Can Solana (SOL) Ever Recover? History and It Tokenomics May Have the Answer!

By Michael @ CryptoEQ | CryptoEQ | 28 Nov 2022


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Will Solana ever recover and reclaim its status as a top-3 smart contract platform? Or will it fade away into irrelevance, much like EOS has over the last ~4 years? Let’s dig into their similarities and key differences to help find that answer.

 

 

Overview 

Solana and EOS are both major layer 1 blockchains known for their high theoretical transaction speeds and emphasis on dApp development. Besides this similarity, interested users should consider other aspects to better distinguish the two blockchains. Solana and EOS differ regarding consensus mechanisms, tokenomics, scalability, and recent user/developer activity. Unfortunately, both blockchains struggle with decentralization. All of these factors affect the health of their dApp ecosystems. 

 

Tokenomics 

SOL’s current circulation supply is 355,724,682.025 SOL, and the EOS supply is about 1 billion EOS, according to Coinbase. While tokenomics involves understanding the incentive and model of the entire network, it's essential to first understand the token allocation and ownership. Solana has had a history of controversy regarding its decentralization and token allocation. In May 2021, research firm Messari pointed out that there's a significant amount of SOL tokens allocated to insiders, such as venture capital firms and developers, compared to other networks, such as Ethereum. EOS attempts to address the centralization issue by stating that no user is allowed to own more than 10% of the total supply. However, even if EOS’s constitution actively promotes decentralization, it might not be possible to verify the existence of multiple wallets being owned by a single user, and there were no codified practices against the earlier distribution of tokens. Thus, decentralization may be the catchphrase of many networks and affect their tokenomics, but the real allocation of tokens may not be as decentralized as these networks claim. 

According to Solana, there are typically about 2,000 validators and 30 super minority on the network. A super minority is the smallest number of validators that can control 33% of the total active stake, which allows them to halve the network and prevent transactions from being recorded on the blockchain. Solana is more centralized when considering the percentage of validators needed for a super minority. On Solana, 30/2000 = 1.5% of validators are a super minority, while 7/21 = 33% are a super minority on EOS. This means a smaller percentage of validators is needed for a group of validators to have transaction veto power on Solana compared to on EOS. However, EOS has a much smaller magnitude of validators (BPs) compared to Solana, with 21 limited validator spots vs. 2,000 validators. Strictly considering the number of validators on the blockchains, Solana is actually more decentralized because a new node on Solana will have an easier time becoming a validator compared to a new node on EOS. Nevertheless, both protocols lack fundamental decentralization.

 

Tokenomic Details

On another level, these tokens’ functionality also changes their incentivization, which fundamentally structures the tokenomics. SOL performs several functions, the most important being staking and fees. Staking allows Solana token holders to stake their SOL to validators on the Solana network and earn a yield based on the inflation rate, thereby increasing the validator’s voting weight. The benefit of staking to the network is that the more stake delegated to the validators on the network, the more difficult it becomes for an attack on the network to alter the consensus protocol. One of the risks associated with staking in PoS networks is “slashing,” where validators lose their tokens for getting caught performing malicious actions against the network. Currently, Solana doesn’t have a “slashing” policy. 

Another important aspect of staking is the inflation rate, which is calculated through a “predetermined disinflationary schedule,” helping keep the supply of tokens stable. Solana launched with an inflation rate of 8%, and it's set to decrease by 15% every year, eventually reaching the targeted goal of 1.5%. 

Another use for SOL is in paying transaction fees. Fees are used to process network transactions and paid as compensation to the validation network, which confirms the transaction. Many other blockchains also use transaction fees to support the network’s long-term economic stability. Specific to Solana, however, is the fact that 50% of the transaction fees in each transaction are destroyed. The transaction fees are mostly calculated on the computational resources needed to process each transaction, but additional fees, called “prioritization fees,” can be paid to decrease transaction times.

Unlike Solana, EOS doesn’t impose any transaction fees. In order to maintain the free service, EOS allocates transactions with restricted resources. Each account is allowed to use up to as much computing power proportionate to the number of tokens staked. Unlike other blockchain tokenomics that use utility tokens, EOS’s economic structure allows developers who own enough RAM to trade RAM with others on the network. In other words, the EOS token allows users to claim resources on the network, and this resource–processing speed–is also available for trading. One benefit of this trading price for RAM is its independence of the availability of RAM to the EOS token’s value, which differs from other blockchain networks where the fluctuating token price often affects transaction costs.

