Digital Assets Pull Back
This week we are going to explore Solana. Solana is a smart contract platform that is comparable to Ethereum.
Solana was first proposed by Anatoly Yakovenko in 2017. Yakovenko and his team received funding in 2018 as part of Solana Labs and have carried out several private and public capital raises since. The project itself is guided by the Solana Labs and supported by the Solana Foundation, a Swiss-based non-profit.
In the past year, Solana has seen a massive rise in popularity with both users and developers. This has been reflected in its price, which has increased by over 13 000% this year alone. The reason it has become so popular is most likely due to the current limitations users are experiencing on Ethereum. We have seen this trend across many other layer 1 platforms as they vie for market share of the smart contract market. This is due to blockchain design limitations, called the Blockchain Trilemma.
The Blockchain Trilemma
We have published several articles about the Blockchain Trilemma and what it entails for blockchains when developers are designing them. We suggest you give the following a read to understand why the problem exists and how developers have gone about trying to solve it:
However, it is worth giving a small recap and showing exactly where Solana fits in within the Blockchain Trilemma and the design choices they have made to create the blockchain they have.
Solana is a scalable and secure blockchain. Therefore, it can process a very high number of transactions per second (around 50 000) with a high degree of security. However, it has sacrificed an element of decentralisation to achieve this.
At Etherbridge, we believe decentralisation comes down to a general ability to participate in the network. When assessing the current decentralisation of a network we analyse the number of nodes that make up the network and how distributed these nodes are. When assessing a networks ability to be decentralised in future we need to analyse the current and future cost of participation whether that be as a node storing a copy of the ledger or as a validator who wishes to participate in securing the network. The current lens through which we think about decentralisation tells us Solana is not currently decentralised and won’t be decentralised in the future.
In the article Smart Contract Platforms: Part One, we highlighted the resource requirements of running a full validator node on Solana; what you will see is that it currently has one of the highest resource requirements of all smart contract platforms. This, as explained, limits the number of people who can actually run a validator node, leading to a lack of decentralisation. This isn't necessarily bad as it opens up use cases that weren't previously possible on slower chains and can actually be complementary to the ecosystem as a whole.
Regardless of our views on decentralisation, it’s obvious that Solana has grabbed the attention of many in the industry from investors to developers to users. This weekends article will be dedicated to outlining Solana’s core components and design.
Solana was designed around eight core components. These separate components plus a few others work together and enable Solana to provide the service it does.
1) Proof of History
Time. Time is one of the most difficult problems that exist within a distributed system. How do distributed systems, whether centralised or decentralised, agree on a time and sequence in which things happened. Distributed systems run by centralised companies like Google's Spanner rely on atomic clocks between data centres. Yet, this becomes harder in adversarial systems like blockchains. Nodes in a blockchain network simply cannot trust any external time source or even a timestamped message. But what if they could?
Instead of trusting a timestamp, what happens if you could somehow prove a message was sent or a transaction occurred at some point before or after an event? With a Proof of History system, you have the ability to create a historical record that an event has occurred at a specific moment in the past. This decreases the time it takes to order transactions chronologically into blocks which fuels the high throughput blockchain that is Solana.
Here is a helpful video explaining Proof of History in more depth:
2) Tower Byzantine Fault Tolerance (BFT) Consensus Mechanism
One of the biggest dilemmas encountered by ledgers distributed across the globe, where anyone can contribute, is how they determine truth. Consensus mechanisms stipulate the rules of how truth is determined by any given blockchain network.
Solana has implemented a custom version of Practical Byzantine Fault Tolerance (PBFT) called Tower BFT, a type of Delegated Proof of Stake (DPoS). Solana, therefore, relies on a voting and reputation system to secure the network and validate transactions.
Tower BFT uses PBFT with one core difference, it implements Proof of History. Solana's Proof of History provides the source of time necessary for the Tower BFT consensus to function correctly. Through the use of Tower BFT, with the help of Proof of History, Solana can significantly reduce its messaging overheads and transaction latency.
The way the validation process works is that each node on the network votes on a specific fork of the chain; voting itself is restricted to a fixed period of hashes called a slot. Currently, each slot occurs every 400ms and as new slots are voted on, the chance of the previous slots being reversed decreases.
Tower BFT also helps address specific problems that blockchain networks experience, such as ASIC speeds between nodes, the cost of rollbacks and the risk that exists with reward-based votes.
The next problem that Solana has managed to address is the propagation of blocks to nodes on the network. This problem exists because as you increase the node count on the network, the time needed to propagate all the data to the nodes on the network increases.
Solana has implemented the Turbine protocol to solve this issue. Instead of one node propagating all the data to 1000 other nodes on the network, messages or data are broken down into tiny "packets", and each packet is transmitted to a different node. These nodes now retransmit their packet to a group of their peers called a "neighbourhood", and they, in turn, are now responsible for transmitting that data to the neighbourhood next to it and so on. As the number of nodes increases, the ability to share this data increases exponentially.
4) Gulf Stream
Gulf Stream is a mempool management solution and is used to smooth and speed up the block propagation process and reduce the memory pressure on validators. A mempool is a set of transactions that have been submitted to the network but not yet processed. In protocols like Bitcoin and Ethereum, the mempool transactions are propagated between random nodes in a peer to peer fashion using what they call a gossip protocol. While it works, it is not highly efficient.
Solana tackles it another way. Using Gulf Stream, Solana essentially picks validators ahead of time, and since every validator knows the order of upcoming leaders, they can actually push transactions to them ahead of time. Through this process, the network can process transactions ahead of time, reduce confirmation times, switch between leaders faster and, as stated before, reduce the memory pressure of the mempool.
