A recent research report by Coinbase Institutional looks at the mechanics of the Solana ($SOL) protocol and its competitive positioning in the layer-1 blockchain space.
According to this report, which was written by Research Analyst Brian Cubellis and published on 22 February 2023, Solana has faced a turbulent few months, losing nearly 87% of its market capitalization and 97% of its total value locked due to a series of challenges, ranging from network outages to tightening financial conditions and crypto-specific insolvencies. However, this report claims that Solana remains a strong competitor in the L1 blockchain space.
The Coinbase analyst says that Solana’s focus on native scalability at the base layer sets it apart from many competitors, including Ethereum, which have had to scale their transactional capacity through second and third layers.
Cubellis goes on to say that Solana’s unique timestamping function — called proof-of-history (PoH) — augments its proof-of-stake (PoS) consensus mechanism and enables the processing of up to 65,000 transactions per second (TPS), which makes Solana one of the highest throughput blockchains in the industry.
Despite the current crypto bear market, the Solana ecosystem has maintained a focus on improving the resiliency of its infrastructure by implementing upgrades aimed at reducing spam transactions and eliminating network outages. The report asserts that Solana’s technological differentiation will continue to act as a foundational element of the protocol’s value proposition, and the ecosystem’s focus on performance for users and composability for developers may play an essential role in driving future adoption and network growth.
The native asset of Solana is $SOL, and validators can participate in network security by staking $SOL, for which they get rewarded in the form of newly issued $SOL and a portion of the transaction fees.
Solana’s low static fee structure makes most staking rewards come from new issuance. As the rate of new issuance declines, validators will increasingly rely on transaction fees for compensation, which suggests network activity will need to increase meaningfully over time to foster a more robust fee market.
Per the report, Solana’s activity in terms of transactions and active users, adjusted for market capitalization, compares favorably to Ethereum. As of the time the report was published, Solana’s market capitalization was just ~4.3% of Ethereum’s market capitalization.
However, Solana processes roughly ~17x the number of daily transactions as Ethereum and has ~43.7% of Ethereum’s daily active user base. This may be largely attributable to Solana’s overtly low-cost fee structure, which creates a more frictionless environment for user activity.
Looking ahead, the report suggests that Solana’s forward-looking value proposition is largely predicated on the technical merit of the protocol, which offers unparalleled transaction throughput at a very low cost combined with an architectural design allowing for native scalability on the base layer.
The reports author believes that the Solana ecosystem must maintain a focus on the technical capabilities of the platform and offer products and services that cannot be executed on other blockchains due to higher latency or less composability.
The report also looks at several key protocol initiatives that could help bolster Solana’s technical advantages, including Token-22, Jito-Solana, and Solana Saga.
It concludes by saying that “given the ecosystem’s relative strength in terms of current network activity (e.g. transactions, users, development),” Solana is “well positioned to reassert itself as a genuine layer-1 competitor.”
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