Due to negative events happening on Solana, some people have started to place their trust in other Layer 1 platforms and move their investment from Solana. So, is the so-called “Ethereum killer” still worth our investment? Let’s have a reassessment with Builder.news.

The events that cause people to lose faith in Solana

Solana outage

Since January 2022, incidents involving Solana outages and decreased service have been recorded on a public page. According to Solana's own data, as of June 1, 2022, there have been 6 major downtimes and 20 periods of poor performance.

The durable nonce transactions feature contained a problem that was the cause of the most recent Solana halt. Two validator nodes produced conflicting results for the same block, preventing the network from moving forward.

To enable the network to restart, the Solana engineers created a fresh version and turned off the durable nonce transactions features. The network was down for almost 4 hours in total. In the past, on September 14, 2021, Solana was unavailable for 17 hours. Bots producing transactions when a protocol was being launched was what caused the network to stall. The network's memory was overloaded by the bots, which prevented the validators from coming to a consensus. This can be compared to a DDoS attack. The outage leads to Solana investors/users' criticisms:

First off, Solana claims to be decentralized, however as demonstrated by the outages, the Solana blockchain is centralized. This entity has the ability to suspend the chain, reorganize and resolve any errors, transmit fresh versions to validators, and restart.

Secondly, the number of validators is really low. According to Solana, they have over 1,000 unique validators. However, critics of Solana point out that the chain actually has four primary validators and several insignificant validators. Furthermore, some people even believe that with centralized power, the Solana entity can launch an attack on the network for self-interest.

Solend DAO’s intention of controlling a whale’s wallet

Solend DAO case is another big fud against Solana this year. However, it is a bit more complicated this time.

Solend faced bank-run

Solend is a decentralized lending protocol on Solana. It all started when Solend Labs published their first governance proposal, named SLND1. The proposal alerted the community that a single client had amassed a very significant margin position, putting the Solend protocol and its users at risk.

The proposal further stated that an unidentified user has submitted $5.7m SOL tokens as security for a $108m loan in USDT and USDC stablecoins. According to the proposal, these positions represent 95 percent of all SOL deposited and 88 percent of all USDC borrowed from their main asset pool - a whopping 25 percent of the platform's Total Value Locked (TVL). Calculating the protocol's metrics, the proposal predicted that if the price of SOL fell to $22.30, 20% of the user's 'borrows,' or around $21m in SOL, would be liquidated. As indicated in the proposal, a liquidation of this magnitude would be difficult to absorb by the market, and SOL may see large price reductions.

Concerns about the risk of this single big loan failing have driven many additional users to withdraw their holdings, bringing the "utilization" of USDC and USDT to 100%. This departure has left nothing for the remaining depositors to withdraw. Worse, holdings that utilized USDT or USDC as collateral are no longer liquidable. A partial bank run had started.

Decentralized risks but centralized benefits?

The proposal also listed the 'decentralized' lenders' futile efforts to get in touch with the 'whale' since June 13.

The automated interest rate mechanism used by the DAO has driven the USDC and USDT APY rates to their highest level since the liquidity problem started. The DAO cannot react to the negative USDC and USDT dynamics through any present means unless the whale agrees to cooperate or Solend can locate a third party to supply it with more stablecoins.

The governance proposal afterward provided two options to deal with the developing crisis:

To de-risk the current whale's margin position, a new regulation for large borrowers should be retroactively implemented.
Give Solend Labs the right to seize the account and liquidate it forcibly according to a plan in collaboration with third parties.

This vote was attended by less than 1% of the overall population of token holders, and it passed after a single huge account contributed more than 98% of the "Yay" (yes) votes.

Solend vote result

SLND1 vote result. Source: Solend DAO.

This "democracy" vote, secured by a single voter, to seize the assets of a different single user, which were to be handed over to a still-anonymous development team, raised concerns with Solend's community, generated SOL headlines all weekend, and seriously questioned the validity and viability of achieving DeFi's primary goal: true decentralization.

The final settlement

After being heavily criticized by the media, the team launched the SLND2 proposal, which would have extended the voting period for future proposals to 24 hours and nullified the earlier vote on emergency powers. It's interesting to note that the million-vote majority that approved the initial emergency powers proposal also supported this proposal.

The prices of SOL reversed their sharp falls during the course of the following day. Solend now had operating room and a safety net for the potentially catastrophic margin call. Lending limits were thus suggested as yet another proposal by the team. Solend DAO has suggested capping the amount that any user can borrow from the protocol and lowering the highest liquidation quantity for margin-called accounts from 20% of holdings to 1%.

After being passed (approved by two powerful accounts), proposal SLND3 calls for rolling, per-account liquidations of positions that exceed the proposed $50 million cap on individual accounts. The Solend DAO team noted that there was no method for this new policy to handle individual users who split their positions across numerous accounts to avoid the new policy but stated that they could solve this issue in the future.

