Analysis

Solana's Past, Present and Future

Where is Solana now... and where is it headed?
James Trautman James Trautman Sep 21, 20235 min read
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Solana's Past, Present and Future

Dear Bankless Nation,

Solana is in an interesting spot. The community has taken a beating this bear, but they've kept the fight going. What does the future hold?

Today, in his first post on Bankless, our new research head James Trautman digs into the question: Where is Solana now... and where is it headed?

-Bankless team


The crypto landscape experienced a tumultuous journey in the past 21 months. The onset of a bear market in early 2022 left its mark on almost every project, especially Solana.

Throughout 2022, Solana contended with challenges such as network outages and the downfall of FTX. The market capitalization of SOL plummeted by ~93% during that year, accompanied by a 96% reduction in the network's TVL. As the year drew to a close, the outlook for Solana entering 2023 was far from optimistic, and speculations about an impending death spiral were widespread.

Despite facing numerous challenges in the past, Solana's future appears bright.

The narrative surrounding network performance and outages has shifted for the better. Solutions like local fee markets have helped improve network uptime while also contributing to the value accrual of Solana's native token SOL. Advancements like state compression and compressed NFTs are ushering in new use cases while catalysts for growth, including grant initiatives and the emergence of Solang, Neon EVM, and AI, are on the horizon.

Below, let's dig deeper into the health and prospects of Solana.

The Present

Network Status

Through 2023, the prevailing narrative surrounding "outages" has shifted. Apart from a momentary network interruption caused by an abnormal consensus bug in February, Solana has maintained 100% uptime year-to-date, and there has been a consistent upward trajectory in total daily transactions.

The improved network performance is the result of the remedies introduced to tackle the issue of network spamming that originated from Gulfstream, Solana's alternative to the mempool for managing pending transactions. The network upgrades included QUIC, Stake-Weighted Quality of Service (QOS), and local fee markets (priority fees).

Priority fees have raised the barrier to entry for spamming the network. The integration of these fees has proven instrumental in eradicating Solana's historical downtime problems, primarily attributable to suboptimal transaction handling.

Through 2023, approximately 42% of daily fees have been contributed by users who choose to prioritize their transactions. This average is poised to escalate as more wallets and applications incorporate priority fees, mirroring platforms such as JupiterSolflare Wallet, and Phantom.

Furthermore, priority fees have only partially played a role in eradicating downtimes. They have also exerted a driving force behind revenue generation, resulting in enhanced value accrual. The revenue directed to the protocol (in SOL) has increased ~42% compared to the previous year.

Given that Solana burns 50% of all transaction fees, priority fees also serve as an additional positive force for value accrual. Following a sharp decline of 92% throughout 2022, the market capitalization of SOL has demonstrated a resurgence of ~111% year-to-date despite the downward pressure stemming from the SEC's recent allegations characterizing SOL as a security.

Ecosystem Highlights

What about the state of the Solana DeFi ecosystem following its setback during the FTX collapse in late 2022?

TVL expressed in USD has experienced a resurgence year-to-date, marking growth of 41%. However, when denominated in SOL, TVL has declined by ~26%, indicating that the rise in TVL has predominantly come from asset price appreciation in USD.

Nevertheless, it's worth noting that liquid staking derivatives (LSDs) have played a substantial role in bolstering Solana and its DeFi landscape throughout 2023. While they have been omitted from the TVL statistics above to prevent double counting, platforms such as Marinade FinanceLido, and Jito have all achieved remarkable triple-digit increases in their TVL. As a result, they now secure positions within the top 10 in terms of TVL.

While the expansion of DeFi continues to be a central objective for the Solana ecosystem, a discernible transition in user engagement has been observed, with a shift from DeFi towards a broader array of applications. This encompasses domains such as NFTs, gaming, and various consumer-oriented sectors.

The drivers?

In April, the Solana Foundation unveiled state compression, an economical approach for onchain data storage. The implementation of state compression was first observed in the NFT space, developed through a collaborative effort involving Metaplex, Solana Labs, and other key ecosystem contributors. Compressed NFTs come at a reduced expense compared to their uncompressed counterparts.

Following this development, Dialect, a messaging platform, and Access, an application designed for content creator monetization, adopted state compression for compressed NFTs. These applications quickly garnered user interest, leading to a combined average monthly transaction count in the range of several hundred thousand.

Furthermore, Tensor unveiled its compressed NFT marketplace, furnishing users with the capability to trade, list, and place bids on compressed NFTs. The marketplace has captured a substantial portion of transaction volume, accounting for approximately 40% of market share year-to-date.

In the aftermath of the FTX upheaval, Twitter became a breeding ground for speculations suggesting that the momentum behind Solana's development was dead and an exodus of core Solana developers was imminent.

However, despite experiencing a more marked decline in August, available data indicates that the count of GitHub developer repositories has largely persisted year-over-year, and the preconceived rumors of a mass exodus heading into 2023 were exaggerated.

The Future

So, what factors are poised to sustain the positive trajectory of the Solana network and its encompassing ecosystem? Several considerations are on the horizon, including:

  • Neon EVM: Solana's Neon EVM went live in July. This development enables Ethereum-based applications to operate on Solana without changes to their existing codebase.
  • Solang - In July, Solana Labs unveiled Hyperledger Solang. This new compiler enables developers to build projects on the Solana network using Solidity, thereby bridging the divide between EVM developers and the Solana ecosystem.
  • Eclipse - Eclipse aims to combine the Ethereum ecosystem and Solana's execution environment. 

With the above as potential gateways, there could be room for growth in Solana development and user activity through network effects. 

  • Move: Although still in its preliminary stages, the introduction of Move as a smart contract language on Solana has the potential to stimulate additional developer engagement within the Solana ecosystem.

The Solana ecosystem is also set to receive capital injections from recently launched growth initiatives, including:

  • Convertible Grants: The Solana Foundation recently introduced convertible grants to bolster projects within the Solana ecosystem. This mechanism transforms into investments should projects meet specific milestones and growth targets.
  • AI: The Solana Foundation recently launched a $10 million AI grant fund, and the expansion of the ecosystem into the realm of AI may be on the horizon.

Finally, details have recently emerged regarding the assets held on FTX's balance sheet:

  • FTX - Recent court rulings concerning FTX token sales will safeguard against a flood of market sales of SOL since liquidations will be subject to volume limits.

Conclusion

The network's consistent 100% uptime, bolstered by priority fees that fuel value accrual, combined with an evolving ecosystem marked by technical breakthroughs like state compression, relegates the network's past performance issues and the FTX crisis to the background. Upcoming catalysts, including grant initiatives, Solang, Neon EVM, and the emergence of AI, hold promise on the horizon.

Action steps

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