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FEB 28, 2024

Solana Blockchain : The Home Of Decentralized Finance

by Fbsn..eYCt, Michaelo

A Deep Dive Into Solana's De-fi Ecosystem
Decentralized finance otherwise called " De-Fi " can be rightly said to have found a comfortable home in the Solana blockchain ecosystem.
This can be clearly seen as developers are constantly trooping into Solana's De-fi ecosystem to innovate, explore and nurture their ideas.
There have been a massive developer growth of over 80% from December 2022 to this moment with a current developer count of over 2,500 active developers
This is simply because the Solana blockchain architecture and its features provide ; a comfortable playground for developers, a perfect dwelling place for users and a profitable marketplace for investors
The result is what we are clearly seeing in the rapid increase of ;
  • De-fi Projects
  • Daily Active Users
  • Monthly Active Developers
  • Valuable Investors
  • Total Value Locked (TVL) in protocols
  • 24hrs DEX volumes
and every other metric that could be used to measure the progress and performance of Solana De-fi ecosystem
I'm gonna discuss extensively about what makes all these possible on Solana and why we should pay close attention to this De-fi goldmine.
We are also going to look at why and how all these matter to De-fi on Solana
But before that ,let's quickly look at how it all started

Solana De-fi 1.0

After Ethereum's exorbitant gas fees became a huge problem, innovators knew it was time to build something that could efficiently scale a huge transaction with the lowest possible transaction fee while also having the fastest throughput.
Anatoly Aeyakovenko took the initiative with a group of developers to develop a blockchain that has the capacity to ;
  • Scale 50,000 transactions per second (TPS)
  • Attain a 400 millisecond block time
  • Attain a near-instant transaction finality
  • Scale over $100k transaction volume with a gas fee of $0.00025
  • Attain a very low latency
......among other important features
It didn't take long for developers to discover these rare but incredible features which made them to start porting to Solana to innovate and explore their ideas. Ethereum users also discovered this and abandoned the ultra-high fees on Ethereum for Solana's ultra-low fees
This gave rise to the development of lots of decentralized applications (dApps) like ,Raydium, Birdeye, Orca DEX, Atlas DEX, SolDEX, Jupiter Exchange and a few other protocols on the Solana blockchain
These dApps came together to constitute the De-fi 1.0 era of Solana.
Blockchain analysts and De-fi researchers called Solana " the Eth Killer " in amazement 
But little did they know that we were sitting on what is to become one of the biggest De-fi ecosystems

Solana De-fi 2.0

After the FTX setback and other technical vulnerabilities (which we'll discuss later in this article), Anatoly went back to the drawing board with his team of dedicated developers to re-program and secure the Solana network with multiple validator clients like MEV JitoSol, Firedancer and a few others
This resurrected the Solana network once again but this time, better than before. The re-structuring gave the network a more decentralized edge while making De-fi more viable and efficient
More developers trooped in and before we knew it, more unique dApps were built 
Some Solana De-fi Activities And Their Unique dApps
  • Lending and borrowing protocols : Solana ecosystem have taken lending and borrowing of assets to a new high as it is now seen as a profitable De-fi activity. Users tend to earn passive income in APY while also earning points for possible rewards. This De-fi activity is championed by dApps like Marginfi, Solend, Kamino Finance etc
  • Native & Liquid staking protocols : Staking is actually a very profitable De-fi activity in Solana as users are given the chance to participate in governance while earning rewards. DApps like BlazeSol, JitoSol and Marinade finance are leading this operation
  • Interoperable DEXs and Bridges: Bridges and cross-chain protocols are now present in Solana as users can bridge assets from Solana to other EVM chains using Mayan Swap
  • NFT marketplaces : NFTs which have always been led by marketplaces like Tensor, Magic Eden on Solana have now been taken to another level through compressed NFTs pioneered by Drip protocol
  • Liquidity Provision : Providing liquidity just got better and profitable with Meteora's DLMM pools as impermanent loss is reduced to the barest minimum for liquidity providers
  • Some unique decentralized wallets on Solana are Phantom, Solflare etc
  • Social-fi on Solana is championed by Access Protocol  where creators are rewarded for creating contents and writing articles (just like I'm doing)
All these dApps mentioned above, constitute the De-fi 2.0 era of Solana 
But then, what are the features of Solana that made it very conducive for developers and enhanced its De-fi growth?

