The Revival Path of the Solana Ecosystem: Analysis of Key Indicators and Driving Factors

Introduction

The Solana ecosystem has shown a strong recovery trend after experiencing a major setback. After falling from a high of $260 in November 2021 to a low of $9.6 in December 2022, the price of SOL has bounced back to $71, and the total locked value (TVL) has also recovered from $210 million in December 2022 to $812 million. This report will analyze the key factors behind the recovery of the Solana ecosystem.

Technical Features of Solana

Solana employs a unique proof of history mechanism that allows nodes to reach consensus on the order of events without having to communicate with other nodes. This enables the Solana network to achieve outstanding throughput and timeliness.

Compared to Ethereum, the Solana network also employs additional charging methods, collecting state rent and validator voting fees from project developers. This reduces the reliance of token prices on transaction frequency while increasing the cost of deploying smart contracts, which may reduce the number of fraudulent smart contracts on the network.

Overall, Solana features high transaction throughput, low transaction fees, and fast block confirmation times.

In terms of decentralization, Solana has also made significant progress. Currently, there are about 3,000 nodes distributed across 392 different data centers in 31 countries. The Nakamoto coefficient score is 21, surpassing other mainstream blockchains like Bitcoin and Ethereum, reflecting its substantial improvements in decentralization.

Current Status of the Developer Community

According to Electric Capital's developer report, as of March 2023, the Solana ecosystem still maintains around 2,540 active developers, just slightly below the peak of 2,648 developers in December 2022. Although the number of part-time developers has decreased, the number of full-time developers remains relatively stable, indicating that core development activities in the Solana ecosystem continue.

Fund Flow Analysis

Comparing the SOL trading data and the Solana ecosystem TVL data from the past year, it is found that the outflow of assets is slower than the decline in token prices. Especially during the period when FTX and Alameda Research were allowed to sell their staked SOL assets multiple times, the token price still showed a stable upward trend. This indicates that the Solana ecosystem is overcoming the negative impact of FTX's bankruptcy, and the market holds a positive attitude towards its future development.

In the Solana ecosystem, the top two protocols by TVL are the liquid staking protocol Marinade and Jito. Both offer liquid staking services, but their profit optimization methods differ.

Marinade Finance automatically manages customers' staked assets, transferring them from low-performance validators to high-performance validators. Jito Network is the first staking product on Solana that includes MEV rewards.

These liquid staking protocols offer SOL token holders an APY of about 7%-9%, providing an attractive scheme for asset appreciation during active market periods, further driving the steady rise of SOL tokens.

Application and On-chain Activity Analysis

The daily trading volume of Solana consistently far exceeds that of other blockchains, with the main on-chain transactions coming from various protocols. Similar to Ethereum and BSC, activities on Solana mainly involve trading. However, unlike Polygon or Base, the on-chain activities of Solana showcase a more diverse ecosystem, highlighting its variety.

The Solana network has speed and cost advantages. In the past month, the total transaction volume of Solana was approximately 825 million, which is 24 times that of Ethereum. Nevertheless, the total gas consumption was only 62,735 SOL(, about 4.3 million USD), with an average transaction cost of about 0.005 USD. In contrast, Ethereum's monthly gas consumption was 126.7K ETH(, about 26.84 million USD), with an average transaction cost of 7.89 USD, which is 1578 times the transaction fees of Solana.

Market Development and Technological Advancement

In August, e-commerce giant Shopify integrated Solana Pay as a new payment option. In September, credit card giant Visa also expanded its settlement solutions to include Solana.

In terms of technology and application, the Solana network has also made significant progress in the past year:

1. State compression: Significantly reduced the cost of minting NFTs, bringing the cost of minting 1 million NFTs down from $25,300 to $113.

2. Neon: The EVM compatibility solution for Solana was launched on the mainnet in July, followed by the release of the Solidity smart contract compiler Solang.

3. Firedancer: A new third-party verification client developed by Jump Trading, aimed at improving network efficiency and transaction processing capacity, with the goal of processing over 1 million transactions per second.

FTX/Alameda Research Liquidation

The liquidation process of FTX/Alameda Research is still ongoing, and attention needs to be paid to the potential risks it may pose to Solana tokens.

In September 2023, a U.S. court approved FTX to sell its crypto assets, with a weekly limit of $50 million, which could permanently increase to $200 million. The liquidation process will be overseen by the crypto company Galaxy Digital.

According to the report from the Solana Foundation, the Solana Foundation and Solana Labs sold 58 million SOL to Alameda Research and FTX Trading. About 10% has been unlocked, 7.5 million will be unlocked in March 2024, 61.85K will be unlocked in May 2024, and the remainder will be unlocked linearly each month before 2028.

Apart from the significant unlocking in March next year, the impact of this liquidation on the SOL price should be relatively mild. According to the FTX bankruptcy report from August 2023, FTX still holds approximately 55.76 million SOL valued at $1.162 billion. We do not know how Galaxy Digital will carry out this liquidation, but if they liquidate these SOL without waiting for the token unlock, the impact will be limited, as these tokens are not actually in circulation in the market.

Conclusion

The significant recovery of Solana can be attributed to the synergistic effects of several factors. First, its unique technical architecture enables high transaction throughput and low fees. Second, the resilience and growth of the developer community highlight the healthy development of the Solana ecosystem. Capital activities, including continued interest from investors, have also played an important role. Additionally, technological advancements such as the Jito-Solana client, state compression, Neon, and Firedancer have greatly improved Solana's efficiency and scalability. As the impacts of the FTX and Alameda bankruptcies gradually fade, these factors not only demonstrate Solana's ability to innovate and adapt in the dynamic blockchain space but also underscore the growing trust and interest from developers and investors, positioning Solana as a leading competitor in the blockchain field.