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Messari: Analyzing the status of Solana ecosystem after SBF from the protocol layer and application layer

Messari

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The Solana ecosystem is not without problems, but it is not without hope either.

Original title: 《The Solana Ecosystem Overview》

Original author: kelxyz, James Trautman

Original translation: BlockTurbo

Let’s talk about the elephant in the room from the beginning: SBF and FTX did play an integral role in promoting the development of the Solana ecosystem in its early days.

They are gone now.

However, it is also true that many other builders have been and are still working to expand the ecosystem.

This report is intended to provide context on the status of individuals and teams that are still building the Solana ecosystem.

The report is divided into two parts: protocol layer analysis and application layer analysis.

Part I - Solana at the Protocol Level

Technical Initiatives

The theme of upgrading performance is fundamental to Solana’s recently completed short- and medium-term technical plans. Firedancer, Jito-Solana, and Multiple Leaders per Slot are some of the most anticipated initiatives in the developer community.

Network Health and Developer Landscape

Despite Hetzner’s Terms of Service issues and FTX’s debacle, Solana’s network health and infrastructure are relatively stable. Validators that were smaller and unprofitable before FTX are facing some pressure, but most validators remain comfortably profitable. See below for more details on stake, geography, and datacenter distribution.

The developer ecosystem looks strong. It is important to note that the amount of data collected on this topic is too small to be fully relied upon.

Protocol Infrastructure

These projects build or extend components of Solana’s infrastructure that are not directly tied to the protocol itself — developer tools, deployment tools, experiments with different VMs, DAO tools, and more.

Solana’s Road Ahead — Top Technical Initiatives

Solana does not have a clear roadmap, but many initiatives have already gained developer traction. Examining these initiatives provides the context needed to understand where Solana is headed on a technical level.

Firedancer (in beta)

Firedancer is a standalone, C++-based validator client spearheaded by Jump Crypto. Once live, it will make Solana the second chain (after Ethereum) to have multiple clients. Having multiple sets of code that can “run” the chain from scratch reduces the likelihood that a bug will cause significant damage to the network. If one implementation has a problem, a completely independent second implementation is less likely to have the same bug at the same time - ultimately benefiting the network.

Firedancer also has the potential to significantly improve performance (600k TPS has been demonstrated live). Expect Firedancer to be gradually deployed in 2023.

Jito-Solana (Deployed)

Jito-Solana is Jito Labs’ improved validator client, optimized to promote MEV in a similar way to Flashbots’ MEV-boost on Ethereum. The client creates a more efficient market for MEV by introducing specific markets for MEV-affected blockspace. Working alongside Jito-Solana are the JitoSOL liquidity staking derivatives, which will give validators running Jito-Solana the option (but not the obligation) to automatically distribute MEV profits to the JitoSOL pool on top of staking rewards.

QUIC (deployed on mainnet)

Solana is replacing its old data transfer protocol, the User Datagram Protocol (UDP), with QUIC, a similar data transfer protocol that also allows for greater control over data flows. This allows validators to exercise more discretion when sending and receiving transaction data to and from slot leaders. In other words, validators will be able to more easily filter out junk transaction data that has corrupted the chain in the past.

Local Fee Markets (Partially Deployed)

Solana accounts have a hard-capped computation limit - once reached, subsequent transactions cannot modify the state of that account within a given block. Local fee markets allow users to send priority fees to validators to express the urgency of modifying a specific account state after that account has already reached its computation limit.

The result is less spam (because it can be outbid) and greater efficiency in the blockspace market (because users can now target specific account states and bid on them, rather than trying to overload the block with bids).

Stake-weighted Quality of Service (QOS) (Deployed)

Instead of validators indiscriminately accepting and transmitting transactions regardless of their source, stake-weighting ensures that a validator with, say, 0.1% of the stake always has the right to transmit 0.1% of transaction packets to the leader. The previous indiscriminate approach made it easy for validators to be eliminated - that is, transmit a total of less packets than their stake weight. This is bad - pushing out smaller validators directly leads to greater centralization.

Concurrent Merkle Trees / Account Compression (Test)

Concurrent Merkle Trees is a new method developed by Solana Labs to compress account data while maintaining the ability to modify the state of that data.

Account compression will significantly reduce costs and storage requirements. Before compression, storing the data for 10 million assets would cost $1.14 million and take up 3.8 GB of space. With compression, storing the same 10 million assets will cost only $250 and take up only 828 KB of space. Metaplex plans to use it to exponentially reduce the cost of NFT minting on the platform.

