Introduction

In the wake of Alameda Research and FTX's collapse, the Solana ecosystem experienced a significant downturn. The value of $SOL plummeted by 96% from its November 2021 peak of $260 to a low of $9.6 in December 2022. However, this was not the end of Solana's journey. Over the past year, developers have remained steadfast in their commitment to the platform, actively developing and introducing innovative and meticulously designed protocols. As a result, the price of $SOL has shown resilience, rebounding to $71 to date, and the TVL also recovered from Dec 2022 $210 million to $812 million.

This report presents the findings of the factors contributing to Solana's recovery.

Characteristics of Solana

This article does not aim to delve into the technical superiority and innovation of Solana, but it's important to recognize that the success of a public blockchain largely depends on its underlying technical architecture. Therefore, I will briefly describe the technological distinctions of Solana and the advantages they confer.

Solana employs a Proof of History mechanism in contrast with the common Proof of Work and Proof of Stake blockchains. This allows nodes to achieve consensus on the sequence of events without needing to communicate with other nodes. This unique approach enables the Solana network to attain a level of network throughput and timeliness distinct from other blockchains.

Moreover, compared to Ethereum, which charges a fee for every transaction on the chain and burns a portion of it, the Solana network adopts an additional approach. It charges project developers state rent and validators voting fees. This strategy reduces the dependency of the token’s price on transaction frequency while simultaneously increasing the cost of deploying smart contracts. This potentially lowers the prevalence of fraudulent smart contracts on the network.

In summary, Solana has high transaction throughput, low transaction fees, and fast block confirmation times.

Solana, once criticized for the centralization of its network, has made substantial progress in decentralizing its infrastructure. The network has expanded its reach by integrating a larger number of nodes globally, now boasting approximately 3,000 nodes operating in 392 different data centers across 31 countries. This expansion can be evaluated using the Nakamoto Coefficient, a metric assessing the minimum number of independent entities required to potentially shut down a blockchain's operation. This coefficient is often used as an indicator of a blockchain's degree of decentralization, where a higher score signifies greater decentralization. Currently, Solana holds a score of 21 in the Nakamoto Coefficient, surpassing Bitcoin and Ethereum’s 2(Two mining pools control a large amount of the network mining power, Lido and Coinbase combined stake more than 42% of all ETH staked globally. Foundry USA and Antpool control more than 54% of all Bitcoin mining worldwide), Binance's 8, Polygon's 4, and Cosmos's 7, thereby illustrating its significant strides in enhancing decentralization.

Developer Community Status

After the bankruptcy of FTX, the number of developers within the Solana ecosystem has remained high with active development progress. According to Electric Capital's developer report, the number of developers in the Solana ecosystem remained at around 2,540 active developers in March 2023, down from its peak in December 2022, with 2,648 developers. The majority of the developers have stayed in the Solana ecosystem under panic. With the gradual user decline of Alameda-Research-affiliated applications, new high-quality projects like Jito, MarginFi, and Backpack have emerged. The number of developers working on Solana has experienced a decline since March. However, the developer report indicates that this decrease is primarily among part-time developers. The count of full-time developers remains relatively stable, suggesting a sustained core development activity within the Solana ecosystem.

Capital Activities Analysis

When we export the $SOL trading data from CoinGecko over the past year and compare it with the TVL data of the Solana ecosystem from the same period sourced from DeFiLlama, it becomes apparent that the rate of asset outflow has been more gradual than the decline in token price. Particularly noteworthy is that during this year, when FTX and Alameda Research were approved for multiple sales of their staked $SOL assets(often associated with the trading volume spike in the chart), the token price exhibited a stable upward trend. This suggests that the Solana ecosystem is overcoming the negative impact of FTX bankruptcy, and the market holds a positive outlook for the future development of the Solana ecosystem.

Now, let’s take a look at where all those assets go in the Solana ecosystem. The top two protocols in TVL are liquidity staking protocols: Marinade and Jito. Both of them offer liquidity staking services, but their methods of profit optimization are quite different.

