The Solana Ecosystem's Revival Is Due to a Decentralized Renaissance

"Renaissance" of Solana in numbers

To better understand the scale and pace of recovery in the Solana ecosystem, let's look at the key blockchain metrics at the time of writing. Let's take the FTX crash on November 11, 2022 as a starting point for comparison.

Note that at the time the cryptocurrency exchange filed for bankruptcy, Solana’s metrics were already significantly below their peak values:

• SOL quotes : $17 versus $62;
• daily trading volume : $2.2 billion (130 million SOL) versus $6.7 billion (108 million SOL);
• number of active users : 506,000 versus 292,000;
• average daily number of transactions : 40 million versus 36 million;
• amount of blocked capital (TVL) : 26 million SOL versus 10 million SOL.

You can also view quarterly data from Messari.

Against the backdrop of the rising price of SOL, interest in Solana from Google users has also increased. The search volume indicator has risen to 100, up from 59 in November 2022.

Even on an annual scale, not all metrics show convincing growth, but if you compare them with Solana’s “best times,” it becomes clear how long and difficult the project has to go if it wants to “rise” to its previous heights.

Key Growth Driver: DeFi Sector 

Since the summer of 2023, new DeFi services have been launched on Solana - lending platforms, LSD protocols and decentralized exchanges (DEX). The developers aim to create a new generation of platforms with “healthy” tokenomics and high-quality UI/UX.

The key projects of the new wave of DeFi on Solana were Drift , Marinade , Cypher , Solend , Jito and marginfi . According to DeFi Llama, they account for the lion’s share of the blockchain’s TVL growth.

One of the factors driving the development of DeFi on the Solana network was low fees, which contrasts with the relatively high gas costs of Ethereum and L2 networks like Arbitrum, which experienced an influx of decentralized applications in the first half of 2023.

If we add to this increased stability, general brand awareness and relatively low hacker activity, then the blockchain looks attractive to users. However, it is possible that the influx of liquidity and increase in the number of transactions are caused by other factors - the development of LSD and potential airdrops.

Liquid staking

The Solana blockchain uses a Proof-of-Stake (PoS) consensus algorithm, so to become a validator, you need to lock a certain amount of SOL. In fact, this means freezing assets without the possibility of using them in decentralized applications.

In the Ethereum network, this problem was solved with the advent of liquid staking services, which gained popularity after the Shapella update.

there are staking with a circulating supply of 422 million SOL (93%), such services only developed in 2023.

Of the five apps with the largest TVL gains, four are related to liquid staking. The most popular were Marinade Finance, Jito and marginfi.

The development of LSD services has a systemic impact on the Solana ecosystem because:

• tokens for staking need to be purchased, thereby increasing transaction volumes and liquidity on the DEX;
• the total number of SOL in deposit smart contracts is growing, reducing the free supply;
• liquid tokens unlock capital, which is then used in DeFi, for example for lending or providing liquidity.

At the same time, prerequisites for an increase in the price of SOL appear and activity in decentralized applications is stimulated, which is why the entire ecosystem receives an impetus for development.

The key question is what motivates investors to buy tokens and use them for liquid staking in the first place? Among the reasons, analysts highlight the attraction of new developers, gaining independence from Alameda Research and FTX, and solving key technical problems. But there is another factor.

Drophunting and loyalty points

What all top Solana apps have in common is not only the LSD niche, but also loyalty programs for users.

Most of the new services have not yet launched tokens, so projects that could potentially distribute airdrops are being considered. This attracts numerous drop hunters.

To implement healthy tokenomics in such conditions, developers are launching loyalty programs. The points distributed within their framework can subsequently be converted into tokens. Similar initiatives have been implemented by:

• MarginFi - July 3, 2023 ;
• Cypher - July 18 (completed);
• Solend - August 3, 2023 ;
• Jito - September 14, 2023 (completed - token announced).

The increase in the number of transactions and the amount of capital in some DeFi services may be due to the activity of users trying to get more points in the hope of an airdrop.

This trend is reinforced by the rising price of SOL and the general atmosphere of euphoria amid the market recovery, which encourage high-risk transactions.

Thus, we get the cumulative effect of several factors: fear of missed opportunities, expectations of airdrops, a new LSD trend for Solana, and a general increase in the price of cryptocurrency. All of them, in fact, are profitability multipliers, which together create a “magnet” for capital.

Solana's technical development and its impact on the ecosystem 

Despite pessimistic forecasts and a general drop in network activity after the bankruptcy of FTX, the Solana developers did not sit idle. Over the past year, blockchain has received several important technical updates and innovations.

The validators' migration to client version 1.16 at the end of September 2023 optimized memory usage, expanded support for zero-knowledge proofs (ZKP), and integrated confidential transfers with the new token standard . The update also increased the stability of the network and reduced the hardware requirements for validators. 1.17 is expected to add even more features for ZKP integration.

State Compression, introduced in April 2023 . The solution makes it cheaper to store data outside the main network by using on-chain hashes to prove its authenticity. Thanks to it, so-called “compressed NFTs” ( cNFTs ) emerged with much lower creation and maintenance costs. The cost of mint from large collections has decreased tenfold.