RAM trading is also considered by some as the de facto EOS token. Moreover, there's a 1% fee applied to every transaction, split evenly between the seller and buyer, to prevent speculative trading and control inflation. Because of the limited supply, even for the foreseeable future, EOS supporters are hoping the supply of RAM will follow Moore’s law, doubling at a pace of roughly every 18 months. 

 

Consensus 

Both Solana and EOS use a Proof-of-Stake (PoS) consensus mechanism, which offsets the higher overhead time incurred from Proof-of-Work (PoW) and allows select validator nodes to verify transactions via staked tokens. 

EOS uses Byzantine fault-tolerant Delegated Proof-of-Stake (BFT-DPoS). EOS users can stake their tokens to obtain voting rights, which have a half-life of 30 days. Using these voting tokens, stakers vote for Block Producers (BPs) who run an application to validate the blockchain. BPs take turns validating the blockchain in 126 block cycles. Blocks are produced every 0.5 seconds, and each of the 21 BPs produces six blocks. 

Two independent layers exist in the EOS BFT-DPoS consensus mechanism that works together. The first layer of the protocol, Asynchronous Byzantine Fault Tolerance (aBFT), is used for recording and validating the blocks. A Byzantine Fault Tolerance system refers to a system’s ability to operate even if some components of it fail, in this case, the nodes in EOS. aBFT offers a unique solution to the Byzantine General Fault problem by making each node independent and leaderless while going through a two-stage confirmation process. A Last Irreversible Block (LIB), containing finalized transactions, is produced during the first stage and the second stage ensures the irreversibility of the block. A block is then considered immutable or unable to be changed if it's confirmed by a supermajority on the EOS chain. The fact that a producer can't sign two block numbers ensures its security. 

DPoS typically processes transactions faster than PoW and PoS, which provides scalability to many applications. This also means DPoS usually requires less computational hardware, resulting in fewer costs. DPoS is arguably more decentralized by allowing the removal of BPs through a voting process and granting more token holders the ability to vote compared to other models. However, DPoS governance is also more susceptible to attack because there are typically fewer BPs and delegates compared to other networks, meaning it's easier to organize a 51% majority in a DPoS mechanism than in other networks. Moreover, DPoS’s decentralization also requires a high level of participation from users, as low participation and low voting turnouts will inevitably result in centralization.  

While all EOS BPs have equal time validating the blockchain when they have enough votes to be in the top 21 BPs, Solana validators compete against each other to be lead validator and write transactions. Competition to become a lead validator on Solana is based on the amount staked because the leaders are selected by stake-weighted ordering. For example, if a validator has 5% of all stake, they’ll be the lead validator for 5% of the time. Thus, the percentage of stake in a SOL validator is important and affects the power that individual validators have.

Solana stands out as it uses Proof-of-History (PoH) in addition to PoS. On typical blockchains, different nodes in a network use their own local clock. On Solana, PoH cryptographically verifies the passage of time between events, letting all of the nodes trustlessly agree on the recorded passage of time, which eliminates the time that validators would otherwise spend ordering the transactions. When new data are created on the chain, it's appended to the most recent hash to create the next hash. This lets us see that the data must have been created before the next hash because inputting the new data creates a different hash compared to if the new data was not appended to the previous hash. The speed it takes to verify the hashes is linearly proportional to the number of cores on the GPU. More cores mean faster verification time. Verifying the hashes is a lot faster than originally generating them because the hashes can be split up and verified in parallel. In short, PoH increases Solana’s transactions per second (TPS). 

In addition to PoH, Solana uses a unique take on the Practical Byzantine Fault Tolerance (PBFT) in the form of a consensus algorithm called “Tower BFT.” This is a complementary layer to PoH, helping to optimize the entire consensus process. In short, Tower BFT leverages the sequentially-generated clock from PoH. Because transaction execution is separated from finality thanks to the combination of PoH and PoS, Solana can operate with ~400 milliseconds block times, one of the fastest in the industry. In practice, a transaction is considered final on Solana once it has received 31 block confirmations (~12 seconds), anything less is technically still a pending transaction.

 

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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