Sealevel is Solana's parallel smart contracts runtime. To understand what this means, we can compare it to something like the Ethereum Virtual Machine (EVM). The EVM has what they call a single-threaded runtime; this means that one contract at a time changes the blockchain state or ledger. Solana, however, can process contracts in parallel or, in other words, multiple contracts at the same time.
One interesting thing to note is that although Sealevel is a virtual machine that schedules transactions, Sealevel itself doesn't actually execute the transactions in the virtual machine. It instead hands off the transactions to be executed on native hardware.
Pipeline helps with transaction validation on the Solana network. It has to do with CPU design and is a process used when a stream of input data needs to be processed in sequential steps and different hardware is responsible for each step. Through Pipeline, Solana can ensure that all parts of hardware are working efficiently at all times and each component of a transaction is verified.
Scaling a blockchain effectively comes with challenges. If you were to scale without sharding, it is simply not enough to only scale computation. The memory required and a protocols ability to access that memory very quickly becomes a problem and can create a bottleneck in the system.
Cloudbreak attempts to alleviate this problem by optimising concurrent read and write speeds across hardware (SSD's). Each SSD on the networks adds additional storage capacity while also increasing the number of simultaneous reads and writes programs can perform when executing.
Due to Solana's memory requirements, they do not require validators to store a full state of the ledger. The data is instead offloaded from validators to a network of nodes called Archivers. These Archivers are now responsible for keeping small parts or "states" of the ledger; there will every so often be a challenge from the network where they will have to prove that they still store the data. The system is based on Filecoin's Proof of Replication approach.
What is interesting in this system is that no single entity is required to store a complete copy of the Solana ledger. This challenges how we at Etherbridge think about decentralisation and opens up the possibility that the older school of thought followed by Bitcoin and Ethereum may be more of a hindrance to their success than help. However, these two projects have had a much longer track record to prove that their systems work.
While all the above may seem confusing, each core component plays an incredibly important role in the Solana network and enables it to achieve its high throughput. All the above was a high-level overview of the components themselves, and if you are interested to understand each in-depth, we suggest you visit the following page to get a more holistic understanding.
We also thought it would be appropriate to explain the basic functions the Solana token (SOL) plays within the network.
The SOL token plays a crucial role in maintaining and operating the ecosystem as a whole.
As Solana is a Proof of Stake network, it is critical to the security and consensus of the network. It is used for staking or delegating to a staker, and you receive a portion of the networks inflation for this as a reward.
It is used to pay the transaction fees of the network.
It also serves as the network governance token where holders can vote on future upgrades and governance proposals made by the Solana community.
Solana has seen significant growth in the number of projects built on top of the network, sitting at around 500 currently. Below are a few infographics from Coin98 Analytics that show you what industries Solana is gaining traction in:
Solana has made waves this year, and for a good reason. The technology is innovative, and the team behind it are sound. However, it is a new technology, and with that comes its risks. For example, on September the 14th this year, the network went down for over 17 hours, due to constraints in node and validator hardware which required a hard fork to start up again.
These are risks that should reduce as the protocol spends more time in a live production environment; however, they still need to be understood and managed.
Solana Labs CEO Anatoly Yakovenko has introduced a new dimension or lens through which we can view decentralisation. He defines decentralisation as the “cost of destroying all copies of the ledger”. We are still trying to wrap our heads around this but we certainly aren’t convinced just yet.
New approaches are great as they open the doors to new ways of thinking and encourage us to challenge our own convictions. We are patiently optimistic and look forward to seeing how the network develops over time.
Notable Articles and News Stories This Week:
TIME Magazine to Hold ETH on Balance Sheet as Part of Galaxy Digital Metaverse Deal
TIME Magazine will hold ether (ETH) on its balance sheet for the first time as part of a deal with crypto investment firm Galaxy Digital to educate readers about the metaverse, according to a press release shared with CoinDesk.
Under the partnership, the magazine will be launching a TIME 100 Companies list for the metaverse, and issuing a weekly newsletter dubbed Into the Metaverse. The deal is completely financed through ether, which TIME will hold on its balance sheet, company representatives told CoinDesk.
TIME has been holding bitcoin since April after being paid in the cryptocurrency for a deal with Grayscale, a CoinDesk sister company.
Read more about the announcement here
Gemini Raises $400M to Bring Valuation Over $7B
Crypto exchange Gemini has raised $400 million in funding to bring its valuation to about $7.1 billion, according to the company.
Morgan Creek Digital led Gemini’s first-ever round of outside funding with participation from 10T, ParaFi, Newflow Partners, Marcy Venture Partners, and the Commonwealth Bank of Australia, among others, according to the press release.
“We are leading the first outside investment in Gemini because of our shared conviction in crypto and belief in the company that Cameron and Tyler are building,” said Sachin Jaitly, General Partner of Morgan Creek Digital, in a press release announcing the funding. “Their vision for the role of crypto in redesigning money, the financial system, art, and the Internet, and their track record of incubating and scaling innovative technologies, gives us confidence in Gemini’s ability to continue to be an industry leader.”
Read the full story here
Banksy Paintings Sell for 3,093 ETH in Auction House First
A pair of paintings from contemporary artist Banksy have sold for a combined 3,093 ETH in an auction at Sotheby’s on Thursday night.
The sale is the first time the auction house has denominated a sale in cryptocurrency. The pieces, “Trolley Hunters” and “Love Is In The Air” (2006) were estimated to sell for $5-$7 million and $4-$6 million respectively, and both largely met expectations with sales worth $6,698,400 and $8,077,200 – a combined 3,093 ETH.
Accepting bids in crypto is part of a larger cryptocurrency-focused push from the auctioneers. In October, Sotheby’s launched “Sotheby’s Metaverse,” a virtual gallery for the live auction event.
Read more about the auction here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co
This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.