“Solving interesting problems” — mid-term plan

These are the prominent initiatives from Anatoly’s earlier thread. Several other developers have also highlighted these as the most important factors driving Solana’s success.

Async block production

Async block production reduces the amount of work that slot leaders (validators competing to validate the latest block) have to do to package blocks. Initially, leaders had to do two loads (querying the store for on-chain data, such as the transactions in the latest block) and two stores (storing instances of on-chain data). After implementation, this work will be reduced to just one load.

The main benefit of this is reduced redundancy. By delegating tasks more efficiently among validators, the time to produce a block could be reduced by several milliseconds. When you’re racing against the speed of light, a few milliseconds matter.

Light clients

Light clients sample shards (small units of transactions) of nodes instead of downloading the full blockchain state. They rely on the assumption that the set of nodes they sample is honest. If the honesty assumption holds, light clients allow validators to contribute to network security by ensuring that honest nodes cannot be overshadowed by a dishonest majority.

Multiple Leaders Per Slot

Typically, one validator does the work of validating each slot or block. The validator that is lucky enough to occupy that position is given the glory of being the "position leader" for about 400 milliseconds. Multiple leaders is a design change that increases the bandwidth of block production so that multiple validators can occupy the leader position.

Each leader proposes its own stream of transactions (effectively a list of transaction trees), and the final order becomes the combination of these streams. This will increase competition and efficiency in the MEV market as multiple leaders compete to get MEV-related transactions included in the final block.

Formal Verification

Formal verification leverages Rust-based code verifiers such as Kani and Prusti to verify programs in the Solana program library and other important, widely used libraries such as those in Anchor.

The ultimate goal is to improve the security of Solana programs. Code verifiers can automatically check for any problems or bugs in a given program. Rigorous use of them — especially on core contracts — should improve the security of those contracts.

Other Smart Contract Languages

Solana is rolling out support for the smart contract language Move. This language is designed to be platform-agnostic, and once fully implemented, it may attract developers to use Solana’s LLVM-compatible smart contract language libraries.

About Solana Mobile

The short-term roadmap for Solana Mobile includes three initiatives:

The Saga Development Kit is scheduled to start shipping in mid-December 2022; the Solana Mobile dapp store application will be open in January 2023; and the Saga Phone will be available to the public in early 2023.

After this, the Mobile team will likely continue to iterate on the features and design of the Saga Phone and Mobile Software Development Kits (SDKs). To this day, Mobile remains an outsider, more of a moonshot than a sure thing. But the size of the opportunity should not be underestimated.

A full history of implemented proposals and a list of proposals accepted but not fully implemented provide more context and insight. Also, check out the Network Upgrades page for the latest on proposal implementation.

Network Health

As of December 8, the Solana network has 2,306 validators with a total stake of approximately 370 million SOL. Validators are spread across more than 35 geographic locations and over 138 unique data centers around the world. Overall, Solana’s Nakamoto Coefficient (as defined) is above the industry average of 28.

The Solana Foundation released a Network Health Report in August 2022 that goes beyond the Nakamoto Coefficient to assess different aspects of decentralization. The report takes into account metrics such as geographic diversity, data center ownership, and entity control over validators to ensure a more comprehensive network health. While a high Nakamoto Coefficient and a growing validator set are beneficial, they are not sufficient to guarantee freedom from centralization risk.

While spread across over 35 geographic locations, ~42% of Solana validators and ~38% of total stake are located in the United States and Germany. “Other” locations account for less than 30% of total stake, but are made up of over 25 different countries.

Geographic concentration is typical of layer 1 networks and a problem Solana aims to solve. Too many validators in the same location can compromise the health of the network due to reasons such as geopolitical risk, regulations, and natural disasters.

Datacenter concentration is another area of concern regarding decentralization. Using private datacenters like AWS to run validators can give the owner of the datacenter disproportionate power over the network. As of December 15, Solana’s total stake has been distributed, with no single data center within the hosting 33.3%. The “Other” category, which represents more than 30% of total stake, includes more than 125 unique data centers.

However, in late September, the Solana network became known to concentrate validators and stake in Germany and the United States, along with German web hosting company Hetzner Online. Hetzner hosts more than 40% of the network’s validators and more than 20% of the stake. This relationship resulted in a high concentration of the network in Germany, with a particular focus on one data center.

