Protocol Overview: Solana 2024

Summary

Solana is a high-performance, low-latency blockchain renowned for its speed, efficiency, and focus on user experience. Despite facing initial recurring network outages and being closely linked to FTX, Solana has made a remarkable recovery and has found strong niche footing across payments, DePIN, mobile, and consumer end markets. Going forward, Solana faces steep competition from the Ethereum L2 landscape and will have to defend its reputation as one of the world’s fastest, most performant blockchains from a new wave of competitors.

Background Information

Solana was launched in 2020 by Solana Labs, which was founded in 2018 by Anatoly Yakovenko (“Anatoly”) and Raj Gokal. Anatoly, who had a background in systems engineering at Qualcomm, set out to build a blockchain optimized for information throughput and speed that addressed the scalability issues that faced Ethereum – specifically, “a state machine that synchronizes with as low a latency as possible globally,” per Anatoly.

Core principles behind Solana that differentiate it from other blockchains include:

• Prioritizing hardware-based scaling advantages. By maximizing efficiency across cores, disks, and network cards, Solana was designed to elastically scale up with hardware improvements over time.

• Using time to reach consensus quicker. Solana combines the Proof-of-History (PoH) consensus mechanism alongside the more common Proof-of-Stake to quickly synchronize state with minimal overhead costs.

• Enabling composability via an integrated (monolithic) architecture. As a unified ecosystem, all applications built on top of this single blockchain inherit composability, allowing them to interact and build upon each other seamlessly.

Other defining features of Solana include:

• Fast transaction confirmations. Solana targets slot times of 400 milliseconds, though they typically range from 500-600ms in practice (see Solana Explorer). Solana (unlike Ethereum) does not have a native in-protocol mempool; instead, user transactions are directly routed to validators, allowing for faster execution and reduced confirmation times.

• High throughput and scale through parallelism. With a theoretical throughput capacity of 65k TPS, Solana utilizes a multi-threaded approach to enable parallel transaction execution (the Solana Virtual Machine (SVM) is designed to process multiple transactions in parallel by utilizing all cores of the validator machine).

• Cheap, predictable transaction fees. Network fees on Solana are fixed at a flat rate of 0.000005 SOL per transaction (averaging ~$0.00025 / tx); localized fee markets (tied to parallel processing) can prevent one specific activity on the network from increasing fees across the network.

• Steep costs to running a validating node. Solana validators have high node requirements with steep operational costs, which consist of hardware costs (e.g., CPU > 16 cores / 32 threads; 512GB+ of RAM; 1TB+ SSDs), on-chain voting fees associated with each validated block (up to ~1 SOL/day), server costs (est. $500 / month) and bandwidth (minimum 1GB/s download/upload speed with 10GB/s commercial speed preferred). Estimates for these operating costs to run a Solana validator collectively add up to ~$50k per year.

  • Note: To improve the decentralization of the network, the Solana Foundation Delegation Program (SFDP) covers a portion of voting costs for participating validators. Helius estimates that if the SFDP were to be immediately discontinued, approximately 900 of the program’s participants—accounting for ~57% of all Solana validators—would struggle to maintain profitable operations.

Solana’s unique approaches to blockchain design and fee markets have contributed to the network experiencing periodic downtime or degraded performance over the years. While the circumstances around each outage may differ, most of these issues have been tied to network congestion resulting from spam transactions (enabled by Solana’s cheap, flat fee structure). During these periods of congestion, Solana users have experienced a high rate of failed or dropped transactions, leading to less-than-ideal UX (see this article for details about how Solana transactions are submitted & processed).

These issues have prompted the network to implement solutions including (i) optional priority fees to increase the likelihood of transaction acceptance, (ii) local fee markets, as explained above, and (iii) QUIC and stake-weighted QoS (Quality of Service) which work in tandem to improve communication between nodes and allow block produces to prioritize traffic on the network. The stability of the network improved significantly after making these changes – only one incident has been reported since the prior incident in February 2023.