Solana wallet exploits

Over 8,000 Solana wallets have had $SOL and $USDC worth $6,000,000 stolen from them.

In one of the strangest and most enigmatic thefts in recent memory, the hacker used private keys to steal user monies.

It all began when certain users on Solana began to observe some odd outflows from Phantom wallets. Users' wallets were being repeatedly reported to have been emptied on Twitter and Discord. The attacker was taking both $SOL and $USDC tokens from people's Slope and Phantom wallets, according to developer and auditor foobar.

Since their private keys were stolen, the only way for owners to protect their assets was to move their tokens to another wallet or centralized exchange. Later, Solana confirmed that Slope and Phantom wallets were being exploited.

However, as soon as RPC nodes started pinging as "offline," the situation quickly got worse. This signaled a problem with the Solana network, which spread alarm on Twitter. It was hypothesized that developers were deliberately launching DDoS attacks against the nodes to slow down the hackers. This backfired since it increased commotion.

After investigating the problem, Solana announced that the cause of this exploit was not a bug in Solana’s code but the software used by several wallets.

Otter Sec later confirmed separately that Slope's mobile app sends mnemonics to their centralized Sentry server using TLS. These mnemonics are then saved in plaintext, which means that anyone with access to Sentry can view user private keys.

To sum up, this attack was not Solana blockchain’s false. However, the media effect has caused people with little knowledge about this event to have a prejudice against Solana.

Solana Reassessment

Update version 1.10

Blockchain pausing must be extremely stressful, but the developers continue to write programming and have found techniques to enhance reliability. Solana's 1.10 has considerably improved performance.

To alleviate network congestion, the v1.10 upgrade made several stability and performance enhancements. The series introduced QUIC and QoS packets based on stake weight and fee prioritization:

The v1.10 series is still being released slowly, and the next release series, v1.11, will concentrate on making QUIC the default and optimizing the other improvements contained in the v1.10 series.

The effect on performance can be seen here. TPS is constantly above 3,500, and no chain issues have occurred after the change.

Solana TPS

Solana TPS. Source: Solscan

The long-term vision of Solana is to become a single-state machine capable of synchronizing 10gbps of throughput as close to the speed of light as physics permits.

So far, Solana has had ten main releases since its inception, and each one has been better than the one before it. Therefore, we can trust in a bright future for Solana’s network consistency.

Adoption

Solana is the only non-EVM chain that has received significant adoption. When you consider the EVM's network effects, that's quite an accomplishment.

In 2022, daily transactions have been continuously increasing. The voting transactions utilized for consensus are not included in this graphic.

Solana non-vote transactions

Solana non-vote transactions. Source: Solscan

Of course, the number isn't a fair comparison since Solana transactions are so cheap, but outside of the recent increase, daily Ethereum transactions were moving lower in 2022. This is also due to the maturation of rollups, with some of the transaction count shifting to L2s. Arbitrum has been steadily rising during the last nine months.

ETH transactions

Arbitrum Daily Transactions

Ethereum and Arbitrum Daily Transactions. Source: Ethscan and Arbiscan.

Because Solana is not an EVM, it has had a far more difficult time attracting funding from other chains. It has currently taken significant damage in TVL, as has every other chain, owing mostly to the significant drop in the price of SOL.

Ethereum daily revenue

Solana daily revenue

Solana versus Ethereum daily revenue. Souce: tokenterminal.

The daily total revenue of Solana is just around $40,000 while that of Ethereum is around $4m which is 100x greater. You may wonder why the revenue of a network with so many transactions is so low. Well, the reason lies in Solana’s fee. Solana’s standard fee is 0.00005 SOL (vanilla rate).

So far, the SOL price has been established by a future prediction that Solana will gain widespread usage and the low fees will add up to something important.

The establishment of fee markets is a significant development for Solana, and it is expected that fees will grow. A user can add an optional charge to their transaction to have it prioritized, with 50% of the cost going to the validator and 50% being burnt.

Rather than establishing a global fee market in which transactions compete internationally to be included in the next block, as Ethereum does, Solana will establish a local fee market, resulting in transaction fees increasing primarily for local states.

A contentious liquidation, for example, in which bots outbid each other with greater fees, should not materially affect fees for other transactions such as swaps or NFT purchases.

This is an outstanding new feature on Solana. In long run, it will improve Solana adoption significantly.

Decentralization

Most individuals believe Solana fails in this area. Expensive gear and the quantity of SOL staked create a significant hurdle for anyone wishing to become a validator. However, the validator number has been expanding extremely steadily. Solana presently has 1,875 active validators. Solana now has the most active validators of any Proof of Stake blockchain. (Ethereum has 8,417 nodes and 409,000 validators, but some node operators will run several validators, hence the number of node operators is unknown...)