In early November, Hetzner removed all Solana-related activity on its servers, stating that its policy prohibits the use of its servers for crypto-related activity. Fortunately, the concentration was not high enough to take the network down. Still, the incident demonstrated the potential risks of a network being too concentrated in a single geographic location and data center.

As a result, the Solana network is now more decentralized. Hundreds of validators and millions in stake migrated from Germany and Hetzner to other countries like France and Finland, and to hosting providers like OVH SAS.

When evaluating the top 28 validators that make up the Nakamoto coefficient, the picture is slightly different with the clear concentration in Germany, Hetzner, and even OVH SAS post-Hetzner migration.

Looking at the number of validators that control over 33% of the network’s stake, over half of these are hosted by Amazon and Terraswitch. Additionally, a third of these are staked in the United States. While these are not enough to collude against the network, it is critical to assess the composition of the top validators’ stake. In this case, if this group of stake moves to a more concentrated geography like the United States or a small number of data centers like Amazon or Teraswitch, the network could be in jeopardy.

Ultimately, the decentralization and health of the Solana network remains intact and is in a better position after validators and stake migrated from Hetzner to dozens of other geographies and data centers.

Developer Overview

Two main takeaways:

A large number of developers are deploying on other chains, especially Ethereum. But the majority (66%) of developers surveyed are sticking with Solana.

Around 72% of developers reported that their teams were not affected at all by FTX. Around 20% have invested personal or project funds in FTX.

While surveys like these aren’t rigorous enough to be published in Science, they do provide some much-needed data to better understand the broad realities of the situation.

Moving to some other stats, the number of Github developer repos and the number of daily unique programs both grew by around 2.5x year-over-year, despite the SOL price dropping -95% over the same period. Note that daily unique programs have been stagnant since May 2022, hovering between 1,000 and 1,150 per day during that time.

Alchemy released a Web3 Developer Report reflecting a similar growth story to the above. According to the report, Solana’s active development team has grown more than 10x and API consumption has grown more than 5x so far this year.

To see what these new teams are building, watching hackathon events and Solana Hacker Houses is your best bet. The 2023 lineup has been released and includes locations such as Mumbai, Austin, Istanbul, New York, and more. The hackathon has been a huge success for Solana so far.

Protocol Infrastructure

These are some of the top projects building or extending Solana infrastructure components that are not directly associated with the protocol itself - think developer tooling, onboarding tools, experiments with different VMs, DAO tooling, and more.

Exploring MEV: Jito Labs

As mentioned above, Jito Labs created validator software for efficiently transferring MEV between validators, searchers, and stakers. The development of similar software on Ethereum (Flashbots) reduced network congestion and increased returns for stakers, especially during times of high network usage. The Jito client should have a similar impact on Solana.

Developer Tools: Coral, Helius, GenesysGo, Clockwork

Coral is the company behind two developer tool infrastructures:

Anchor Lang: Anchor is the framework of choice for writing programs (smart contracts) on Solana. Anchor simplifies the program building process by handling more baseline tasks, allowing developers to focus primarily on business logic. Seahorse Lang is a community-led project built on top of Anchor that enables programmers to build smart contracts in Python. Other development projects allow Solana programs to be created using Typescript, another popular coding language. xNFT: xNFT is a standard for "executable NFTs" that give users the right to execute code. Backpack is an application for xNFTs that creates a new type of wallet where applications run natively through an interface instead of interacting with the application through a browser view.

Helius provides RPC node management specifically for Solana, webhooks that allow developers to trigger actions in response to on-chain events, and a set of APIs for decoding on-chain data, which is easier to access than standard block explorers. In two months of mainnet operation, Helius has gained more than 1,200 users.

GenesysGo also provides RPC services as well as storage and computing services. According to Step Data Insights, as of October 2022, GenesysGo's Shadow Drive storage solution has stored 3.5 TB of data.

Clockwork is another development tool infrastructure dedicated to transaction scheduling and smart contract automation. Since launching on Solana Breakpoint in early November, they have quickly expanded to 60,000 automated instructions per week.

Experimental Virtual Machines: Neon, Eclipse, and Nitro

Several projects are experimenting with importing and exporting different virtual machines from Solana. Neon Labs will launch a smart contract program to port the Ethereum Virtual Machine (EVM) to Solana. This will allow EVM developers to deploy to Solana with little to no changes to their original code. Look for them to deploy to mainnet in January 2023.