In addition, as a longer-term solution that will dramatically improve Solana’s performance during congestion periods, Jump Crypto has been leading the development of Firedancer, a new validator client written in C++. The Firedancer client leverages a distinctive modular architecture by completely rewriting the functional components of networking, runtime, and consensus. With a demonstrated ability to process over 1 million transactions per second (more than 10x higher than Solana’s current theoretical max of 65k TPS), Firedancer promises to future-proof the Solana network and solidify its positioning as the ‘world’s fastest blockchain.’ Firedancer will also reduce hardware requirements, making it cheaper to run a new validator on Solana, and will improve the resilience of the network by introducing another validator client to run alongside the existing Rust-based Agave client. At Solana’s Breakpoint conference in September 2024, Jump’s Chief Scientist announced ‘Frankendancer’ (an interim non-voting version of the full Firedancer client) was live on mainnet, and the Firedancer client was live on testnet (the runtime and consensus components of the full Firedancer client are still in development). No target date has been provided for Firedancer’s mainnet launch, though it is expected to be sometime in 2025.

Ecosystem Highlights

The Solana network and its community were particularly affected by the FTX collapse in early November 2022 due to the ecosystem’s ties with FTX and its CEO Sam Bankman-Fried, who was an early supporter of the protocol and investor in many ecosystem projects. Since then, slowly but surely adoption of Solana has backed up, especially toward the end of 2023. Today, Solana has a rich ecosystem of projects across several notable verticals including:

• Retail (memecoins / NFTs). Due to their virality and potential for astronomical gains, memecoins and NFTs have captivated a new wave of retail users on Solana. Solana has a robust ecosystem of launchpads, marketplaces, and community engagement tools. Memecoin and NFT creators on Solana can leverage tools like Pump.fun or Metaplex to easily mint new tokens at extremely cheap deployment costs. Solana has led all other blockchains in token launches, many of which were memecoins such as dogwifhat (WIF), Bonk (BONK), Jeo Boden (BODEN), and Moo Deng (MOODENG). In addition, Solana’s state compression has enabled NFT creators to bulk mint NFTs via Metaplex at significantly cheaper costs compared to using Ethereum.

• Payments. Solana Pay aims to go beyond just “pay with crypto” to usher in a new era for payments and commerce. Solana enables users to pay merchants with near-instant confirmations with minimal and predictable fees. Solana Pay is available across Shopify-powered storefronts as an integrated plug-in option. Solana has received endorsement from Circle, Visa, and PayPal for its feasibility for stablecoin settlement. Specifically in the Deep Dive on Solana report, Visa highlights Solana’s high throughput capacity, multi-threaded approach to enable parallel transaction execution, low and predictable transaction fees with localized fee markets, and near-instant transaction confirmations.

  • In early 2024, Paxos—the issuer of stablecoins including USDP and PayPal’s PYUSD—received regulatory clearance from the NYDFS (New York State Department of Financial Services) to offer its products on Solana, making it the second blockchain after Ethereum. Previously, NYDFS-regulated trusts like Paxos were limited to issuance on Ethereum.

• DePIN (‘Decentralized Physical Infrastructure’). Solana is home to a rich ecosystem of DePIN (‘decentralized physical infrastructure’) projects. DePIN leverages crypto’s financial infrastructure and token incentives to establish impartial physical infrastructure networks, facilitating the distribution of ownership. Projects including Helium, Hivemapper, and Render recognize Solana’s technological merits that enable cheap deployment of DePIN infrastructure at scale and the developer/user community to power and iterate on them – in 2023, Helium and Render both migrated from other chains to Solana in 2023, highlighting Solana’s robust network infrastructure, its developer tooling, and its distribution capabilities as reasons to make the switch.

