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

The resistance to censorship, lightning-fast transaction processing speed, scalability, and excellent compatibility with other platforms are the key reasons for the Solana cryptocurrency’s popularity.

You can easily buy digital coins on crypto exchanges or exchange them for fiat money via online services. Profits can be made by investing in Solana (SOL) cryptocurrency, trading, or staking, as long as you invest wisely.

The History of Solana

Solana was developed in 2017 by former employees of Qualcomm, a California-based company specializing in wireless communication technology. One of the project's founders is Anatoly Yakovenko, who previously worked as a software engineer at Dropbox, where he gained invaluable experience with compression algorithms. The Solana team includes Anatoly's former colleagues, Eric Williams and Greg Fitzgerald. Together, they discovered a new way to solve issues related to low network bandwidth, a challenge faced by cryptocurrencies like Bitcoin and Ethereum.

During the development of their own technology, the specialists behind Solana drew on the expertise of leading corporations like Apple Inc., Intel, and Microsoft. The Solana project quickly attracted major investors, including Foundation Capital, CMCC Global, Multicoin Capital, and Abstract Ventures.

The Sol crypto was named after the Solana beach in California, located around 30 minutes north of San Diego, where Yakovenko spent most of his life. Initially, he had little interest in cryptocurrencies, but he still earned BTC while working on the deep learning computer network.

In 2017, Yakovenko participated in an experiment that led him to realize that Bitcoin's SHA-256 hash function could be used to create decentralized clocks on a blockchain. He realized that timestamped transactions would significantly improve network scalability while maintaining the blockchain's decentralized nature.

SOL General Characteristics

Solana is the native coin of a blockchain designed to power fast, secure, and scalable decentralized applications (dApps) and trading platforms. The initial goal of the Solana project was to create a user-friendly protocol with high bandwidth. Based on the work accomplished, it's clear that the team has successfully met this objective. Additionally, the developers claim that the platform minimizes transaction fees and operational costs, as well as ensures the reliable performance of dApps and holds great potential for launching smart contracts.

The project's founders confidently state that Solana represents an open, fair, and censorship-resistant global marketplace capable of competing with the New York Stock Exchange. According to the developers, Solana is a cutting-edge, fourth-generation blockchain.

Before figuring out how to mine Solana cryptocurrency, you need to look through its key features outlined in this guide:

• Global transactions on Solana are conducted without intermediaries. The network is decentralized, meaning operations cannot be halted or blocked.
• Users can earn rewards by holding coins in their accounts. Many traders, especially beginners, commonly use this method to secure a stable passive income. Delegated staking can further provide passive income growth.
• The Solana platform can handle a large volume of transactions, up to 710 000 per second (TPS). This impressive capability makes Solana a record-holder in terms of transaction bandwidth.
• The system can easily handle increasing workloads. Technological innovations, including the original Proof-of-History protocol, allowed the developers to create a flexible platform with excellent scalability based on the principle of decentralization.
• Cost Efficiency. Due to its large user base, the Solana platform maintains low transaction costs within the system and across decentralized applications built on its network.
• High Compatibility. Solana is capable of interacting with other crypto platforms.

Solana's Key Features

In early blockchains, consensus was achieved when users solved a mathematical puzzle. This algorithm is called Proof-of-Work (PoW). For Bitcoin, the transaction confirmation process takes about 60 minutes and is highly energy-intensive. As a result, neither Bitcoin (BTC) nor Ethereum (ETH) have become sufficiently scalable systems. According to Elon Musk, Tesla stopped accepting BTC specifically due to the blockchain's heavy dependence on energy consumption.

Solana works on a Proof-of-Stake (PoS) consensus algorithm, which is considered a more environmentally friendly version of the previous popular algorithm, Proof-of-Work (PoW). This mechanism assigns transaction processing rights to users with the largest SOL cryptocurrency amount in their accounts.

Computing hardware is still needed to conduct operations in PoS networks, but significantly less than what is required for PoW. That’s why the PoS algorithm is less harmful to the environment.

The Solana blockchain uses the Proof-of-History (PoH) algorithm, which the creators believe improves network bandwidth. The algorithm increases blockchain speed by synchronizing nodes.

Almost all blockchains are based on the principle of sequential block confirmation. Validators need to communicate to reach a consensus on the transaction timing. This process takes longer because each subsequent block requires confirmation from all nodes. As a result, the blockchain's operation slows down.

To make it clearer, let's consider a relay race analogy. Imagine three runners in the race, and the track represents time. The total result is the sum of the distances each runner covers. In this scenario, the second runner cannot start until they receive the baton from the first runner. This process represents how blockchains require each block to be confirmed by all nodes before moving on to the next one, which can slow down the overall operation.

In the Solana blockchain, all three runners can start simultaneously without waiting for a signal. This allows them to cover the same distance as their relay counterparts but in significantly less time. Those using the sequential method will take three times longer to complete the task.

The founders of the Solana (SOL) project emphasize that Proof-of-History (PoH) isn’t a consensus mechanism but a tool for optimizing network performance. The PoH algorithm aims to reduce the time required to create blocks, optimize the block production process, and increase network bandwidth. Additionally, PoH enables efficient data storage in the ledger.

Additional Optimization Tools

Solana's high performance is achieved through several key tools:

• Tower BFT. This algorithm uses Proof-of-History (PoH) as cryptographic clocks to achieve consensus without requiring continuous messages between nodes.
• Gulf Stream. This technical solution aims to reduce the pool of unconfirmed transactions. It allows the system to handle up to 50 000 transactions per second.
• Turbine. This tool 'packs' the information that needs to be transferred from one node to another into more compact 'packets.' This increases bandwidth and speeds up the processing of transactions.
• Sealevel. This engine allows the network to process multiple transactions simultaneously.
• Pipelining. This tool optimizes the input data processing, speeding up the network's operation.
• Cloudbreak. This refers to an account database that optimizes parallel data reading processes and enables efficient writing to SSD storage.
• Archivers. It’s the storage system for the distributed ledger.