Marinade’s staking service provides automatic management for clients’ staking assets from low-performance validators to high-performance validators. As I mentioned in the previous chapter, the validator on Solana needs to pay a voting fee when operated. No matter if you staked 10K $SOL or 1m $SOL, you pay the same voting fee, then a portion of the voting fee gets burned, and the rest will redistributed to the proposer of the block. Therefore, the larger validators are essentially taking a voting fee from smaller validators; that is why validator performance can be vastly different, and pooling together does have a benefit when operated as a validator.

Marinade Liquid Staking Protocol(MLSP) allocates the received $SOL to one or multiple validator nodes. Marinade periodically updates its list of validator nodes, selecting the most optimal candidates based on their performance and reputation. The profits accrued by MLSP are accumulated in a deposit pool, thereby increasing the value of mSOL.

Jito brands itself as the first staking product on Solana to include MEV rewards. Jito Lab developed the Jito-Solana Client, the first third-party validator client on Solana. The architecture of the Jito-Solana Client is designed to capture MEV profits within the Solana network effectively. Where traders submit bids for transaction sequences, they believe to be profitable. A third-party block engine then runs complex simulations to identify the highest-value transaction combinations. These bids are then distributed to validators and token holders (JitoSOL), thus increasing rewards for the token holders.

Each of them holds hundreds of millions in TVL, and it’s hard to tell the exact number since liquidity protocols can be double counted in TVL due to self-capacity. Let’s get back to their impact on Solana's recovery.

In September 2023, FTX was allowed to sell its crypto assets, including $SOL, which alone is said to be worth $1.16 billion. Those $SOL tokens after one month of liquidation, a portion of those tokens were removed from old staking protocols and FTX exchange wallets and gradually sold to new holders who now stake them into the mentioned liquidity staking protocols. When the price of Bitcoin broke through $30,000 on October 23rd, the market was continuously warmed up. Typically, people are reluctant to merely hold assets and wait for appreciation when the market is thriving. This is where those liquidity staking protocols come into play, offering an attractive method for revenue enhancement with approximately 7%-9% APY. This trend has further bolstered the steady rise of the $SOL token.

Applications and On-chain Activities Analysis

Apart from the optimistic expectations for Solana's price, the Solana ecosystem has also maintained a healthy and active state during this period. The daily transaction volume on Solana consistently remains far ahead of any other blockchain, with the main on-chain transactions originating from the following protocols.

(Sol Incinerator is quite an interesting project. It allows users to burn useless NFT and scam tokens in return for a small amount of $SOL, from 0.002SOL to 0.01SOL per NFT or token burned. If you wonder where the $SOL is from when an account on Solana is created. The network will require a small storage fee to open them. By burning a token, the account can closed, and the storage fee can be reclaimed.)

As you can see, the majority of activities on the Solana blockchain predominantly involve trading, paralleling the trends observed in Ethereum and BSC. Unlike Polygon or Base, which are predominantly influenced by one or two applications, Solana’s on-chain activities showcase a more diverse ecosystem; this should not be misconstrued as a lack of successful applications within the Solana network. On the contrary, it highlights the diversity of Solana. Notable projects such as Jito, STEPN, and Drift are significant but do not singularly define the Solana network's utilization.

(The reason why Pyth, as a millisecond-level oracle, has not generated a significant amount of interaction on the Solana blockchain is because its primary data stream is collected and finalized on Pythnet — an AppChain launched by the Pyth team based on the Solana codebase. The Pyth Network chose to build on Solana because the network is able to process thousands of transactions per second with fast finality. Furthermore, Solana’s 400ms slot time allows the Pyth Network price feeds to update faster than most other layers one technology.)

The Solana network boasts speed and affordability advantages. To put this into perspective, almost all public blockchains are faster and cheaper compared to Bitcoin and Ethereum. However, data from Spire.fyi reveals that in the past month, Solana's total transaction count was around 825 million, approximately 24 times that of Ethereum's 34 million. Despite this massive volume, the total Gas consumed was 62,735 $SOL, or about 4.3m USD, averaging around $0.005 per transaction. In contrast, Ethereum's total Gas consumption over a month was 126.7K, equating to about 268.4m USD, with an average cost of $7.89 per transaction, which is 1578 times higher than the transaction fees for Solana.