• Solana Mobile. Solana Mobile, a subsidiary of Solana Labs, offers a purpose-built Android phone designed for Web3 with its own fee-free Solana dApp Store. The Saga phone, which officially launched in May 2023 at a $1000 price point, initially saw limited demand before quickly selling out of all 20k units that were produced, thanks to a discounted price of $599 as well as added financial incentives from third-party ecosystem projects (namely the coveted BONK airdrop for Saga purchasers, which was worth more than the initial cost of the phone at its peak). As of September 2024, pre-orders for the new $450 Seeker phone (Saga’s successor) have already exceeded 140k with a release slated for mid-2024. Also at Solana Breakpoint this year, Jambo announced the launch of JamboPhone 2, another Android phone integrated with Solana and priced at just $99.

New tooling launched this year unlocks greater capabilities for project teams on Solana, which can accelerate adoption and growth across the core end markets listed above.

• Blinks/Actions. Introduced in June 2024, Actions and Blinks (short for ‘blockchain links’) on Solana make it easy to integrate blockchain transactions into any platform to create a seamless and intuitive experience for users. Actions are APIs that prompt signable transactions from an application to a user across various contexts such as QR codes, buttons + widgets on mobile and desktop apps, and websites. Actions increase accessibility to Web3 applications, reduce user friction, and simplify integration of on-chain transactions into existing websites or apps. Examples of how actions can be used include facilitating in-person retail payments with crypto through a QR code or integrating blockchain functionality to gaming platforms for in-game marketplace transactions, while blinks can be used to tip content creators through social media without needing complex wallet setups.

• Token Extensions. In early 2024, Token Extensions (fka Token-2022) were introduced as a new Solana token program with rich native functionality to offer advanced tooling including confidential transfers, transfer fees, and permissioned access to meet the requirements of regulated enterprises and institutions. Token extensions unlock new use cases including interest accumulation for yield-bearing assets or governance for RWA issuance. Stablecoin issuers including Paxos have already implemented token extensions, leveraging features like permanent delegation, metadata pointer, and transfer hooks.

SOL Token / Tokenomics

User transaction fees on Solana consist of:

• Network transaction fees, or “base fees", are fixed (unlike Ethereum’s variable base fees) at a flat rate of 0.000005 SOL (5,000 “lamports”) per signature.

• Priority fees (implemented in 2023) are optional payments to combat network spam and expedite transactions for a higher likelihood of inclusion within a block. Priority fees are a function of compute requirements for transaction processing. Since memecoin activity picked up on Solana in late 2023, priority fees have quickly grown to become the largest component of total transaction fees on Solana, averaging more than 80% of total transaction fees through 2024 so far.

In addition to base fees paid on user-initiated transactions, validators participating in consensus must submit voting transactions on-chain for each proposed block subject to the same flat rate of 0.000005 SOL as base fees. Voting costs can add to ~ 1 SOL per day or ~300-350 SOL per year, representing the main operational cost for a validator.

Currently, 50% of all transaction fees on Solana (incl. base fees, priority fees & vote fees) are burned. The remaining 50% goes to the current leader who proposed the block.

Going forward, the rewards distribution structure will soon change with SIMD-0096 (approved by Solana governance in May 2024), which will allow block producers to keep 100% of priority fees.

As stated earlier, the annual operational costs to run a validator on Solana will start around $50k. Validators generate income through (i) inflation commission, (ii) block rewards, and (iii) MEV, which is primarily through running the Jito client. Priority fees have historically been in line with Jito Tips, though Jito Tips have tended to outpace priority fees during periods of heightened economic activity. But with validators only earning a 50% margin on priority fees before SIMD-0096 (since 50% is burned), MEV has been a more significant source of revenue for validators.

Other token details:

• Token Inflation: SOL’s inflation rate was initially set at 8% and is set to decrease by 15% each year before reaching a long-term inflation rate of 1.5%. There is no theoretical supply cap but without including the impact of token burns, SOL supply is expected to grow to ~737m by the end of 2030 (+110m from current levels, or +3.0% inflation over the next 6 years).