Eclipse and Nitro are exporting the Solana Virtual Machine (SVM) to Celestia and Cosmos, respectively. These projects seek to leverage the speed of the SVM and the modularity of chains like Celestia and Cosmos to achieve the best of both worlds. Projects on Solana will be able to deploy code to Eclipse or Nitro as easily as Ethereum projects deploying on other EVM chains like Avalanche or Polygon.

DAO Tools, Wallets, and Fiat Onramps

Realms and Squads are leading DAO governance and multi-signature solutions, respectively. Finally, Phantom remains dominant in the wallet space — it is one of the teams looking to leverage its early success into multi-chain scaling on Ethereum and Polygon.

The aforementioned Coral Backpack Standard is also aiming to expand the market and gain market share. Solflare, Glow, Spot, Ultimate, and Cashmere are a few of the many other wallet competitors. Dialect is a protocol that strives to provide the messaging infrastructure for all of the above.

On the payments side, all eyes are on two teams in this ecosystem: Solana Pay and Stripe. Solana Pay has made a splash with its recent partnerships with STEPN and Asics, but the game here is really about point-of-sale level integrations.

Stripe’s fiat-to-crypto onramp showcased 16 projects, 11 of which are based on Solana. One of the projects mentioned is Ottr Finance — a Venmo alternative built on Solana. Tiplink is another protocol that takes a different approach.

In the privacy space, Light Protocol is leveraging zero-knowledge proofs (ZKP) to enable privacy-protected on-chain payments and transfers. Otter Cash is another privacy solution available to Solana users.

Concluding Part I — Solana at the Protocol Layer

Historically, one of the biggest criticisms Solana has faced has been the gap in ecosystem maturity compared to Ethereum. This gap still exists, but the projects shown above suggest that it is closing. The closure rate is open to explanation, but it is undeniable that Solana has an ecosystem dedicated to improving its core infrastructure and functionality.

Describing Solana as just a “SBF chain” seems largely unfounded.

Part II — Solana at the Application Layer

The best technology means nothing without the applications built on top of it. Solana has a wide range of applications across DeFi, Web3 infrastructure, NFTs, and gaming — too many to highlight every project in this report. Instead, we created an ecosystem map covering most of the names in each sub-field as well as highlights of the top projects and narratives in each.

DeFi Applications

It’s fair to say that Solana DeFi is the sub-sector hit hardest by FTX. Solana DeFi’s TVL took a huge hit due to the cancellation of Alameda’s on-chain events, with the price of SOL falling 67%.

That said, there are still innovators building for the future. Here are some of the best.

Spot DEX

Three names to watch out for when it comes to spot decentralized exchanges are OpenBook, Ellipsis Labs, and Lifinity. OpenBook is a community-run fork of Serum V3 that launched after Serum’s upgrade key was potentially compromised. Serum’s public Twitter handle has publicly endorsed the new fork.

Ellipsis Labs’ Phoenix order book expands on Serum’s original central limit order book (CLOB) vision with a number of design decisions aimed at improving efficiency, such as removing the operationally intensive “launch” (definition) from the DEX design.

Lifinity leverages pooled liquidity and an active market maker model (actively adjusting prices using sub-1 second oracle latency) to eliminate reliance on arbitrageurs, reduce impermanent loss by limiting trades against stale prices, and more.

Derivatives and Structured Products

Many teams are building in the derivatives, options, and structured products space: Drift, Zeta Markets, Mango Markets, Friktion, PsyOptions, 01, and Cega are just a few. Teams have been working hard to solve key problems such as sourcing liquidity, new asset support, cross margin, and user onboarding.

Liquid Staking Derivatives (LSD)

Jito Labs’ JitoSOL may be grabbing all the headlines, but Marinade and Lido are still way ahead in terms of market share. This could change if JitoSOL’s higher yields (9.10% for Lido, 8.80% for Marinade, and 8.08% for Marinade as of Dec 7) persist.

Look for integrations across Solana DeFi as a potential catalyst for additional demand.

TIPIN Project

TIPIN, or Token Incentivized Physical Infrastructure Networks, is a little-known space. Helium, the first protocol to use token rewards to incentivize individuals to complete real-world activities, recently made headlines by voting to migrate its network from its own blockchain to Solana. The move aims to solve the network’s scaling and throughput issues and allow the community access to Solana’s developer and infrastructure ecosystem, including wallets, DeFi applications, and the Solana Mobile Stack. Other TIPIN networks to watch on Solana include:

Pollen Mobile – A Helium competitor in the 5G space. They already offer cheaper coverage than traditional competitors – sometimes up to 90% cheaper.

