana’s DeFi, measured by trading volume divided by TVL, is growing at about four times the rate, almost an order of magnitude higher than that of Ethereum’s DeFi. As major projects launch their tokens, these numbers could increase further, providing more high-quality assets to the Solana ecosystem.

The non-financial sectors of Solana are also thriving. Despite an 80% decline in NFT trading volume on Solana since January 2023, the introduction of compressed NFTs (cNFTs) has reinvigorated growth in the industry, positioning Solana as a potential continuous growth share winner in the NFT market. On Solana, the cost of minting and distributing cNFTs is about 1,000 times cheaper than any Ethereum environment - meaning cNFTs can be distributed to 10 million users on Solana for a few hundred dollars, whereas it would cost tens of thousands on Ethereum L2 and hundreds of millions on Ethereum L1. Since Metplex introduced its cNFT standard in April 2023, the number of NFTs issued on Solana has exceeded the total of the previous three years - the cost reduction offered by cNFTs is so significant that large brands can reasonably attempt to use chain assets on a scale, greatly increasing Solana’s appeal to enterprises and the likelihood of it becoming the home of the industry’s next breakthrough application.

In addition to the revival of Solana’s NFTs, Solana has also become a popular choice for decentralized physical infrastructure networks (DePINs) due to its low latency and low fees. Notably, the decentralized wireless network Helium migrated to Solana in April 2023, indicating that Solana enables larger scale operations, and recently Render completed a similar migration, stating that Solana’s unparalleled performance and state compression capabilities will increase the profit margins of node operators and expand their market potential.

At some point, investors need to ask themselves: Is the probability of Solana’s success as low as the market implies? Solana’s current valuation is about 13% of Ethereum’s, suggesting the market believes Solana has about a 13% chance of becoming a top smart contract platform. Despite the accelerated development of the Solana ecosystem after the FTX trough and gaining momentum among enterprises and crypto-native developers, the Solana blockchain is preparing for the Firedancer upgrade, which in many ways can be seen as “Solana 2.0.” Considering all the above factors, we believe Solana has an excellent risk/reward ratio. As the market realizes that Solana is a foundational platform beyond Bitcoin and Ethereum, we think its market cap could at least reach 25% of Ethereum’s – comparable to the peak of the last cycle relative to Ethereum’s market cap. Moreover, if the market starts to favor Solana’s long-term outperformance over Ethereum, this ratio could be even higher.

Phoenix Reborn, Building Heaven in Hell

“If heaven is now rising in hell, it is because, in the suspension of order and the failure of most systems, we have the freedom to live and act in another way.” —— “Heaven Built in Hell”

In the crypto economy, the greatest projects have repeatedly overcome the greatest adversities. Bitcoin survived the notorious Mt. Gox hack, despite Mt. Gox handling 70% of Bitcoin transactions and losing 6% of all Bitcoins at the time. Ethereum survived the infamous DAO hack, despite the DAO raising $150 million and ironically also losing 6% of all Ether at the time. In both cases, the recovery was a testament to their resilience - the lasting impact was the fortification of their souls and the solidification of their fundamental propositions. Decentralized currencies and autonomous programs will persist.

Today, Solana is writing its history. Despite FTX once being one of the biggest contributors to the Solana ecosystem, holding about 8% of Solana’s supply through its fraudulent and now bankrupt Alameda entity, the Solana ecosystem is rising from its worst nightmare. Just as Bitcoin and Ethereum reached new heights based on enhanced resilience and identity, we believe Solana has the potential to become the next successful ecosystem. After all, in the crypto economy, legends often arise from difficult circumstances. In a permissionless world, only those projects that can survive disasters can reach the promised land.

As previously mentioned, we seldom encounter a project that can unlock new possibilities on a scale comparable to Bitcoin and Ethereum. Finding such a project at a special moment like this for Solana is even rarer. Moreover, the liquidity of a project like Solana is a rare sight.

We are extremely excited about Solana rising from the ashes, with a steady pace leading the way again.

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The information provided in this article is for general guidance and informational purposes only, and should not be considered investment, business, legal, or tax advice under any circumstances. We are not responsible for any personal decisions made based on this article, and we strongly recommend that you do your research before taking any action. While every effort has been made to ensure that all information provided here is accurate and up-to-date, omissions or errors may occur.

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