• Staking: As of 10/15/24, 83.9% of the circulating SOL supply is staked, of which 88.4% is running the Solana Labs or Jito-Solana client and earning MEV rewards. There are 1,328 staked validators with an average staking balance of 325 SOL worth ~$50k USD (though in reality, 33% of the total staked balance is held across the top 19 nodes). Stakers are currently earning 6.3% APY.

• Unlocks: Following major cliff unlocks in January 2021 to private investors & the Foundation, as well as the completion of Team unlocks in January 2023, there are no other programmed unlocks for SOL supply aside from standard inflation paid to stakers.

  • Note that some portion of non-circulating or staked supply may be locked (e.g., the result of an investment in SOL or a grant by the Solana Foundation) or subjected to bankruptcy proceedings. Other portions of the non-circulating supply may be owned by Solana Labs or the Foundation for their delegation program, where stake is delegated to over 1,000 validators to improve decentralization.

Fundamental Metrics

• Since voting transactions are on-chain and every validator votes on every slot (resulting in over 2k votes per second), non-voting transactions should be looked at as a better representation of Solana user activity.

• Voting fees should also be excluded from calculating the total economic value of Solana, which is the sum of base fees, priority fees, and Jito Tips (data shown in the prior section).

• Solana fees by source are representative of the evolution of the network. Priority fees have grown to constitute more than 75% of total network fees, overtaking both base fees and voting fees (data shown in the prior section). It will be important to monitor the volatility and growth of network transaction fees for non-vote transactions, which have averaged $0.017 through 2024 so far.

• While Solana's infrastructure has improved its uptime in recent years, failed and dropped transactions on Solana are still a common problem. Failed transaction rates have come down from their peak in March and April of this year when the rate of failure for non-voting transactions averaged over 60%. However, it’s worth noting that most of the failure rate has been attributed to spam transactions from MEV bots.

• Solana validator income will be important to monitor the Foundation’s spending on the Delegate Program. Many of Solana’s validators fail to cover their high operating costs, requiring subsidies from the Foundation. Even as economic activity has recovered in Solana in 2024, native issuance rewards have accounted for more than 80% of total staking rewards to validators. The Foundation currently subsidizes ~50m SOL to 1,100 validators (~70% of total validators), suggesting most validators would not be profitable if the Foundation were to stop the delegation program.

Competitive Positioning

Solana’s primary competitors by category include:

• Ethereum & L2s in the ‘modular vs. integrated blockchains’ debate. The Ethereum ecosystem is fighting for technological superiority through its modular approach, which benefits from a rich ecosystem of project teams each focused on optimizing one specific infrastructure component. While most of the Solana community has denounced L2s and app chains, some builders are attempting to combine aspects of both approaches (e.g., by launching rollups (RollApps) on Solana or SVM-powered L2s on Ethereum), blurring the competitive lines of the two networks.

• Consumer- and payments-oriented blockchains (e.g., memecoins and NFTs): Base is the second most popular platform for trading memecoins, Tron is one of the most adopted for payments, and the TON blockchain takes a mobile-oriented approach to onboarding retail users (competing with Solana’s Saga & Seeker phones).

• Other high-performance, fast blockchains. Solana has experienced growing competition from other blockchains that take a similar approach in optimizing for speed and have adopted similar core design elements like parallel transaction processing. The list includes Move-based chains like Aptos and Sui, Sei—the first parallelized EVM blockchain, and emerging chains that promise sub-second latency with >100k TPS of throughputs like Monad and MegaETH. It’s also worth noting that block times on Solana (average 0.45s) lag block times on Aptos, Arbitrum, and Sei (ranging from 0.21s – 0.41s for the group, respectively)

Challenges / Opportunities going forward:

• Expand into new payment flows. Payments on Solana can become a gateway for web3-enabled commerce experiences (e.g., token-gated offers, NFT-based loyalty programs, and airdrop rewards to onboard new customers and increase engagement). While Solana has been praised for its feasibility for payments by companies like PayPal, Shopify, and Visa, we have yet to see strong evidence of commerce-based payment adoption on the network (or on any other blockchain). These companies are all looking to drive widespread adoption of new use cases using crypto payment rails, so their alignment with Solana can help drive significant economic activity on the network.

