The Death And Rebirth Of Solana

Summary Solana was created to solve the Blockchain Trilemma. The project has a unique set of technologies that allow it to run better and faster than competing Layer 1s. A fundamental approach shows a blockchain that’s better rated compared to Layer 1 peers. FTX's sudden failure was a shock to the whole Solana ecosystem. New innovative technologies such as Compression, Validator Client Software and the Neon EVM are attracting projects involved in decentralized infrastructure and NFTs. Solana recently released a blockchain-native smartphone with an embedded wallet. Thesis Though Solana (SOL-USD) is named after a beach, life at SOL has been ANYTHING but a beach. Like all projects, Solana suffered from the 5/2022 TerraUSD stablecoin crash and the associated decline in the Terra (LUNA-USD) ecosystem. However, the hit to Solana during the 11/2022 FTX (FTT-USD) blowup was considerably worse than its peers. Below I highlight the numerous ways Solana was uniquely affected by the FTX event and then show how the Solana ecosystem has pivoted away from Defi towards NFTs and the consumer market. This pivot is being aided by Solana's innovate technologies, several of which will go live in 2024. Before proceeding, I give a summary of my Ratings Scorecard for Solana as I see a dire need for a holistic fundamental analysis that's currently not being utilized. Anatoly Yakovenko and the Birth of Solana The soul of Solana is Anatoly "Toly" Yakovenko, who co-created the project while working at Qualcomm. Toly was trading on the side and figured there could be a better way of trading quicker and on a level playing field with professionals. So in 2017, Toly organized a group of Qualcomm colleagues and friends to find a better solution ( Whitepaper ). Solana is a monolithic, Beta-staged, non-EVM designed L1, third-generation, smart-contract protocol developed to enhance network scalability and performance through its novel Proof-of-History (PoH) technology. Yes, that's a mouthful! Technologies Below I highlight the key technologies that will power the project into 2024 and help mitigate regulatory risks. Proof of Stake (PoS) and Proof of History (PoH): Solana uses a PoS consensus mechanism (like most L1 chains) that is optimized with an innovation called PoH. Solana's PoH boosts TPS to 50k with Max Theoretical TPS (Transactions per Second) of >100k. This is becoming increasingly important now as NFTs and Meme coins have slowed the Ethereum and Bitcoin networks and users are seeking an alternative chain. Pontem Network Validators: Solana has amongst the highest number of validators. It has made continued and successful efforts to increase its Nakamoto coefficient (number of validators that would need to collude to control the network) and geographic and cloud diversity. Solana is now focusing on node quality, not just quantity (see Validator Client below). This is important as U.S. regulators are less likely to label Solana as a security if they consider it "sufficiently decentralized." Solana has a staking ratio of 71% ( See Tables below for historical data). Solana Foundation Messari Validator Client : In 2024, Jump Crypto's Firedancer client software will be introduced, which will allow better concurrent transaction processing and will significantly improve performance, decentralization and reliability (i.e., reducing all those outages!). Solana's monolithic design, which handles both transaction execution and consensus on the same chain will also support its security going forward. Not Ethereum Virtual Machine ((EVM)) compatible : It's difficult to port over Dapps from the Ethereum chain to Solana's. However, on 12/2022, Neon EVM went live on Solana's mainnet with full EVM compatibility and interoperability expected by 2Q'2023. Going forward, this will help deter the migration of dapps from Ethereum to EVM compatible chains like Fantom (and onto Solana instead). Ratings Scorecard I developed a scoring system that broadly rates blockchain projects. Solana is amongst the highest-rated project - factors are summarized below: Funding: Above-Average . Rating was lowered from excellent due to the FTX scandal. Solana had over $0.5Bn in funding during 2018 and was the third-largest post-ICO funded project. During the aftermath of FTX, Toly said the project still has "30 months of funding." There's an ongoing $600MM in seed funding related to Solana's hackathons. Management team: Excellent . Several experienced team members and good relationships with other projects. Formerly worked at Qualcomm, Apple, Alphabet, Microsoft and Dropbox. Technology: Above-average. On 2/22, Solana's Wormhole bridge was hacked for $321MM. Despite several outages in 2022 (only one so far in 2023), TPS speed is high and there's near-instant finality ( See Technologies for additional information ). Developers: Excellent . Most rapid developer growth amongst large cap blockchains. Its programming language Rust is considered the " most beloved language " by coders. Electric Capital User Experience (U/X): Above-Average . The Solana wallet, Phantom , is typically highly recommended and the nice U/X make it appealing to onboard