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Solana (SOL) – What is Solana, and How Does It Work?

Updated on :  

08 min read.

The fast-paced cryptocurrency space has seen numerous projects come and go. Amidst all that, it has also seen several players making it big. One such crypto is Solana. It emerged as one of the hottest projects last year following NFT (non-fungible token) hype and monstrous growth. Speed, capability and scalability are some of the key selling points of this project, making crypto enthusiasts roll their eyes towards it.

But there’s more to this crypto platform. So let’s take a closer look.

What is Solana?

Solana is a decentralised blockchain platform created in 2017. It supports smart contracts that include NFTs and an array of DApps (decentralised applications). The native cryptocurrency of Solana is SOL, which is used for staking and paying transaction fees. Also, it gives a right to vote to holders in future upgrades. 

Key Technologies – Proof of History

Solana runs on a hybrid protocol of PoS (proof-of-stake) and PoH (proof-of-history). Proof of history is a method to prove that transactions are found by the right leader and in the correct sequence.

The blockchain of Solana is broken into time slots or periods where a validator ingests transactions and generates a block. Leaders are chosen ahead of every slot in this system to save time. 

A validator or node is chosen to be a slot leader via the PoS mechanism. This is done depending on the quantity of SOL held. Every validator is responsible for continuing a tally or count of the passage of time, known as a PoH sequence, and the next block of transactions for the slot they have been selected for.

All validators can see the tally of the passage of time. Also, slot leaders are chosen ahead of time. This allows everyone to know when a leader must begin.

The PoH system increases throughput and reduces latency. This is because slot leaders need not wait to fill a complete block and send it at once. Instead, they can stream transactions to the remaining validators in real-time. 

SOL token

SOL, the native and utility token of Solana, offers a means of transferring value and blockchain security via staking. It is an inflationary token launched in March 2020 amid the beta testnet release. SOL is designed with a decreasing supply and an annual inflation rate of 1.5%.

SOL was an exceptional performer last year. As of September 2021, it even became the seventh largest crypto in terms of total market capitalisation.

Solana staking

Staking refers to the procedure through which an SOL token holder assigns a part or all of their tokens to validators or a specific validator. This helps increase the voting weight of those validators.

Assigning tokens to add to the stake-weight of a validator is referred to as “delegating” the tokens. By staking tokens, the concerned token holder shows a degree of trust in the validator they opt to delegate to.

The more stake delegated to several different validators across the network, the more secure and safe the network becomes for all its users.

Also, token holders who opt to stake their tokens and help secure the network become eligible to receive staking rewards after delegating the tokens to one or more validators.

Use cases of Solana

  • Decentralised Applications (DApps)
  • Non-Fungible Tokens (NFTs)
  • NFT marketplaces
  • An investment opportunity for passive income

Main competitors

  • Ethereum
  • Polkadot
  • Binance (BSC)
  • NEAR Protocol
  • Cardano

Major Solana projects

  • Orca
  • Mango Markets
  • Oxygen
  • Phantom Wallet
  • Star Atlas
  • Synthetify
  • Raydium
  • Serum
  • Bonfida

A bit about Solana NFTs

Solana NFTs are one of the vital things to hit Web3 in a while.

One of the reasons for Solana’s booming popularity last year was because of the monstrous growth of NFTs on its blockchain. People preferred it over Ethereum because it was cheaper and much faster – users were able to mint NFTs at a low cost. Also, there were several projects which took off. 

For instance, the Degenerate Ape Academy project had NFTs, which sold for more than $1 million at that time. 

Given below are some of the top Solana NFT projects:

  • Meerkat Millionaire Country Club
  • Frakt
  • Chainers
  • Thug Birdz
  • Cosmic Condos
  • Portals
  • Solsteads

Phantom Wallet

Phantom Wallet is a digital wallet developed for NFTs and DeFi. This wallet provides a browser extension which can be used to access DApps and manage digital assets on the Solana blockchain. It functions by generating and managing private keys on behalf of its users, hence enabling them to sign transactions and store funds.

Advantages of Solana

Listed below are the advantages of Solana:

  • This crypto boasts a theoretical throughput of 65,000 transactions per second with $0.00025 as the average cost per transaction. 
  • Solana ensures composability between projects – users need not deal with multiple layer-2 systems or shards.
  • By leveraging the PoH and other noteworthy innovations, Solana has achieved a high degree of scalability.

Solana: Downsides

Besides the advantages, Solana has demerits like any other cryptocurrency project. These include:

  • Solana blockchain is vulnerable to centralisation as there aren’t many blockchain validators.
  • Even though it is possible for anyone on the network to become a Solana validator, the process for that isn’t easy. This is because of the requirement of several computing resources.
  • The protocol still presents itself as a beta version of the mainnet. That does not negate the possible existence of errors and bugs.

Future

Recently, a Bank of America analyst stated that Solana bears the capacity to take away market share from Ethereum because of its differentiated design. Also, there are many exciting developments which are coming online. From an investment perspective, it is impossible to state with total certainty as to how it will perform, given the volatility. However, Solana’s ouster seems unlikely. 

Notably, one of the world’s most popular music festivals, Coachella, announced an NFT collection built using Solana.

Solana is a high-performance blockchain which has the backing of some of the industry’s big names. It will also see further growth despite the challenges. Considering all this, crypto enthusiasts must keep in mind the above-mentioned aspects related to Solana.

Frequently Asked Questions

Is it possible to make passive income with Solana?

Yes, it is possible to make passive income with Solana. As Solana uses PoS for validating transactions, it provides an opportunity to stake crypto and earn rewards.

Is it possible to create crypto tokens on Solana?

Yes, it is possible to create multiple types of fungible and non-fungible tokens on Solana using the Solana Program Library (SPL).

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