The rise of Solana: low fees, DeFi, meme coin mania, and real-world assets

One of the hottest projects of the current bull market has been the layer-one (L1) project Solana as the network has moved beyond its associations with FTX and the exchange’s former CEO Sam Bankman-Fried and is now making a name for itself based on its technological capabilities. 


While the network has not yet solved all of the underlying issues that gave some investors pause – as evidenced by the five-hour network outage that occurred on Tuesday – on-chain activity continues to increase and new wallets are being established at a feverish pace as traders look to join in on the airdrop and meme coin mania that is driving activity on the platform. 


To gain insight into what is going on with Solana today, and a glimpse at future developments, Kitco Crypto spoke with Austin Federa, head of strategy for the Solana Foundation. 


At the outset, Federa addressed the increasing talk of Solana as an ‘Ethereum killer,’ a topic that has made headlines since shortly after the launch of Ethereum in 2015. 


“I don’t think any project out there wants to be an Ethereum killer,” he said. “I don’t think it’s necessarily possible. It’s not a title that anyone at the Foundation or Labs ever put out there into the world. I would say you can’t really kill Ethereum any more than you can kill Bitcoin or any more than you can kill Linux. That also means it won’t be easy to kill Solana.”


“These are networks run by hundreds of thousands of people all around the world and that is the real staying power of any open-source community and software movement,” Federa said. 


“Solana’s pretty differentiated from Ethereum now at this point too,” he added. “Solana’s not built on the Ethereum Virtual Machine (EVM). It has its own programming language – Rust – that folks use to build Solana smart contracts on the SVM.”


“These are reasons why the term ‘Ethereum killer’ never made sense,” he said. “If we were trying to kill Ethereum, we probably would have had EVM support on the network, right? The intended function of the Solana network, from its inception in 2018, was that we wanted to be able to build something that would synchronize all of the world’s information as close to the speed of light as possible in one global state machine.”


Federa noted that the vision of one global state machine was “actually the original vision of Ethereum,” adding that “what made Ethereum so powerful back in the day was this idea of composability, that any program on the network can establish trust with any other program on the network because it’s all operating in the same state.”


“That is the vision that Solana was originally built towards and continues to be built towards today,” he said. Our goal “is to have the highest transaction throughput possible with the shortest blocks possible, all in one global state machine, which will drive fees to as low as possible on the network.”


Federa said this was the goal because the network was intended to be the optimal network for decentralized finance (DeFi), which requires a lot of transactions and can’t have profits eaten up by the cost to transact. 


“The original pitch deck was blockchain at NASDAQ speed, but it turns out that when you build a network, that’s really high performance and really well suited for DeFi, it’s also great for NFTs and it’s great for decentralized social media networks and it’s great for creators as well,” he said. “So the uses of the network have really evolved over the years, but that original core product market fit was DeFi.” 


Meme coins and airdrops


Transitioning to the topic of the breakout performance of the Solana-based meme coin Bonk, which has significantly outperformed tokens like Dogecoin (DOGE) and Shiba Inu (SHIB) in this bull market cycle, Federa said that at this point, “Bonk has escaped meme coin territory and is more about the community.” 


“I think a lot of people talk about meme coins as something negative,” he said. “They say, ‘It’s just a meme coin,’ as if it’s a putdown. But memes are a proxy for community, right? The world’s most successful meme coin is Bitcoin. That’s not a bad thing. That’s a great thing.”


“And if you look at the work that the team behind Bonk has done, it’s integrated into most Solana applications,” he added. “They are now building their own little mini apps on Bonk. It’s a whole vibrant ecosystem.” 


This led him to highlight one of the main benefits that Solana has over Ethereum. 


“One of the characteristics of Solana is that you can launch tokens like this and it’s not inordinately expensive to do so,” he said. “The entire Bonk distribution was a few thousand dollars in gas. So it was incredibly cheap to send all of those transactions out to all of those users.”


