The DOT-Token

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The DOT-Token

It took Wood over three years to carefully design and develop the Polkadot ecosystem without compromising the blockchain trilemma. While in theory, Polkadot checks most boxes to emerge as the No. 1 competitor to Ethereum, but the technology is still new and unproven. Polkadot’s native utility token, DOT, is used for multiple purposes, including bonding, governance and staking.

Bonding: To earn a parachain slot, projects must raise and bond DOT tokens. While some projects will have private venture capital funds to acquire DOT tokens, others will source them publicly via crowdloans. Polkadot crowdloans are a crowdfunding model for borrowing DOT tokens from the public. In exchange for bonding your DOT tokens during a crowdloan, the project in question gives an amount of its native token. An interesting aspect of DOT bonding is that your tokens are always yours. When you lease them to projects raising DOT for parachain auctions, the tokens never actually leave your wallet. Instead, they’re delegated from your wallet and are unlocked at the end of the lease.

Governance: DOT tokens are used for voting in governance matters called referenda. Voting on Polkadot referenda is always a yes or no binary — there is no in-between — keeping votes simple. This being Polkadot, there’s a twist on governance that gives you more or less voting power. Using voluntary locking, you can lock your DOT tokens to increase voting power the longer the lock duration.

Staking: Polkadot is a proof-of-stake network secured by validators staking DOT tokens on the Relay Chain. Staked DOT tokens act as collateral ensuring validators act honestly. If they don’t, their DOT tokens are slashed. About 58.9% of the DOT liquid supply is staked, with the average staking reward rate currently standing at ~12% on exchanges, such as Kraken and in the Polkadot.js wallet.

With a current price of $7 and a circulating supply of just under 1 billion, DOT has a market capitalization of ~$7 billion, putting it in the No. 13 spot among the top 20 cryptocurrencies ranked by market cap. P/S Ratio, calculated by dividing the fully diluted market cap by the annualized protocol revenue is 25,136.43x. The cumulative protocol revenue (share of fees that goes to the protocol’s treasury or directly to its token holders through e.g. a burn mechanism) for Polkadot $30700 (30-day), while the annualized revenue totals $373000. The burn mechanism is similar to a stock buyback because it decreases the amount of tokens in circulation. There are a total of 808,000 addresses that hold DOT, with 27,130 addresses being active.

The wheels have been set in motion, and with such strong fundamentals, the developer community has been flocking to the ecosystem. GitHub shows Polkadot having the second-most average daily development activity in the past 30 days. It is now a matter of when not if Polkadot will emerge as the top three blockchain ecosystems.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Comparing Consensus on Polkadot & Ethereum

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Comparing Consensus on Polkadot & Ethereum

When evaluating the technology of a Blockchain it is always important to look at the Consensus Mechanism that this Blockchain uses. When it comes to newer chains, like Polkadot, it is also a good idea to compare them to their more established competitors like Ethereum.

Ethereum 1.0 uses a single blockchain to process all transactions, run all apps, and validate the network with mining. It does all this while using a slow PoW consensus algorithm that seriously restricts throughput. That’s why network congestion is so frequent during high-traffic days.

Polkadot eschews the single-chain design for a fully interoperable multichain ecosystem. Instead of using one chain to do everything, the Polkadot philosophy lets different chains specialize and share resources

Both Ethereum 2.0 and Polkadot use hybrid consensus models where block production and finality each have their own protocol. The finality protocols of Ethereum 2.0 and Polkadot both finalize batches of blocks in one round.

For block production, both protocols use slot-based protocols that randomly assign validators to a slot and provide a fork choice rule for unfinalized blocks. There are two main differences between Ethereum 2.0 and Polkadot consensus algorithms:

  1. Ethereum 2.0 finalizes batches of blocks according to periods of time called “epochs.” The current plan is to have 32 blocks per epoch and finalize them all in one round. With a predicted block time of 12 seconds, this means the expected time to finality is six minutes (12 minutes maximum). Polkadot’s finality protocol finalizes batches of blocks based on availability and validity checks that happen as the proposed chain grows. The time to finality varies with the number of checks that need to be performed (and invalidity reports cause the protocol to require extra checks). The expected time to finality is 12–60 seconds.
  1. Ethereum 2.0 requires a large number of validators per shard to provide strong validity guarantees. Polkadot can provide stronger guarantees with fewer validators per shard. Polkadot achieves this by making validators distribute an erasure coding to all validators in the system so that anyone — not only the shard’s validators — can reconstruct a parachain’s block and test its validity. The random parachain–validator assignments and secondary checks performed by randomly selected validators make it impossible for the small set of validators on each parachain to collude.