Market Development and Tech Advancement

In August, e-commerce giant Shopify integrated with Solana Pay as a new payment option to transform commerce. In September, the credit card tycoon Visa also expanded its settlement solution with Solana. In Visa's announcement, Visa stated the reason behind this integration is ”Solana's blockchain network has attributes like high transaction throughput and scalability at low cost that help make it a good candidate for payments and Visa’s stablecoin settlement pilot.” Beyond being embraced by traditional markets and forging partnerships with internet giants, the Solana network has also made commendable progress in technology and applications over the past year.

In April, Solana posted the introduction of State Compression, a new method of storing data that can reduce the cost of minting NFTs by more than 2000 times. The cost of minting 1 million NFTs has dropped from $25,300 to $113 through State Compression technology. In comparison, the costs of Ethereum and Polygon are, respectively, $33.6 million and $32,800. Helium, which migrated to Solana in April, greatly benefited from this technology. During the migration, 900K hotspots on the Helium network were minted as NFTs. Without compression technology, this would have incurred costs exceeding $260,000, but with it, the cost was just  $122 at the time of migration.

In July, Solana's EVM compatibility solution, Neon, was finally launched on the mainnet. Subsequently, Solang, a Solidity smart contract compiler, was introduced. These developments make it easier for developers to write Ethereum applications on the Solana platform.

In October, Firedancer went live on testnet. Firedancer is a new third-party validator client developed by Jump Trading for the Solana blockchain that aims to improve the network’s efficiency and transaction processing capabilities. As the second client for Solana, it aims to reduce the risks associated with a single client and prevent the network from going down. It aims to process more than 1M transactions per second.

FTX/Alameda Research Liquidation

This aspect was briefly mentioned above in the previous section regarding recent capital activities. However, it's important to note that the liquidation process of FTX/Alameda Research is extensive and ongoing. It is certainly prudent to anticipate and be mindful of potential risks associated with the Solana token.

In September 2023, the US Court signed an order permitting FTX to sell its crypto assets. The liquidation plan was limited to $50m per week and may permanently increase the Weekly Limit to $200m upon further Court order. The liquidation process will be supervised by crypto firm Galaxy Digital.

In the Solana Foundation report, Solana Foundation and Solana Labs sold a total of 58m $SOL to Alameda Research &  FTX Trading. Roughly 10% of those tokens are already unlocked, 7.5m will be unlocked in March 2024, 61.85K will be unlocked in May 2024, and the rest will be linearly, monthly unlock till 2028. Apart from the significant unlocking scheduled for next March, the impact of this liquidation on the price of $SOL should be relatively mild.

According to the FTX bankruptcy report in August 2023, FTX still holds $1.162b worth of $SOL, which is roughly 55.76m $SOL. We do not know how Galaxy Digital will facilitate this liquidation, but any impact by liquidating those $SOL tokens without waiting for token unlock will be limited since those tokens are essentially not circulating in the market.

Conclusion

Solana's remarkable resurgence can be attributed to a confluence of factors that synergistically contribute to its renewed vitality. Foremost, the network's unique technical architecture facilitates high transaction throughput and low fees, distinguishing it from other blockchains. Additionally, the resilience and growth of its developer community, despite market downturns, underscore the robust ecosystem Solana nurtures. Capital activities, including the sustained interest of investors. Moreover, technological advancements like the Jito-Solana Client, State Compression, the Neon, and the launch of Firedancer have significantly enhanced Solana's efficiency and scalability. With the impact of FTX and Alameda's bankruptcy gradually diminishing. Collectively, these factors not only demonstrate Solana's ability to innovate and adapt in the dynamic blockchain landscape but also underscore the increasing trust and interest from both developers and investors, positioning Solana as a leading contender in the blockchain space.

Coresky is an Asset-packaged NFT launchpad and trading platform. The Coresky Launchpad converts primary market currency rights into Asset-packaged NFTs. Coresky leverages Launchpad's economic utility to drive user transactions while also addressing both primary and secondary market liquidity for crypto rights and the NFT trading market. 

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