• Maintain/accelerate momentum in DePIN vertical. DePIN is one of the most compelling and potentially transformative use cases for blockchain technology. The migration of the two largest DePIN projects to Solana—Hivemapper and Helium—has attracted other projects to similarly take advantage of Solana’s tech and ecosystem. That said, with low barriers to entry and the emergence of copycats/forks on alternate platforms, Solana must move quickly to consolidate its leading position if it is to dominate an emerging DePIN market.

• Convert first-time crypto users from memecoins to lifelong, committed Solana users. Memecoins have been a powerful user acquisition funnel for Solana. They have onboarded a new wave of users to crypto, teaching them how to self-custody, and how to submit (and re-submit) transactions by raising priority fees or increasing slippage settings to increase the likelihood of success. Memecoins complement DeFi activity but given low retention and limited user engagement across longer time frames, there is an opportunity to convert first-time crypto users from memecoins to committed lifelong Solana users. For example, a dedicated mobile strategy using the new Seeker and JamboPhone 2 can leverage Solana Actions/Blinks to drive user engagement on Solana.

• Increase institutional adoption & regulatory acceptance. Despite Anatoly’s “blockchain at NASDAQ speed” tagline, Solana has had relatively slow institutional adoption from TradFi brands. However, Token Extensions were only introduced in early 2024, and they have already been adopted by Paxos to enhance the token standards for PYUSD and USDP. Further, the NYDFS gave regulatory clearance to Paxos to expand stablecoin issuance to Solana as the second chain after Ethereum, signaling growing regulatory acceptance of the network.

• Re-adjusting fee structures and improving validator economics. Past technical upgrades including priority fees and stake-weighted QoS have reallocated network resources to address transaction failure rates and network downtime. However, these solutions have not been entirely effective in deterring spam transactions. Since the base fee represents a minuscule proportion of total transaction fees, they have room to increase from their current level of 0.000005 SOL, which can also alleviate the profitability challenges of operating a validator. Hardware improvements and the upcoming launch of Firedancer should also lower the costs of running a validator. As a result, the Solana Foundation could potentially reallocate financial resources from the Foundation’s Delegation Program to dedicate towards various ecosystem initiatives across the verticals mentioned above.

• Convincing project teams that launching on Solana > launching an app-chain. Ethereum L2s and Cosmos provide builders with rich developer tooling and the ability to customize app-specific chains to meet the specific needs of their users. These solutions have enticed project teams to launch their own rollups for benefits such as less block space competition and greater control over the economic value generated by users. Solana must convince project teams on the technical & social benefits of monolithic/integrated chains over launching application-specific chains/L2s, which are subject to fragmentation and lack composability as they stand today.

• Fending off emerging ‘Solana killers’ and maintaining the title of ‘world’s fastest/most performant blockchain’. While Ethereum is Solana’s primary competitor, there is a wave of ‘next-gen’ blockchains that are starting to emerge that have their targets set on Solana. These newer chains take different approaches in optimizing different system components to offer the same speed and throughput benefits that Solana currently offers. Solana will look to stay ahead of these emerging competitors by fostering its community, retaining its existing user base, and by shipping technical improvements like Firedancer to maintain the title of ‘the world’s fastest blockchain’. Still, it’s worth noting that upon push to mainnet, the network will still be constrained by downstream networking capabilities and QUIC. Unless 100% of validators upgrade to Firedancer then its fullest impact on the network won’t be achieved, and if they all do, then the “multi-client” benefits will not be realized.

Important Upcoming Events / Developments

Some important upcoming events/developments and expected timing:

• Full Firedancer client (estimated in 2025)

• Solana L2s, SVM rollups, Solana Restaking and ZK Compression (2024-2025)

• Solana Breakpoint 2025 in Abu Dhabi (December 2025)