Hivemapper – A money-making network that incentivizes users to provide high-quality street view map data to the network.

Teleport – An Uber-like app that incentivizes drivers and passengers to join the network.

‍NFT Projects and Infrastructure

Amid the chaos, “JPEG” has remained relatively and surprisingly resilient. Daily volumes denominated in SOL nearly hit a record high in November as holders and traders rushed to adjust the valuations of their NFTs to the plummeting SOL price.

The royalty debate has dominated the narrative in the JPEG space. Initially, the adoption of aggregators enabled the avoidance of royalties wherever possible.

Now, leading platforms Magic Eden, Metaplex, and Cardinal have all announced a form of protocol-level creator royalty protection. The pendulum has swung to the other end, with several designs enabling creators to prohibit marketplaces that do not enforce royalties. Time will tell which design wins out in the long run.

In addition, Solana’s NFT ecosystem is fueled by the continued optimization of the Metaplex Digital Asset Standard, the base token standard for all NFTs on Solana.

Metaplex continues to iterate on its popular open-source minting solutions, such as the Candy Machine, and recently announced a no-code solution for less technical creators. Together, Solana and Metaplex provide a venue for creators to efficiently publish NFTs.

Metaplex’s compression of NFTs may also support the NFT ecosystem. Compression will reduce the on-chain storage costs of NFTs, enabling enterprise-level users such as airlines and live events to store tickets on-chain and launch at scale. Compression will allow up to 1 million NFTs to be minted simultaneously at a price of approximately 6 SOL ($204) and 100 million NFTs to be minted simultaneously at a price of approximately 50 SOL ($1,700).

In addition, the recently launched NFT minting solution, additional marketplaces, and enhanced UX applications may grow the NFT ecosystem. Phantom allows users of its browser extension to list their NFTs directly on Magic Eden. Atomic Wallet launched support for Solana NFTs on its desktop and mobile versions. Solana NFTs have also begun trading on other NFT marketplaces such as Rarible.

Despite the bear market and recent macro events, Solana’s strategy and position in the NFT space remain strong. Solana remains the second-largest network in terms of secondary volume and is closing the gap with Ethereum.

Gaming Ecosystem

As the crypto space positions itself to support GameFi, Solana Ventures is in the lead. Their $150 million fund to promote the online gaming ecosystem has attracted additional investment capital and boosted gaming traction.

Other efforts since then have included more investors like Magic Ventures for Magic Eden, infrastructure like Ancient8’s DoJo (a gaming launchpad), and builders like Eternal Dragons.

Developments such as these put GameFi on the cusp of catalyzing a wave of activity across the crypto space, and Solana is well positioned to grow its GameFi ecosystem.

Most of the big games in the Solana ecosystem are either not live yet or are in the early stages. Some of the top games to watch include ev.io, BR1: Infinite, No Way Back, Aurory, and Star Atlas, among others.

If some of these do succeed, beware — games have been shown to generate exceptionally high usage and revenue in the past.

Solana Investors

A common criticism from those outside the ecosystem is that FTX is one of a small group of investors who simply want to extract value from projects built on Solana. “Sam coins” — especially Serum, Oxygen, MAPS, and others — are often used as examples.

Non-FTX investors associated with this group — namely Jump, CMS, Sino, and Multicoin — have been and remain integral to supporting the Solana ecosystem, with the exception of the Sam Token. However, the VC side of things has a broader range of investors than that group — investors like Foundation Capital, Race Capital, and others have been investors long before FTX came on the scene.

Newer investors like Chris Burniske of Placeholder and Twitter personality R89 Capital have publicly offered new perspectives on Solana in the wake of the FTX debacle. If these and more names can combine to solve some of the ecosystem’s long-standing problems — especially around token economics — the private and public market venture landscape on Solana could emerge from the FTX implosion stronger than ever.

Conclusion

The Solana ecosystem is not without problems. One of the most central, SBF, may be a complete fraud. The technology is not finished. And, yes, the price is down.

However, the ecosystem is not without hope. New applications may re-boost usage. Potential new winners could surpass SBF in terms of active contributions to the network. Actively developed technical upgrades may continue to alleviate network issues and improve network performance.

As for the price?

That’s for all of you to decide.