users. Introduced a blockchain-enabled smartphone. Use-Case: Average : Huge decline in Total Value Locked (TVL) in 2022 and weak Defi activity. However, very popular for DePIN (decentralized infrastructure) ( see below ). Decentralization: Above-Average : Validators, Nakomoto Coefficient, and diversity (by Data-Center ASN, country) has increased over time (see charts below). Both Solana and Liquid Staking Pools (i.e., LIDO) are pushing to onboard validators outside of the "superminority" of validators that comprise the Nakomoto Coefficent. Solana Foundation Solana Foundation Tokenomics: Average : There's no Maximum Supply. Inflation , at 9%, is scheduled to decline rapidly to 1.5% in about nine years. Inflation may be lower due to 50% of transaction fees that are burned. High percentage of Insiders ( 48% Founders/Investors and 60% including Solana Foundation) is a negative in terms of potential dumping by Whales. Vesting schedule is now complete (no token unlocks). Alameda Research is expected to sell its coin-stash when the bankruptcy restructuring is complete. InvestAnswers Social: Excellent . High social engagement. Nearly 2.3 million Twitter followers, 59k Telegram followers and 1.8 million CoinMarketCap watchlists. The Death of Solana Solana's name comes from the beach near Qualcomm's headquarters. However, life for Solana has been ANYTHING but a beach. The FTX (and Alameda hedge fund co-founded by Sam Bankman-Fried ((SBF))) failure left Solana for dead. Below I summarize the effects from the FTX fraud: The number of Validators temporarily declined, suggesting FTX/Alameda were running the lost ones. The 45MM SOL tokens owned by Alameda/FTX will likely be sold when the bankruptcy reorganization is completed (source: Solana Compass ). Solana's popular decentralized exchange (DEX) Dapp called Serum had to be forked into a new DEX - Openbook. Serum was decentralized in name-only as SBF controlled most of its coins and admin-keys. Its TVL (Total Value Locked) plummeted ( see chart ). TVL had already been declining before FTX's scandal. The decline was attributed to lower volumes post the Terra-Luna failure as well as a clock problem . Solana's Developers were rumored to quit en masse . This was later found to be a data-issue from the data provider Token Terminal. ( See chart for Code Commits decline .) The Treasury (i.e., funding) level was rumored to have dwindled. This is partially true as Solana had $200MM of FTT (FTX) and SRM (Serum) tokens, which together are now worth around $10MM (as of 5/2023). Several Dapps, such as Oxygen (a prime brokerage) and Maps.me (mapping app), on the Solana network said (on Twitter ) that they were custodied (i.e., controlled) by FTX. Solana lost two of its largest NFT dapps (DeGods, y00ts) which migrated to Ethereum and Polygon. DeFiLlamma Tokeninsight The Rebirth of Solana It's ironic that the loss of the NFT Dapps was the "final straw" that broke Solana's back, because Solana's NFT technologies have been key to its rebirth. To me, Solana's DNA always felt that it was about connecting consumers rather than the business of finance. Toly himself is a "social connector" who worked at Qualcomm - a company which links people and data. As FTX was collapsing, Solana began making deals with consumer-facing Facebook/Instagram ( for NFTs ), Google Cloud (its Blockchain Node Engine will allow anyone to setup a Solana node), and Fireblocks (launched support for Solana NFTs and games). And let's not forget the dog-meme coin named BONK , which was air-dropped into Solana on 1/2023. Even non-tech companies like McDonald's have tested Happy Meal NFTs and ASICs introduced a new running shoe (X Solana UI Collection) which will give owners the chance to win a STEPN-based NFT . Given this momentum, Solana's NFT volume-growth is greater than Defi, according to analysis by CryptoPotato . Messari Onboarding the Next Billion Users There's a saying that Web3 needs a "killer app" to onboard the next one billion users. In Solana's case, I believe its "killer app" isn't an app at all! While Solana's ecosystem remains mid-sized, I believe its ethos of innovation, as well as the technologies I noted above, will carry the chain to the next level. Two recent innovations are Compressed NFTs and the Solana smartphone. Compressed NFTs (co-developed by Metaplex ) are NFTs on Solana that store their data in a Merkle tree (think of a digital fingerprint) structure where the Merkle root is on-chain in an account and the Merkle leaves are stored in the Solana ledger (which is off-chain) rather than fully on-chain like conventional NFTs. So who cares? Well, this method allows costs to fall by magnitudes of scale, opening new use-cases for NFTs ( see chart ). The use-cases are ginormous, including gaming, events, music ticketing (think Ticketmaster) metaverse, enterprise supply chains and personal identity/records. Solana Foundation Render and Helium moving to Solana On 4/2023, Helium moved from its native blockchain to Solana. Solana's technology is aptly suited for what's called "DePIN" - (decentralized physical infrastructure networks) such as wireless, storage and energy networks. Helium provides peer-to-peer