“That also means that it’s not on the users to pay for the distribution,” he said. “In contrast, with the ApeCoin airdrop in 2021, people were paying $3,000 in gas fees to claim their airdropped APE tokens. That sort of dynamic hurts people. It’s not fun for them, especially if the meme coin’s price doesn’t support that over the long term.”


“So there’s a very different community and culture around token drops on Solana,” he said. “We’ve had three really big ones just in the last four months.” 


Touching on the airdrop for Jupiter, the largest of the four, Federa noted that the token was distributed to more than 300,000 different wallets, with “over 100,000 people claiming in the first 28 minutes of the airdrop being announced. That’s a level of volume that no other network has even come close to being able to do.”


Meme coin projects like Bonk and the growing communities around them could eventually become web3’s version of social media platforms like Facebook, he said, and agreed that Solana is well positioned to foster this kind of growth due to its ability to exchange and transfer things at a lower cost. 


“If you look at what made Solana the breakout success that it is, it’s the cost structure,” he said. “Solana had to be 10,000 times cheaper than Ethereum with a thousand times transaction capacity for anyone really to pay any attention or notice. That speaks to the power of Ethereum, the EVM, and the network effect.” 


“Solana had to be very differentiated in terms of what it offered in order to get to the place that it is today,” he added. “And I think those characteristics that made the network successful in the early days have continued to make the network successful today and are helping to expand what’s possible on the network.” 


“That’s the piece that I’ve always been excited about – looking across at this network and this infrastructure system and seeing what’s possible for people to build on it today.”


EVM compatibility


When asked about plans to introduce EVM compatibility by the development team behind Solana, Federa said there are no plans at the protocol level, “largely because EVM is built in a very different way than Solana network is built.”


He said that while Solana developers are not working on compatibility, the Neon EVM (NEON) project is “an emulation layer that runs on top of the Solana blockchain, which brings full compatibility for Ethereum applications and addresses on top of the Solana network.”


He noted that the way it operates is “not quite the same as saying it’s running on Solana because it can’t,” and instead said it is the equivalent of a “layer-two (L2) network on Solana that is built to enable Ethereum compatibility.” 


“One of the things about Solana is it’s the world’s first and still the world’s only parallel blockchain,” he said. “Parallel blockchain means that two transactions can execute at the same time. This is possible because transactions on Solana specify all the information about the transaction before they execute.” 


He gave the example of trying to transact with USDC while also trying to send a non-fungible token (NFT). “The transaction schedule is able to determine that those two transactions talk to two different parts of the blockchain, so they can both happen at the same time,” he said. 


“Ethereum doesn’t have that built into it, so it would be quite difficult to bridge Ethereum with Solana because it would break the parallel structure of the network,” Federa said. “That’s part of the reason the network can scale to hundreds of thousands of transactions, especially through innovations like Firedancer – because of the parallelization built into the runtime.”


Due to this design, Solana can process a higher number of transactions than the other leading blockchains.


“The network runs a little benchmark at the end of every epoch that benchmarks how many simple transactions it can handle,” he said. “That number is usually about 55,000 or so, depending on the state of the network. But the steady run rate of the network is usually around 4,000 transactions per second (TPS).”


For comparison, data provided by Blockchair shows that Ethereum averages around 13 TPS, while Bitcoin averages 5 TPS. 


Institutional investors


Switching gears to discuss the motivation behind the team at Solana, Federa said “Investors have never been something that the Foundation or Labs focuses on. What we’re really focused on is use cases for the network.” 


“Sometimes people use it for investment cases, certainly, and institutions also really care about transaction fees,” he said. “They don’t care about them in the pilot phase, but when they go to market, when they actually think about integrating blockchain into a core business, transaction fees are very important.”


“We’ve been seeing more interest from institutions due to the low fees, which are predictably low in the future,” he added. “If there’s a future where Visa is sending 10,000 transactions per day, and each transaction costs 10 cents, that’s a meaningful amount of money for that organization. If each transaction costs 0.00025 cents, that’s also a meaningfully small amount of money for the organization. 