Solana's Unique Features

Solana was built with a very unique tech stack and blockchain architecture that combines the use of many efficient features which help it scale transactions in a very profitable way 
 These features are ;
  • High throughput i.e high transaction speed
  • 50,000 Transactions per second (TPS)
  • Approximately 400ms block time
  • Incredibly low transaction fees
  • Near-instant transaction finality
  • Hybrid consensus model (Delegated PoS & Proof-of-History)
  • Byzantine Fault Tolerance (BFT) mechanism for security
and all other subtle features worthy of note
All these features combine to make Solana a very cost efficient blockchain for De-fi transactions while enhancing the user experience of its De-fi applications
But one might ask how these features help improve De-fi on Solana?
I'll briefly explain these features, their application and how they improve Solana's De-fi ecosystem
1. Hybrid Consensus Model
  • The Solana blockchain uses a unique combination of two consensus mechanisms to secure its network. It combines the consensus models of Proof-of-History (PoH) and Proof-of-Stake (PoS) to give Solana a high throughput ability and security at the same time
  • The PoH mechanism plays a crucial role in the consensus combination by leveraging hashed timestamps (clock) to verify the time which transactions occur after which it records and encodes the passage of time into the ledger or block
  • The recorded passage of time is relied upon by every node on the blockchain for better synchronization and speedy processing of transaction. It is the core reason for Solana's high throughput
  • This hybrid consensus model paves the way for high speed scaling of Solana De-fi transactions thereby enhancing the user experience of De-fi apps and protocols
2. High Throughput 
  • The Solana blockchain scales transactions at a very high speed. This is due to ; its ability to process transactions in parallel and most importantly, the use of its PoH consensus mechanism
  • This high throughput functionality improves the performance of Solana De-fi apps by efficiently executing De-fi transactions at a very fast rate on the network.
3. 50,000 Transactions per second (TPS)
  • The Solana network has been proven to be able to scale a very high number of transactions in one second.
  • Although it was theoretically capped at a maximum of 710,000 TPS and at least 50,000TPS minimum, it has been practically proven on testnet to be able to scale 24,000TPS and approximately 4000TPS on mainnet
<b>Live TPS of Solana network</b>. <i>Source : explorer.solana.com</i>
<b>Live TPS of Solana network</b>. <i>Source : explorer.solana.com</i>
  • This functionality makes the user experience of Solana De-fi applications smooth and seamless while reducing network congestions that may occur due to multiple De-fi transactions
4. 400ms Block Time
  • Having a 400ms block time means that the Solana blockchain creates blocks very fast. This is as a result of its PoH consensus model as validators agree on the transaction order using the recorded passage of time
  • This goes to improve the overall speed of the network while enhancing the performance of De-fi applications as these apps tend to depend on the speed of De-fi transactions 
5. Near-Instant Finality
  • Transactions on Solana network are confirmed almost instantly due to its near-instant finality.
  • This makes sure that the Solana network is not congested with pending De-fi transactions while preventing the lagging of De-fi apps
6. Incredibly Low Transaction Fees
  • The ability to process high volume transactions with ultra-low fees ($0.00025) is the biggest flex of the Solana De-fi ecosystem. This low fees can be mostly  attributed to Solana's network always being less-congested and free of spams 
  • This ultra-low fees is the reason for the increase in daily transaction volume on DEXs as users are not afraid to push transactions unlike on Ethereum blockchain. This plays a crucial role in the growth of De-fi on Solana as it makes the ecosystem conducive for developers, users and investors alike
7. Byzantine Fault Tolerance BFT
  • This is the security mechanism used in the Solana network that keeps the network secure by preventing malicious actors(validators) from compromising the network
  • This improves the decentralization of the network by providing security and enhances the development of Solana De-fi ecosystem as people tend to be more confident in a secure network
We can now see how all these features contribute efficiently to improve the De-fi ecosystem of Solana. They do this in a unique way that sets Solana apart from other blockchain counterparts like Ethereum, Bitcoin, Binance Smartchain and a few others
Most of these unique features make some De-fi innovations, transactions and applications only achievable on Solana. That is to say that some De-fi innovations are best suited for the Solana network.
But what are those innovations that are only possible on Solana?

Only Possible On Solana (OPOS) Innovations & Applications

Due to Solana's unique tech stack and blockchain architecture, some innovations and applications are " exclusively " possible only on Solana. This is not me trying to sound like a gatekeeper, I have proof.
This claim can be evidently seen in the groundbreaking innovations which the Solana blockchain/De-fi ecosystem have been achieving in the past years.
This is to state without reservation that " some " of these innovations or applications cannot be replicated by other blockchains without directly or indirectly integrating Solana.
These OPOS innovations are ;
Proof-of-History (PoH) Consensus Mechanism
  • This mechanism was individually invented by Anatoly Aeyakovenko (Solana's Co-founder) for the sole purpose of Solana development. As we have seen, this groundbreaking innovation runs deep to the core of every Solana network's De-fi operation/transaction. No other blockchain uses this exact model
  • Some blockchains like Avalanche use a not-so similar model that employs timestamps and avalanche-voting to resolve their time-related issues
  • Other networks like Chia use Verifiable Delay Functions (VDFs) to cater for its transaction time issues
NB : These other models stated above are much below standard in functionality and efficiency to compare with PoH and can be termed to be experiments
On-Chain Central Limit Order Books (CLOBs)
  • This innovation, which allows users to place and execute trades directly on the blockchain using order books (just like on CEXs), is only possible on Solana.
  • This is due to its ultra-low fees, fast transaction speed and low latency abilities which are functionalities of Solana's high throughput and near-instant finality features
Climate-Conscious Tech
  • Solana's tech is definitely one of the most(if not only) climate conscious blockchain network as its technological architecture ensures that developers are building on a blockchain that prioritizes energy conservation and efficiency
  • Other blockchains like Bitcoin are the direct opposite as they require lots of energy consumption and dissipation for their operation
Other innovations (like NFT compression, Ultra-Fast Scalability, Quick Transaction Settlement etc) and applications (like Hivemapper, Helium Mobile, Dialect, Drip etc)  are all best suited for the Solana De-fi network given its unique features and abilities