Another important factor of the Polkadot ecosystem is the DOT Token. What role does it play for the functioning of the Polkadot Blockchain as a whole?

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

What is the Polkadot Relay Chain?

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What is the Polkadot Relay Chain?

Polkadot, now live as the Relay Chain, only plans to launch the ability to validate up to 20 shards per block, gradually scaling up to 100 shards per block. Besides parachains, which are scheduled for execution every block, Polkadot also has parathreads, which are scheduled on a dynamic basis.

This allows chains to share the sharded slots, much like multiple small airlines might share a gate at an airport. In order to interact with chains that want to use their own finalization process — e.g., Bitcoin — Polkadot has bridge parachains that offer two-way compatibility.

Relay Chain: At Polkadot’s core is the relay chain, a simple blockchain responsible for coordinating the Polkadot ecosystem of connected parachains. The Relay Chain doesn’t support smart contracts to keep its functionality generalized and geared toward governance matters. The Relay Chain is Polkadot’s hub and is the site of parachain auctions, governance votes and validation.

Parachains and parathreads: Whereas the Relay Chain is the hub, parachains are Polkadot’s spokes. Each parachain is a blockchain capable of independently running its consensus algorithm, utilities, tokens and so on. 

Source: Polkadot Network blog post on Medium

Because the relay chain doesn’t support smart contracts or other specific features, those responsibilities pass onto parachains. However, parachains are not bound to any rules apart from the requirement that they are trustlessly validated. Polkadot limits the number of parachains to 100 — a hard limit creating competition among projects vying to connect to Polkadot.

To connect, potential parachains must win a parachain slot auction by outbidding other projects. Once a parachain wins a slot, it bonds Polkadot’s DOT tokens to pay for its slot lease (parachain slots are never sold, only leased). If these auctions sound complicated, it’s because parachain slots are scarce and Polkadot prioritizes serious, high-quality projects.

Instead of winning a parachain slot auction, a project can connect as a parathread instead. Parathreads are not standalone blockchains; they’re meant for DApps wanting Polkadot’s scalability, throughput and security without the expense and development associated with building parachains.

Both Ethereum 2.0 and Polkadot use hybrid consensus models where block production and finality each have their own protocol. Next week we will take a closer look at the consensus model of Polkadot in another article.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Genesis of Polkadot

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The Genesis of Polkadot

In 2016 Gavin Wood left Ethereum and founded the Web3 Foundation and Parity Technologies, both of which were tasked with researching and developing the project that evolved into Polkadot. But who is Gavin Wood?

Gavin Wood is a gifted programmer credited with inventing the Solidity language, and consequently, smart contracts. As Ethereum’s first chief technology officer, Wood sought to build a decentralized internet capable of hosting uncensorable applications and public good utilities. Despite achieving some of the stepping stones to his vision along the way, he became frustrated by the Ethereum Foundation’s slow pace in building Ethereum 2.0.

After all, multichain Ethereum 2.0 was always his vision (Ethereum 1.0 — the current proof-of-work version — was supposed to be very temporary). Polkadot considers itself a project bearing close similarities to his vision of Ethereum 2.0. Conceptually, Polkadot intends to form the protocol layer of a new Web3 internet that’s fully decentralized, interoperable, secure, private and scalable to billions of people globally. 

Both platforms include smart contract functionality, based on Solidity for Ethereum and Ink for Polkadot. If we look at Ethereum 2.0, both platforms are pursuing a scaling strategy based on parallelized execution. Each thread of execution is called a shard in Ethereum 2.0, and a parachain or parathread in Polkadot. One of the biggest differences is design goals. Ethereum aims to be a platform for distributed finance and smart contract execution, whereas Polkadot has a vision of helping people build entire blockchains and integrating these blockchains with one another.

Ethereum’s Beacon Chain

Ethereum 2.0’s main chain is called the Beacon Chain. The primary load on the Beacon Chain is attestations, which are votes on the availability of shard data and Beacon Chain validity. Each shard in Ethereum 2.0 is simply a blockchain with the Ethereum WebAssembly (eWASM) interface. Ethereum 2.0 launched Phase 0 of a multi-phase rollout in December 2020, operating in parallel to the legacy Ethereum 1.0 chain. Phase 0 provisioned the Beacon Chain, accepting deposits from validators and implementing proof-of-stake consensus, eventually among many shards. Phase 1 will launch 64 shards as simple chains to test the Beacon Chain’s finality.