“So institutions are also looking at Solana as well as retail users that are using more consumer-focused applications on the network,” he said. “That’s a big trend we have seen over the last year – Institutions are really starting to think about what scale means for their blockchain integrations, and anytime questions of scale come up, people turn to Solana as a potential solution.” 


And it’s not just institutions showing more interest in the capabilities of the network, he noted, as projects that operate on other platforms have also shown interest in migrating to Solana. 


One of the best examples is Helium (HNT), a decentralized blockchain-powered network for Internet of Things (IoT) devices.


“Helium was the largest migration to ever take place on a blockchain,” Federa said. “They moved more than a million accounts and a million hotspots from their custom layer-one (L1) network over to Solana, which was an impressive feat to see.” 


Current and future developments


More recently, the focus of development for Solana was on the creation of token extensions, which plays into the growing movement of real-world asset (RWA) tokenization. 


According to a press release announcing the launch of the new service, “Token extensions are a comprehensive suite of turnkey solutions tailored to meet the needs of businesses moving onchain – arming developers, enterprises, financial institutions, and Solana-native development teams with ready-to-use advanced token functionality. Token extensions were designed specifically to cater to builders across various industries, including stablecoins, real-world assets, and payments.”


“Token Extensions is a new program that just launched on the Solana network this month,” Federa said. “It is designed to meet the needs of institutions that are currently building on private blockchains because they don’t have the tools to build the things that they want to build, or they don’t have the tools to get their compliance team to sign off on building this sort of thing on a public blockchain.” 


“Token extensions are going to be one of the major drivers of RWA adoption on Solana,” he added. “Two of the world’s largest stablecoin issuers are already building on token extensions – Paxos and GMO Group have announced stablecoins on Solana built on token extensions.”


He said the exciting thing about token extensions from a compliance standpoint is that it “allows an issuer to do something with it, like a transfer hook, which inserts a program in the transfer, which can check to see if the address in question is on any sort of blacklist or bad list. If the answer is yes, the program will reject the transaction.” 


“So Solana has a lot of tools that help companies that are not Web3 native, but want some of the controls they would expect in Web2 or on a private blockchain, to be able to deploy on the network,” he said. 


Artificial intelligence and blockchains


On the topic of artificial intelligence (AI) and blockchain, Federa noted that “AI and blockchains is a really good meme right now, but I think there are some areas that it makes a lot of sense.” 


“One of the things blockchains provide is transparency, audits, and traceability,” he said. “So it can be really great for data set modeling, which can help with things like proving that someone’s creation is not based on a bunch of copyrighted material.” 


But the most applicable use case between blockchain and AI is the first use case identified by Satoshi Nakamoto, the creator of Bitcoin: payments, Federa noted. 


“Funny enough, the classic use case of blockchain continues to come back time and time again,” he said. “AI billing has one of the highest rates of fraud and rejection of any type of credit card processing system.  Platforms like Midjourney and similar subscription services have a high and rampant fraud rate, similar to the adult industry when it comes to fake credit card usage.”


“Blockchain payments offer a fully programmatic, end-to-end solution for companies that are building AI models and want to be able to sell to anyone, anywhere in the world,” he said. “That is one area that we are seeing catching on recently.”


“There are also projects like Hivemapper that are building global decentralized maps,” he added. “Part of that includes using AI to improve the quality of those maps and image submissions.” 


The future of Solana


As the conversation wrapped up, Federa returned to the topic of token extensions, which he said “are the biggest thing that we have launched over the past year.” 


“They are behind the scenes and they’re not necessarily the front-and-center sexiest thing you can see on blockchain, but they are a massive step forward for what’s possible to build on public blockchains,” he said. “This is where we’ll see a ton of adoption and growth come from.”


“I would say another area that is seeing increased adoption is Solana DeFi,” he said. “The types of applications built on Solana DeFi are much more holistic constructions of the future of DeFi than you see on other networks because of Solana’s characteristics of being fast, cheap, and composable. And it means you can build different kinds of applications that you aren’t able to build on other networks.” 

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