Crypto spring is in the air, and price charts are sprouting with vibrant green shoots.
Over the past 30 days, Bitcoin gained 34% and Ethereum 27%. It was a good performance and a strong sign of the new growth cycle, where the market’s many coins usually tend to follow the leaders.
However, one coin in particular outpaced them all. Solana, the blockchain at the heart of so many controversies including frequent network outages and close ties with the defunct FTX, has stolen the spotlight with an astonishing 175% rally. What’s more, Grayscale's GSOL trust shares soared to a stunning premium of 784%.
The burning question for many is why $SOL spiked so high. Additionally, and perhaps even more importantly, how did Solana manage to break from its past, winning over both retail and institutional investors?
To answer this, let’s take a look at Solana’s main strengths and weaknesses, as well as its current state.
Scalability
Solana’s main promise is to offer a highly scalable layer-1 blockchain, and it delivers on this promise by integrating into its Proof-of-Stake consensus a mechanism called Proof of History.
Most traditional blockchains synchronize on blocks, which means that the network must wait for a certain block time to pass before working on the next block. This time cannot be too short, in order to counter clock drifts and network latencies.
Solana’s Proof of History streamlines this process by enabling leader nodes to cryptographically timestamp blocks (thus maintaining an internal clock) and allowing validator nodes to verify the blocks in any order. As network participants synchronize at their own pace, the blocks can be added much faster, increasing scalability even as the network grows.
Solana is now the world’s most utilized blockchain, processing approximately 37 million daily non-vote transactions. This surpasses by far not only Ethereum’s 1.1 million but also all of its layer-2 solutions, combined (five most popular sidechains cumulatively process around 3.5 million daily transactions).
Solana’s transaction per second (TPS) metric currently hovers around 4000 (including vote transactions), with claims from the development team suggesting scalability up to 50,000 TPS. With nearly a million monthly active users and a network of 2,000 validators, Solana seems to be keeping its scalability promise, but there is a catch.
Outages
The rapidly growing number of validators, while beneficial for Solana’s decentralization, put the blockchain to the test, which it did not always pass.
In 2022, it faced no less than ten partial or full outages, some lasting many hours, and the Solana clock ran adrift of real-world time on occasions. The blockchain’s founder Anatoly Yakovenko acknowledged the problems and committed to resolving them by working on the bugs internally. With only one major outage in 2023, this effort seems to be bearing fruit.
Solana Foundation also outsourced the creation of a new software client to the development company Jump Crypto, assuming that an independent process would not produce the same bugs. The beta of this alternative client, known as Firedancer, was introduced at the recent Solana's Breakpoint conference in Amsterdam at the beginning of November. The market response was swift, with $SOL gaining over 90% since then.
Tokenomics
While it looks like Solana is about to overcome its technical challenges, another critical one persists—the blockchain's tokenomics. Its average fee of $0.0002, while attractive for users, poses a financial challenge for the whole system. Compared to Ethereum’s daily earnings of $4.7 million, Solana’s $10,000 gain is so tiny that many skeptics do not believe it will ever be economically profitable ((source: Nansen).
In fact, in order to break even on the current 4% inflation, Solana would need a staggering 8.8 billion daily transactions.
$SOL price
Despite these concerns, $SOL continues to be traded with huge premiums.
The driving force behind its recent surge lies primarily in the positive outlook for Solana's future. The more challenges the blockchain has overcome, the more investors' faith has grown in both the Solana Foundation and its developer community.
The blockchain’s commercial development adds more points, with the release of Saga, a smartphone with native crypto custody and web3 integration, as well as a recent partnership with VISA, which chose Solana for USDC stablecoin settlement.
It remains to be seen if Solana can hyper-scale and reach the billions of transactions it needs to prove its business model. Until then, people who believe in this scenario will continue to drive the price up in the long term.
Written by D.Center
