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Solana has been described by many as the next blockchain for launching decentralized financial applications. From its ability to process transactions faster to the energy-saving potentials which have recently proven to be many times more efficient than traditional financial transactions, the blockchain is set on its path to becoming the most popular ecosystem for DApp developers.
If you are in crypto at the moment, and you have not heard about Solana, well, I wonder what you have been up to but thank goodness you are here. In this article, we will explain what Solana is and the features of this blockchain that is currently driving the cryptocurrency space crazy.
We will explore the blockchain architecture of Solana, and the history behind it. Our ultimate focus, however, will be on decentralized finance applications or Solana Defi, a unique space of decentralized protocols offering better returns and the most exciting interface for crypto users.
We will also talk about some traditional financial instruments that have been revolutionized already with previous blockchains like Ethereum. With Solana, decentralized finance is taking a whole new turn because the average cryptocurrency user who is not in the class of the super-rich whales will shudder when the name Ethereum is mentioned.
You may be thinking, why? Oh yes! That is what happens when you pay nearly 50% of what you hold in a digital asset as fees for transactions. There are also issues of scalability and the overall efficiency of the network that has led to the creation of roll-ups lately, which are meant to improve Ethereum, nevertheless, some people are still not excited about the idea of having to move their funds to another layer to do the same thing that will take a few clicks on another blockchain. So you see why it is now Solana all the way, and so we don't forget, if you are launching your DeFi application, you may want to consider this super hot blockchain. Sit tight, relax and enjoy the rest of this article. Also keep in mind that unless otherwise, stated, we will use SOL and Solana interchangeably in this article.
Solana was created by a team of developers led by Anatoly Yakovenko, who is himself a former employee at the revolutionary file-sharing platform, Dropbox. He named the platform after the Solana beach in California, which he so much appreciated. Solana has a block time of 40o milliseconds which is super fast when compared to Ethereums 10 seconds or Bitcoins 10 minutes. Solana blockchain can also handle up to 710,000 transactions per second, which is around 300% more than the total transactions handled by the biggest payment giant VISA.
Even though the network has not gone beyond 50,000 transactions per second, this only means that it has not happened yet, but Solana is capable of executing as many as 710,000 transactions. The transactions fees of Solana are also incredible with the average network fee set at about $0.00025 per transaction. Solana does not use proof-of-work, the consensus algorithm for Bitcoin. It doesn't also use proof-of-stake which is now partly the consensus mechanism of Ethereum. Instead, Solana's consensus algorithm is unique and it is what drives this interesting platform as we shall see in subsequent parts of this article.
You can also understand Solana as an open-source blockchain dedicated to solving the problems of scalability and speed. In the Solana whitepaper, Anatoly Yakovenko noted that the biggest challenge of blockchains like Ethereum and Bitcoin is that transaction fees per second are too low. The cause of this problem is that with the consensus mechanism of these blockchains, it took so much time to order transactions in the right way. Just in case you do not know, transaction fees on blockchain networks are set based on the number of transactions that can take place per second. The explanation is commonsense if you consider that if a block will contain more transactions the cost of processing these transactions becomes lower when it is spread across all users who initiate these transactions.
The Solan ecosystem, as it is called now is now a DeFi ecosystem consisting of digital assets, crypto assets, and DeFi projects, one of which can be simply called a decentralized protocol because of its nature. Solana blockchain is at the heart of the Solana ecosystem now comfortably powering several DeFi projects. Let's now explain the SOL blockchain to give you more insight into this interesting cryptocurrency.
Bitcoin uses proof-of-work, which requires nodes to perform mathematical computation, powered by the SHA256 algorithm which takes in date and hashes it with input to get a specific number of zeros required to solve a block. Mathematically, the only possible way to solve a hash function is guessing randomly using the power of combined CPUs. The first computer to find the matching nonce thus solving the block, and publishing the solved block on the network wins the race and is rewarded for securing the network.
