Is Solana the future of DeFi?
Recent weeks have seen the price of blockchain Solana’s native currency — SOL — skyrocket. From just over $67 on Wednesday, August 25, SOL has shot up to its current price of $145 (as of September 6), marking more than a 100% rise in just 12 days.
From April to August 2021, the token’s price had hovered around the $30 mark, so the current price represents a nearly five-fold increase in value. This has taken the market capitalization of Solana to $42.1 billion, making it the world’s seventh-largest cryptocurrency by market cap, surpassing even Dogecoin.
So what’s behind this astronomical rise and what does it mean for the decentralized finance (DeFi) ecosystem?
Speed, price and NFTs
Interest in the Solana blockchain has been growing along with the adoption of DeFi and non-fungible tokens (NFTs), both of which have grown steadily in popularity over recent months. Solana has been dubbed an “Ethereum killer” by many in the market, along with some others including Cardano, and its recent success suggests it could be living up to this expectation.
One of the reasons Solana, which was set up in 2017 as a direct competitor to Ethereum, has been so popular is the speed of transactions on the blockchain. Solana claims to be able to process some 70,000 transactions per second compared to just 15 per second for Ethereum, on which the majority of the DeFi ecosystem is based (although Solana is reportedly processing just 6,000 transactions per second currently).
In addition, Solana doesn’t plan to stop at what it has already achieved, promising to double its processing speed every two years. To support this, Solana uses a network timestamp system called Proof-of-History. This generates a local timestamp to create a single, trusted source of time, thereby improving network efficiency. At the same time, it also offers lower transaction costs than many of its competitors, with the average cost per transaction sitting at $0.00025, according to Solana’s own website.
Ethereum’s gas fees have been going down this year, and currently stand at an average of 116.33 Gwei per transaction, which is 58% lower than a year ago. However, this is still double the price of Solana at $0.0005 per transaction. With gas fees being a significant cost factor in DeFi and users constantly looking for faster transaction times, it is no wonder then that Solana is emerging as the biggest potential threat to Ethereum’s dominance.
In addition to its benefits for users, there are perks for validators of the Solana blockchain. Incentives include an inflation-linked mechanism, with an initial inflation rate of 8% for stakers and validators, decreasing by 15% each year until it reaches a long-term rate of 1.5%. This creates some stability in the volatile world of digital assets, which is surely a plus for users as well.
In June Solana garnered headlines for its $314 million fundraising round — the fourth largest raise ever seen in cryptocurrency outside of initial coin offerings (ICOs). The event involved some of crypto’s heaviest hitters, including venture capitalist firms Andreessen Horowitz and Polychain Capital as well as Alameda Research. The latter’s involvement is particularly notable for its founder, multi-billionaire crypto magnate Sam Bankman-Fried, who also founded Solana’s highly successful Serum exchange.
The blockchain recently stoked speculation about a potential token burning event by introducing “Ignition” on their official media handles, with a video teaser featuring a purple-flame lighter. In fact, the event turned out to be a virtual hackathon aimed at catalyzing new platforms on the ecosystem, with up to $5 million in prizes and seed funding, taking place from August 31 to October 8. However the notion that this might be mistaken for a token burn event was likely not lost on the development team.
Solana was also quick to jump on the NFT bandwagon. A booming market that has seen sales balloon to $2.5 billion in the first half of 2021, NFTs are a buzzword among cryptocurrency enthusiasts. Solana has been capitalizing on this surge in demand by launching Solanart, the first fully-fledged NFT marketplace on its blockchain. Last month, it also launched Degenerate Ape Academy, an NFT project representing a collection of 10,000 unique pictures of cartoon apes, which sold out in 8 minutes with an overall trading volume of nearly 96,000 SOL (more than $5.9 million).
Finally, Solana is hitting the spot for investors worried about the impact of regulation on the world of digital assets. On August 24, digital asset management firm Osprey Funds registered a Solana-centric fund for institutional investors with the US securities regulator — the Securities and Exchange Commission (SEC) — paving the way for big money into the ecosystem.
With so much positive news behind the project, it is no wonder Solana’s token is pumping; however, the key question now is, can Solana replace Ethereum as the blockchain of choice for DeFi applications?
It is perhaps too early to say at this stage. Solana is not alone in challenging Ethereum’s position in the market, with Binance Smartchain, Cardano and Polkadot among promising alternatives. However, the Solana blockchain does have many things going for it that will ensure stiff competition for Ethereum. In the fast-moving world of digital assets, the market could look very different in a few months’ time.