Hotspots that creates an internet of things ((IOT)) and a mobile network. The project said its move was motivated by Solana's reliability, access to developers, Solana's network speed and most importantly, compression technology that will sharply lower Helium's network costs. Also on 4/2023, Render Network , the first decentralized graphics processing unit ((GPU)) rendering network ( Beeple uses them ), voted to migrate from the Ethereum/Polygon platforms to Solana. Render also announced a partnership with Metaplex, so Render will be able to sharply lower costs for its graphically-intense (and real-time) renderings and utilize Solana's scalability and software developers. The Saga Phone On 5/8/23, Solana announced that consumers will be able to order its new Solana Saga smartphone. Odds are, the Saga won't be able to compete successfully against the iPhone/Android incumbents. However, a great deal will be learned. Saga features a Mobile Stack that integrates crypto usefulness (think payments) into the phone's hardware and software. For example, there's what's called a Seed-Vault, which stores a user's private keys in a segregated manner from the rest of the phone's data, thereby offering heightened protection to the keys. Toly jokes that it'll have 16 dapps (around the same number Apple had on its first smartphone) in its appropriately name Dapp Store. Solana will undercut Android's/Apple's 30% fee as it will not charge ANY fee. I believe that even if the Saga gains a fraction of the smartphone TAM ($479Bn in 2023 ), it'll be deemed a success given the large market opportunity. Already, orders have been steadily climbing to 10,000. (See Chart.) Adheeraj (Dune Analytics) Determining a Valuation Method Changes in TVL have been behind strong moves in coin prices, especially when users are dependent on just one third-party data provider - in this case Defi Llama. For example, some TVLs soar from nothing to hundreds of millions due to incentive programs. However, those incentives tend to burn-out quickly - and how do you compare incentive vs. non-incentive (Solana) projects on an apples-to-apples basis ? In the case of Solana, not all of its ecosystem's TVL is captured - some of this is due to the high composability of Solana. For example, the Hivemapper, Helium and Render dapps are not in Defi Llama's dropdown data for Solana. This is especially true when the project has a high proportion of NFT transactions that are participating in Defi. Kamino Finance wrote an article highlighting this very point. There are several ways you can value crypto projects including: number of active addresses, daily transactions, price/book, price/revenue and price/TVL. However, I believe it's too early to use these metrics as crypto projects are analogous to venture capital portfolio companies which have minimal revenue-bases. As I mentioned with TVL, several of the metrics can be incorrect. Prior to FTX, I thought Solana was somewhat undervalued using price to book value. I assumed that its huge treasury was analogous to book value as projects are debt-free. But with the FTX blowup, so too has Solana's treasury. Given Solana's high exposure to NFTs, I believe using Market Cap/Daily Transactions (the lower the number the better) could be the best valuation strategy ( see Chart below ). Using Market Cap/Active Addresses yields similar results, with Solana being one of the most undervalued compared to its peers, at under $20,000/address. The closest peer is Near Protocol which is double that amount. InvestAnswers Technical Analysis of SOL's Chart I believe the cryptocurrency space is inefficient (asset prices do not accurately reflect fundamentals). Once you've done the hard work of finding a good project, technical analysis can be used as a timing tool. I believe that Bitcoin is overbought and that the global macro situation of tightening liquidity does not support higher prices for all crypto including Solana. Further, increased regulatory scrutiny of Altcoins and Stablecoins may increase Bitcoin's Dominance (i.e., market share of Bitcoin vs the total crypto market) causing Altcoins to "bleed" against Bitcoin. See Sol/Bitcoin Chart. Trading View Risks Investing in Solana: Regulatory: The SEC under Gary Gensler has conducted what I would call "regulation by enforcement." As of 4/2023, the SEC has sued or sent Wells Notices to 13 crypto entities, according to Blockworks. Several of these pertain to tokens/coins not being registered with the SEC as Mr. Gensler considers nearly everything (including some NFTs and Stablecoins) to be securities under the Howey Test. Crypto related crime grew to $20Bn (2022) in illicit on-chain transactions (40% sanctions related). Hacking accounted for $3.8Bn stolen (mostly from bridge-hacks including Solana's Wormhole). (Source: 2022 Crypto Crime Report (Chainanalysis ). Conclusion: Ethereum's issues with speed/scalability and long upgrade cycle, leaves the door open for new L1s like Solana to capture market share. As such, a DCA accumulation strategy would be recommended on Solana. So, if the old Facebook could "move fast and break things" a reborn Solana could certainly " eat glass ." Enjoy the ride!