Proof-of-stake is an alternative to proof-of-work which requires participants to vote for holders of cryptocurrencies in large amounts, thus giving them the power to verify transactions on behalf of the entire network. Ethereum uses this along with proof-of-work which we explained earlier. Other blockchains like Qtum, Cosmos, and NEO use the proof-of-stake consensus mechanism.
Solana uses a new timekeeping technique called proof-of-history. One of the problems of most blockchains is transaction time which accounts for discrepancies in confirmation times for transactions on the Bitcoin network. Such discrepancies in transaction time could result in inefficiencies in the processing of transactions which is why Solana is better than most of these. Software companies like Google have solved their own time issues by synchronizing an atomic clock across all networks. Such methods do not just apply to centralized networks, and they require a lot of overhead costs for maintenance.
Solana timestamps blocks on the network using a verifiable delay function which adds inputs to each SHA256 record. The hashing algorithm is used to keep data secured and encrypted. Hashing requires processing the data input by users from a block through a mathematical function which results in an output of a fixed length.
Proof-of-history adds an input to the hashing function by adding a timestamp signature, which is recognized by everyone on the Solana network. Since Solana uses proof-of-history, everyone on the network is working in synchronization and in agreement with the decentralized network. Proof-of-history also means that nodes on the network can create the next block without having to coordinate with the entire network since they can trust the timestamp and order of the message received that comes right from the Solana website.
Solana's timestamp mechanism places specific dates and times on the blocks, allowing for a fast sequencing of validators. Computers on other blockchains often grapple with the problem of time agreement which can take lots of time in the real world. On Solana, validators can agree on the organization of data on the block after the fact which means that they do not have to wait for other validators to check their work.
Take Charlie, for example, who wants every member of his family to send him a letter one day after the other. He has to first send a letter to them before they would send their own letters to him. The time when his letter and their letter are in the mail will be a long period of time. One way he can go about this is to meet each member of his family and tell them to send him an email on a specified date. They may respond on different days due to unforeseen circumstances, and even though they all respond as he wants, their email service provider could make the email arrive later than he anticipates. The best way to organize these letters according to the order in which they were sent is to rely on the date written on each of the emails. That is about how Solana works if you think about these members of Charlie's family as anonymous persons representing blocks. There are no requirements to become a validator on Solana.
The next unique feature of the Solana blockchain has never existed on any other blockchain yet. It is known as sea level. It is a fun term that describes that validators can run smart contract code in a parallel way. To understand this, consider a human who has to perform several tasks in one day. That person will have to do each of those in order since he/she is just a person. You can call this task a serial task with the word parallel meaning that you must do all tasks at once. Imagine if you could make two copies of yourself to get such tasks done at the same time. If you could, you will be using sea level, which is what Solana achieves with its smart contracts. Solana believes that every time Nvidia doubles the number of SMID lanes, the Solana network will double in computational capacity. If you consider the number of supercomputers that will be available in a couple of years, Solana may become far more valuable than it is today.
SOL which is traded on several decentralized exchanges at the moment is the native currency of the Solana network. SOL can also be earned by staking in liquidity pools as a liquidity provider which enables the holder to earn interest for simply providing liquidity.
SOL is used all over the Solana ecosystem and it is both deflationary and inflationary. It is inflationary because the network recently approved an inflation schedule where staking rewards are paying out around 8%, which is reduced daily until the final staking rewards are reached. Before this, the SOL ecosystem burned 100% of its transaction fees for a long time which explains its earlier deflationary setup. There are about 293 million SOL tokens in circulation at the time of writing this Whitepaper with a maximum supply cap of around 500 million SOL tokens.