The Imperfections Of The Solana De-fi Ecosystem

Despite the amazing features and the solid tech of the Solana blockchain, it cannot be exonerated from mere vulnerabilities that plague its De-fi ecosystem.
Just like nothing on earth is 100% pure, that is the way Solana is not 100% perfect as an ideal blockchain.
What then are the imperfections of the Solana blockchain?
1. Centralization
An Ideal blockchain is supposed to be fully decentralized i.e 100% decentralization. But that is not the case in the Solana De-fi ecosystem as we have found lots of loopholes in its decentralization leading to the centralization of some key areas of the network
Its Proof-of-Stake consensus mechanism was meant to decentralize and secure the network but we have seen some iota of centralization as some validators have huge stakes which give them unnecessary control of the network
2. Network Outages & DDoS Attacks
Machines need to undergo scheduled downtimes so as to perform efficiently but not blockchains. An Ideal blockchain is one that never encounters a downtime or network outage. 
The Solana blockchain in the past, have experienced unscheduled downtimes or better said " abrupt network outages " which always throw the whole Solana De-fi ecosystem into a frenzy as transactions hang or remain pending as a result of new blocks not being produced
The network has also encountered a high profile distributed denial-of-service (DDoS) attack in the past which exposed the vulnerability of Solana's security system
 All these have always been a concern for investors and users alike and also in a way, turned into a subject for taunts and caricature for neighboring blockchain counterparts like Ethereum 
3. Regulatory Uncertainty 
Although this might look subtle but it still stands in the way as the U.S SEC listed SOL as a security which resulted in it being delisted from few centralized exchanges.
We have seen little issues like this tear down a whole thriving ecosystem like the case of XRP (Ripple) and the Solana ecosystem should not take it lightly
  • Regulatory clarity is something of a concern for global investors and users alike and should be seen as a serious challenge as Solana is now going mainstream with real world adoption and application
4. Liquidity Instability In MMs
While the SOL token keeps pumping, what we often miss is that Market Makers are finding it hard to maintain a stable liquidity as levels keep going down.
This is very subtle but pressing issue as this goes on to impact on De-fi activities like trading on DEXs and AMMs
This image below can give you a hint of the challenge
<i>Source : Kaiko</i>
<i>Source : Kaiko</i>
Other Challenges or imperfections of the Solana De-fi ecosystem could be ;
  • The impending FTX Liquidation, 
  • Duplicate transactions, 
  • High network congestion
  • High compute transactions
  • Recent forking incidents
among a few others. 

The Way Forward For Solana De-fi Ecosystem

Solana in my opinion, has the brightest future among all other blockchains. I state this because Solana seem to have a clear path and a well defined strategy towards achieving its goals and milestones
The imperfections stated above could be resolved with strategic employment of ideas.
How?
  • Centralization Issues : This could be resolved by constantly increasing the number of nodes while incentivizing and encouraging validators to maintain decentralization . Educating the community about decentralization could also help in their staking decisions
  • Network Outage Issues : Encouraging more participants to run nodes while increasing incentives could help resolve this and also secure the network
  • Liquidity Issues : Incentivizing liquidity pool creation using the solidly model could go a long way in solving this while also encouraging more LST projects
  • Regulatory Issues : Requesting for regulatory clarity from the SEC while being disposed for collaboration will go a long way to solve this
If these and many other ideas are carefully employed, Solana's issues would surely be deeply resolved

Solana De-fi Ecosystem: The Perfect Hub For Airdrops

Solana could be said to be that De-fi ecosystem that never stops giving back to its community in the form airdrops and token giveaways
This started from the SOL token itself as I personally got some fraction of it for free from an official token faucet back in 2020.
Solana De-fi projects ever since then, have followed the same path in distributing airdrops to its loyal users 
The Solana De-fi 2.0 projects introduced the point system which has now become the mode of operation. This point strategy has effectively encouraged community engagement and participation in De-fi activities while fostering competition among community members
Airdrops which was initially used as a marketing tool for crypto projects have now become a tool for adoption in Solana De-fi ecosystem using points to foster engagement and participation
Due to Solana user-friendly decentralized apps and low gas fees, newbies have no problem interacting with the De-fi ecosystem as they anticipate to get rewarded for it through the points they acquire.

Conclusion

  With multiple validator clients (like Firedancer) on the way and hardware compatible developments being incorporated, I have no doubt that Solana and its De-fi ecosystem are on the right path to becoming that ideal blockchain that is highly efficient and performant  
Sources : solana.com

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