Solana’s archivers are responsible for storing information but don’t participate in the consensus process.

Despite its impressive features, the Solana project still has its weaknesses. For example, in September 2021, the network experienced a technical outage.

Support for SOL

Token SOL isn't backed by fiat money, gold, or other tangible assets. Instead, its value is driven by practical use, meaning its support mainly depends on the popularity of the Solana coin and several other vital factors:

• The number of users
• Demand for cryptocurrency exchanges
• The number of stakers who help maintain SOL's liquidity

The more users the system has, the higher the backing and Solana’s value. Additionally, factors like investment in the Solana project, feedback from major players in the crypto world, and more significantly impact its growth.

Ways to Use Solana

SOL is the most crucial element of the Solana ecosystem, offering its holders a wide range of valuable opportunities. For example, SOL can be used for investment, storage, and other purposes. Let’s take a closer look at the functionality of SOL tokens:

• Microtransactions. For this purpose, a fraction of the SOL cryptocurrency, Lamport, is used (named after the American scientist who first used such a division). 1 Lamport equals 0.000000001 SOL. This division targets future increases in Solana’s price, similar to Bitcoin.
• Management. SOL can be used as an 'exchange fund' to execute software on the blockchain, run applications, or for identification purposes.
• Staking. It’s an alternative to mining. You can earn passive income by holding SOL tokens in your wallet. This method supports the security and functionality of the network.
• Rewards for nodes. SOL tokens are transferred as rewards for validating blocks.
• Transaction Fees. A commission is required to carry out payment operations, and SOL tokens can be used for this purpose.

Factors Affecting the SOL Exchange Rate

No matter which earning method you choose (staking, investing, or trading), you need to monitor the asset's value and consider the factors influencing its fluctuations. Let's explore some key reasons for the rise or fall in the price of the Solana cryptocurrency:

• Acquisition of large number of coins by major investors and partners
• The overall distribution of cryptocurrencies on the crypto market
• Price increases of key digital assets like Bitcoin and Ethereum
• Statements from major investors and leaders in the crypto market
• System updates
• Introduction of new regulatory measures

Ways to Earn with SOL Tokens

You can buy Solana on a crypto exchange. Another way to get coins is through online exchange services. However, mining this digital coin isn’t possible.

Investments

To invest profitably in Solana cryptocurrency, you need to open a position at the right time. The project is evolving rapidly, with updates each year. Many major investors are showing interest in this cryptocurrency, and the number of SOL users is growing fast. All of these factors positively impact the potential ROI you can get.

Staking

Passive income can be provided through Solana staking. You can hold coins in your crypto wallet to support the network and get rewards in return. The amount of invested funds determines the amount of these rewards.

Trading

While trading can offer high returns, you need to study both technical and fundamental analysis. Without this knowledge, you might face significant risks. It's important to stay updated with news, be aware of developments within the crypto community, and consider statements from the platform’s developers. Monitoring this information on the project's official website is essential.

Solana’s Prospects

The Solana cryptocurrency ecosystem was systemically linked to the scandalous FTX exchange and the Alameda Research fund, negatively impacting the company's reputation. Some projects went to other blockchains, the SOL token price dropped significantly, and community members criticized both the developers and the network. However, despite the scandal, the protocol managed to continue its existence. Then, new services emerged to help restore the project's reputation.

The Solana network is technically innovative, and its activity is on the rise. This is evident from the growing number of project developers and the increase in funds circulating within existing DeFi (decentralized finance) protocols. Additionally, you can now create NFT images on the Solana blockchain.

Experts highlight the promising prospects for Solana's development. Due to the consolidation of the Solana community, alternatives have emerged for components of the ecosystem previously tied to FTX or Alameda. For example, the decentralized exchange OpenBook has taken over from Serum as a key liquidity provider for the ecosystem.

Over the past two years (2022-2023), the price of Solana cryptocurrency dropped by 96%. However, the coin is currently regaining popularity among crypto users. As of August 2024, according to Binance, SOL is trading at $ 143 with a market capitalization of $87 million.

F.A.Q.

Does the SOL coin have any drawbacks?

Today, Solana cryptocurrency is far from perfect. It has high volatility, and the network experiences frequent outages. It’s also worth mentioning that there were some incidents of hacking users’ crypto wallets.

Many issues have already been fixed. However, users still remember past malfunctions and often remain cautious about working with the coin. On top of that, the project frequently faces criticism for the lack of transparency. Records of long-term transactions were initially stored in an undefined location and have since been moved to Google Bigtable. It remains unclear whether Solana's centralization has passed the point of no return since one of the key selling points of blockchains is verifiable transparency, which the project has struggled to maintain.

What competitors does Solana have?

Ethereum remains one of Solana's strongest competitors, holding a leading position in terms of capitalization. While Solana steadily climbs the rankings, it still trails behind Ethereum and Bitcoin in terms of user trust.

What is a Solana staking?

Solana staking allows you to earn passive income by supporting the network’s operation. If you delegate your coins to a validator, you receive rewards while retaining ownership of your digital assets.

How many coins are in circulation?

In June 2023, approximately 70% of the total SOL supply was in circulation. When the project launched, the total supply was 500 million coins, but there is no cap on the maximum supply. The initial inflation rate for this cryptocurrency is 8%, which will decrease by 15% annually until 2031. By then, the inflation rate is expected to stabilize at 1.5%.

SOL has only recently entered the blockchain but quickly gained popularity and attracted many major investors.