Following the allocation of SOL 37% of the tokens went to initial investors, 38% of pre-mined rewards and airdrop, while 25% went to the founders of the project. SoL's pre-launch private sale came with a 9-month lockup after the network launched. Becoming a validator on the SOL ecosystem is also easy with little barrier to entry. Validators are responsible for verifying transactions on the blockchain, and they receive token rewards in return for verifying those transactions. On other networks, there are lots of barriers to entry which may be another reason for the increase in SOL popularity and value. On Ethereim, for example, validators need to stake 32 Etherem to become a validator, that amount may not seem huge at 32, but the actual price for that amount of Ethereum at the time of writing this article is worth $132,184.2665. You can imagine how expensive it is. The system requirements for becoming a validator on SOL is the only drawback as it is pretty high, and the cost of the hardware may be so expensive. On the SOL website, it is stated that the requirements are 12 cores, 24 threads, 2.8 GHz or faster, and 128 GB or more in motherboard capacity. Voting fees on the Solana network costs 1.1 SOL daily. Solana also went down for around 6 hours in December 2020., although this did not affect the price of the token so much. Most of the 1,000 validator nodes currently on the network are owned by the development team, which brings the decentralization of the SOL network into question.
Like Ethereum, Solana supports the development of applications and decentralized protocols according to the native chain standard. Popular cryptocurrency exchange, FTX has also integrated Solan with their NFT Marketplace. In terms of compatibility with other networks, Solana uses Rust while Ethereum uses Solidity which makes Solana less compatible with Ethereum apps.
Recently, however, a new bridge called the wormhole has been launched to resolve the compatibility between Solana and Ethereum. The bridge, which is much like the synapse bridge allows users to move their digital assets from Ethereum to SOL and from SOL to Ethereum.
The Solana DeFi ecosystem consists of NFT platforms that allow users to exchange digital assets as well as decentralized financial protocols which allow users to stake their tokens and gain exposure to earn interest on their cryptocurrency. Interacting with these platforms requires wallets like the Phantom or Sollet which are the most popular and reliable wallets on SOL. You may hardly find a borrowing protocol on Solana which is tiring but thanks to platforms like Port Finance that allows users to borrow more than 50% of their assets held as collateral in SOL.
Protocols like Saber allow token holders to make their investment decision and profit from providing liquidity with pegged assets. Holders of USDC can profit up to 11% to 28% APY paid in the governance token of the platform SBR tokens. The lower transaction costs are partly a driver of the finance DeFi activities on Solana with a TVL, or total value locked of hundreds of millions of dollars for individual projects.
Another interesting project in the SOL DeFi ecosystem is Radyum which has its native token Ray listed on several exchanges. Raydium is a leveraged staking platform with allows you to gain more exposure to yield farming investments than the amount you hold on your portfolio. There are currently thousands of farms on Raydium most of which involve new or old tokens of projects running on Solana.
Yield farming protocols on the SOL DeFi ecosystem use the same AMM constant product market maker function to enable exchange between tokens while relying on prices provided by oracles or centralized exchanges. Francium finance is a yield aggregator which allows users to create their custom yield farming strategies and auto compound the rewards on staked tokens in the yield farm. Users can earn yield farming rewards in stablecoins on Francium finance. Francium also plans to make leverage yield farming available to its users.
Another protocol that helps yield farmers earn money on their staked stablecoins essential higher than they will get from staking the same coins in decentralized yield farming protocols is Mercurial finance. The focus of the project is to drive liquidity and adoption of stablecoins on SOL, improve utilization of yields on their protocol, create a grant program for key community members, develop a system for MER utility and function.
Synthetify is a decentralized asset exchange on the SOL blockchain that tracks the price of specific assets based on the SPL token standards allows interoperability with other DeFi applications like automated market maker protocols on other blockchains. The platform also offers lost-of-yield farming pools with interesting returns on stablecoins on other digital assets. The decentralized NFT marketplaces on SOL are explored in our SOL NFT article. Other remarkable DeFi applications include Solend, a platform for borrowing and lending digital assets.
Launching smart contracts on Solana is not easy as the programming language, Rust used by the platform is not beginner-friendly. Just to put this into context, Rust is a low-level programming language. Solana smart contracts are stateless and read-only. Once it is deployed, third-party smart contracts can interact with the smart contract we have deployed, and store data locally on their account.
The SOL data storage space is rented out using the SOL token which means we can deploy a smart contract on the network, get the public key from where the code is stored, and create a second smart contract to interact with the smart contract code and store application-based data. So how this works is that you have one key pair for the smart contract, and another key pair for the data.