Solana Validator Count

Solana Validator Count Over Time. Source: Ultimate

When we check at the locations of Solana's validators using validators.app, we discover that about half are in the United States and Germany. This is a problem, and it is not specific to Solana. When we look at the locations of Ethereum's nodes (not all of which are validators), we see that the US has a 46% share, with Germany a distant second with about 12%. Avalanche, the only other network with over 1,000 validators, has over 75% of its validators in the United States and Germany.

However, the distribution of staked tokens among those validators is just as important in determining the decentralization of a network as the total number of validators. Even though a network may have hundreds of validators, the blockchain is controlled by a single validator if 99.9% of tokens are staked with them.

Solana, with a Nakamoto coefficient of 27, has a better stake distribution between its validators than other networks like Cosmos or NEAR. Due to its staking system, which demands an equal distribution of stake among validators, Polkadot has three times the Nakamoto coefficient of Solana while having just 15% as many validators.

To assist validators in becoming profitable, the Solana Foundation established the delegation program, in which validators receive 80% of the Foundation's treasury (100 million SOL). Moreover, in collaboration with data center providers Edgevana, Equinix, Lumen, and Stackpath, the Solana Foundation has also developed a server rental service to reduce the cost to become a validator. All of these actions are to make Solana more and more decentralized.

NFT

Solana truly shines in this category, delivering some really amazing numbers.

Despite OpenSea adding support for SOL NFTs, Magic Eden has barely lost any market share to this competitor. It demonstrates how the Solana NFT market has been able to compete with Ethereum, at least in terms of Solana NFT volume and daily unique purchasers. However, the most valuable NFTs are still available on Ethereum.

Magic Eden vs Opensea Solana NFT daily volume

Magic Eden vs Opensea Solana NFT daily volume. Source: Dune Analytics

Numerous factors contributed to Solana's NFT expansion, including:

Metaplex's ongoing success.
Serum debuted its NFT Ecosystem Series in Q2. The Burnt Finance Ignition Launchpad's launch and mint functionalities are used by the Serum NFT Ecosystem, a group of Solana-based NFT collections.
Magic Eden followed up on its $27m Series A funding round in March with a $130 million Series B funding round in June as it continued to challenge OpenSea's market supremacy.

June witnessed daily minted NFTs on Solana reaching their peak and July has been strong too. For more information, read this article.

DeFi

In the past, Orca used to be the biggest DEX on Solana. This is partly contributed by STEPN users. However, things changed recently.

On June 10, STEPN announced the introduction of their own DEX, DOOAR, to increase liquidity for their GST and GMT tokens while maintaining complete control over the fee structure. Orca's volume and daily users have decreased because STEPN altered their built-in swap capability to use their own DEX rather than Orca. DOOAR quickly became the largest DEX on Solana.

Solana Dex daily active users

Solana Dex daily active users

Image: Solana Dex daily active users. Source: Dune Analytics.

As we can see, STEPN continues to dominate everyday DEX usage since people must likely run marathons every day in order to recoup their investment.

From the chart, if we don’t count STEPN users, Solana DEX has around 34,000 daily users. This is a solid number compared to ~29,000 of Polygon and ~32,000 of Ethereum, especially since Solana DeFi has had significant hurdles and problems in the last six months. From mainnet outages to Oracle failures to a DeFi platform attempting to seize control of a major whale's account in order to avoid a bad debt situation, there has been a lot going on.

ETH and MATIC DEX daily users

ETH and MATIC DEX daily users. Source: Dune analytics

Conclusion

Solana's mindset of moving quickly and occasionally breaking things contrasts with Ethereum's credo of slow and steady wins the race. In general, we can agree that "decentralization is important," which is a key concept of Ethereum that will never be compromised. But, as we all know, this approach has flaws that have hampered ordinary users and the chain's mass acceptance.

Everything on Solana is geared toward making things easier for ordinary users, such as your grandmother. While Ethereum developers may not have prioritized concentrating on the average user. More users equal mass adoption. We are not blaming Ethereum, but it would be imprudent not to acknowledge what Solana is doing well.

Solana still has a long way to go when it comes to scaling, but that is true of every other Layer 1s. Solana's goal is to make it better with each update. With the level of activity on their chain, they are attempting to solve challenges that no other L1 is currently experiencing. Solana can acquire the technology that they require in order to continue scaling. But who knows? So yet, no blockchain has effectively scaled, which is why so many people are gambling on a few Layer 1s.

Is Solana capable of competing with Ethereum? There is plenty of evidence that it can. Solana and Ethereum can both exist and thrive in the future. Why not? All in all, the macroeconomic environment is still challenging, but Solana has kept much of the momentum it developed during the previous bull run, and there is a good chance that it will perform well if market circumstances improve.

Written by Blue Pine

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Solana Reassessment: A Fair Breakdown