According to Messari , 40 million cNFTs were issued in the third quarter of 2023 using the DriP (87% of tokens) and Dialect protocols. And at the moment this is the most active niche in the NFT segment of Solana.

In addition, Jump Trading is developing its own client for Solana - Firedancer , which theoretically will increase the throughput of the blockchain to 1 million transactions per second. Work is also underway on the first lightweight node - Tinydancer , which simplifies transaction verification for users who do not have access to powerful hardware

Against this background, there is also growing interest in the Solana virtual machine (SVM), which is beginning to be seen as a competitor to the market-dominant EVM . One of the most famous examples is the MakerDAO development plan, which involves using SVM to create its own network. And the Eclipse project is working to turn this framework into a full-fledged execution layer for modular networks.

The most noticeable thing on an everyday level was the lack of network outages - at the time of writing, Solana has been working uninterruptedly for almost 300 days and is ready to update its record in this direction.

Network upgrades are likely to have a positive effect in the long term. The updates will attract new developers, as well as provide reliable and accessible infrastructure to users during the bull market, when Ethereum becomes too expensive and slow.

(De)centralization?

The key problem with Solana as a blockchain is its centralization. Community accusations related to this aspect of the network are based on:

• widespread use of data centers to run nodes;
• high requirements for the hardware of validators;
• lack of client diversification;
• uneven distribution of SOL, most of which went to early investors and the project team.

On X it is easy to find threads both in favor of these theses and those aimed at debunking the “myth” about the centralization of Solana. And the team managed to completely or partially solve some problems - Jump Crypto presented an alternative client, and the hardware requirements became somewhat lower, although they remained high enough to run a node at home.

At the same time, Solana validators still prefer cloud infrastructure. The problem with this approach became apparent in November 2022, when the Hetzner provider took down more than 1,000 nodes at one point, which was comparable to a 20% attack on the network.

At the time of writing, more than 300 data centers around the world are involved in deploying nodes, so the likelihood of a similar scenario repeating has decreased. However, 18% of validators still use the power of the Terraswitch provider, 9% use OVH SAS, and 13% use services from Amazon. Changing the user agreement of any of these companies could cause a significant blow to Solana's infrastructure.

The problem of geographic centralization of validators also remains unresolved - more than 50% of stake nodes are concentrated in the United States. However, Ethereum also faced similar difficulties.

To this it is worth adding the centralization of staking. According to Solana Compass, almost a quarter of all locked liquidity is held by the 45 largest validators, with average deposits ranging from SOL 500,000 to SOL 99,999,999.

In addition, the 22 largest validators collectively control more than 33% of the stake, which is potentially dangerous for the PoS consensus mechanism.

The Nakamoto ratio , used to measure Solana's decentralization , having peaked in August 2023, has also begun to decline and now stands at 22 points.

As a result, if from the technical side the developers managed to reduce the centralization of the blockchain, then organizationally Solana staking is essentially controlled by a group of large SOL holders, and most of the nodes are located in the USA and are potentially vulnerable to political decisions of the authorities.

Sword of Damocles Alameda Research

Solana’s dependence on the actions of its largest investor, Alameda Research, and, more precisely, the liquidators of the bankrupt company, has not gone away. She owns 25 million SOL, which is 6% of all staked tokens. For comparison, the total number of non-staking SOLs at the time of writing is 27 million.

For now, the project is relatively safe, since Alameda acquired the assets under the terms of gradual unlocking and the company’s cryptocurrency is frozen in Solana smart contracts. The average unlock period for these assets is November 2025.

And while it is difficult to predict what the market will look like when Alameda Research liquidators receive most of the tokens, it is almost certain that they will be sold. The sale of such a volume of assets will require carefully developed sales schedules, but one way or another 14% of the circulating supply will affect SOL quotes.

However, the asset is successfully overcoming the pressure from the sale of tokens on the FTX balance sheet. The exchange has almost completed the implementation cycle, sending almost 7 million SOL to other platforms. At the time of writing, FTX still has 3,400 tokens left, but this is unlikely to have much impact on the price.

The second obstacle to Solana’s “bright future” is a liquidity crisis, which could be triggered by airdrops in “weak hands” or reduced incentives from ecosystem DeFi applications.

This trend may be exacerbated by a drop in the SOL price, triggered by the same Alameda Research or other unfavorable market circumstances. Not everyone has enough faith in Solana to stake a depreciating asset. Especially if other ecosystems can offer more attractive conditions.

Thus, Solana's rapid growth and SOL rally are based on three main factors:

• the emergence and rapid development of liquid staking services;
• loyalty programs and possible airdrops of tokens from new DeFi protocols;
• the growing popularity of SVM and the technical development of blockchain.

However, it is difficult to predict how long the momentum of LSD platforms will last and how users will behave after receiving the expected distributions. It is possible that after this the growth of TVL Solana will slow down and the network will again reach the plateau where it has been since the collapse of FTX.