To develop a smart contract on Solana, you must be careful and plan out how you are going to store data. If you are storing 8 bytes of integers, for example, these integers will take 4 bytes of space each.
To deploy the actual contract on SOL you first need to do an NPM run test. You create a new user and request an airdrop to get some SOL tokens to use on the testnet. The fund user will request, then the test net opens.
The next stage after this is the load program stage where you set up a second account for the program contract. You can upload the pre-compile code to the Solana blockchain, and store the contract code in an account. You then get a public key from the account in which you will store the program ID variable.
Once that has gone through, you can then create a third account called the app account. The app account is where you transfer some tokens to rent space for the DeFi application. Once this is deployed, what we have is two functions to push Json and push Json from the blockchain. There are some limitations to this step as there are no security measures in place since anyone can edit the data.
There is also a limit of 996 characters in the text data, and if you ever decide to change any of these, you would have to edit and re-build the smart contract. The next steps involve editing the Rust code, replacing it, and finalizing the contract. You can always check out the Rust contract examples on the Solana GitHub repository, study them, and tweak them to build your own SOL smart contracts.
Keep in mind that you must not understand the explanation given here to build your DeFi lending, borrowing app, or NFT platform. Only experienced developers will get the hang of what we are talking about. Even though you are one of the steps stated here are not exhaustive so refer to SOL GitHub repository and other useful tutorials to get the hang of what this is all about.
In a famous Ted Talk on Digital assets, Roop Sighn noted that the move away from tangible physical assets is one that has come to stay. He noted that humans have traded physical assets since the ancient Roman cities. Florence, the ancient city, was at a time in debt to itself, which her citizens had to pay. The citizens of Florence had to pay these debts and it did by selling them to its citizens who in turn sold the debt to other citizens when they needed cash urgently.
These transactions birthed a bond market. Florence was also able to use strategy to make its citizens its biggest investors. The revolutionary idea changed the world forever. A similar situation happened in the Dutch East India company where assets, mostly ownership of spices was transferred through updates on the account books.
The line between the physical and the virtual kept blurring until we reached the stage of tokenization which allows us to create a digital form of anything we own in the physical world. Blockchain technology improved this further by allowing us to store on-chain securities which are much the same as traditional securities and commodities in a way that they can be shared unarguably between users of the blockchain platforms.
All that we just described is possible on Solana, and we can even do more with cross-chain compatibility and low transaction costs. Assets tokenized on Solana can be stored for informational purposes, and swapped for tokens that can be exchanged on on finance (DeFi protocols) on SOL.
Rejolut is a specialist company in Rust development, NPM, and other JSON packages needed to build Defi applications on Solana. Our combined decades of experience set us apart in the industry as a force to reckon with in Solana Defi development. Rejolut has written code for thousands of companies and businesses spread across all continents of the world. We are specialists in blockchain development and so we know the problems that can come up from the point of explanation when you tell us your idea. Rust is a complex programming language, but hiring the wrong developer can make things worse and seriously complicated. Crypto is the future and even more so are borrowing apps, tokens, and derivatives built to scale. The goal of crypto projects, whether these crypto projects are DeFi or NFT is to become a force to reckon with and establish governance from within their community. Rejolut can help you achieve all this and more on Solana.
In this article, we have explained Solana, and even though there are other explanations on Solana in our previous posts, it is important to consider that the explanation offered here is relevant in particular to Defi platforms on SOL. We looked at the SOL ecosystem, the blockchain and learned that the programming language for writing smart contracts on SOL is Rust, a low-level programming language that is quite different from Ethereum. We explored tokenized assets and lending platforms which are ideas you can use to launch your own projects. SOL, of course, is the native token of the SOL ecosystem, and at this point, you already know where to go for the best technical help and outsourcing if you ever need to build a project on SOL.
Solana claims it is the most efficient blockchain on the planet and boasts of its ability to confirm 65,000 transactions in a second with a cost of less than a penny per transaction. The system is intended to be an extremely efficient blockchain and is extremely energy efficient.
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