Each shard submits “crosslinks” to the Beacon Chain, which contains the information to finalize shard data. Phase 1.5 integrates Ethereum 1.0 as a shard to finalize the proof-of-work chain’s blocks. Phase 2 implements the eWASM interface, phasing out proof-of-work and finally making the system usable to end-users. After the launch of the Beacon Chain in Phase 0, the roadmap was altered to prioritize the transition of Ethereum 1.0’s chain from PoW to Ethereum 2.0’s PoS consensus, preceding the rollout of shards on the network. The network will also have “side chains” to interact with chains that are not under the finality protocol of Ethereum 2.0.

Source: Cointelegraph Research

Like Ethereum 2.0, Polkadot also has a main chain, called the Relay Chain, with several shards, called parachains. Parachains are not restricted to a single interface like eWASM. Instead, they can define their own logic and interface as long as they provide their state transition function to the Relay Chain validators so that they can execute it.

We will examine how this Relay Chain operates in praxis in another detailed article next week before we will also take a look at the Consensus Mechanism of Polkadot.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Challenge of Polkadot

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The Challenge of Polkadot

The multichain ecosystem of Polkadot was designed for mass adoption using interoperable blockchains and it does not want to compromise on the blockchain trilemma: decentralization, scalability and security. But can the project that was developed and backed by some of the brightest minds in Web3 really emerge as the top competitor to Ethereum?

Ethereum and Polkadot are attempting to accomplish similar goals but through different avenues. Both platforms are infrastructure to replace the internet as we know it, with secure community-owned and -operated networks. Ethereum aims to implement a globally decentralized, un-ownable, digital computer for executing peer-to-peer contracts (smart contracts).

In contrast, Polkadot aims to provide a framework for building your own blockchain and an ability to connect different blockchains with one another. Put simply, Ethereum is a world computer, while Polkadot is a blockchain of blockchains.

Polkadot Ecosystem Map

Source: PolkaProject

The Strength of Ethereum

Ethereum’s key strength is its large and established ecosystem of developers, users and businesses, including its rich set of developer tools, tutorials, etc. It already enjoys significant network effects from this ecosystem, making it the de facto smart contract platform. Ethereum standards, in many cases, become industry standards, such as ERC-20.

The value of the Ethereum network is similarly significant, providing a high degree of economic security based on the value of the underlying Ether token. The DeFi space, which is one of the areas in the crypto space with the most developer traction, is largely built on Ethereum and leverages the composability among different Ethereum smart contracts that can call one another in the single Ethereum Virtual Machine that powers Ethereum 1.0.

The key challenge facing Ethereum is scalability. The success of the CryptoKitties application demonstrated some of the scalability limits that affect Ethereum 1.0. One popular application was able to significantly degrade the performance and throughput of transactions on the network.

Another challenge is the gas cost required to run smart contracts on the platform. Gas fees are required for the security of the system overall and to protect it from being stalled by runaway programs. But as the value of Ether has risen, gas fees for running smart contracts has also risen and has made certain use cases prohibitively expensive. These costs tie back to scalability because if there were more capacity, the fees for each transaction could be lowered.

In this article series we will explore how Polkadot aims at challenging Ethereum in these important areas but first we will start next week with a look into the history of Polkadot.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Solana NFT Sales and Transaction Volume

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Solana NFT Sales and Transaction Volume

DeFi is not the only driver of Solana adoption. Digital artists have also embraced the platform’s low fees and created some smash hits in the process.

The two top NFT projects on Solana are “Degenerate Ape Academy,” which hit the ball out of the park in August 2021 and sold out in minutes, and rival “Solana Monkey Business,” whose secondary sales have continued growing in the last months.

Total NFT sales reached $247 million in September 2021 and $246 million in October. At the same time, Ethereum NFT sales amounted to $2.2 billion and $1.7 billion, respectively.

Most of that volume comes from big-ticket sales such as “CryptoPunks” or “Bored Ape Yacht Club,” where a single deal can be worth millions of dollars.

Secondary sales for Solana’s top NFT projects from August to October 2021

Source: Messari

Solana NFT Sales

Looking at just the dollar-denominated volume doesn’t paint a complete picture, however. Ethereum saw 132,879 and Solana 68,235 unique buyers in October, according to Messari. The average amount paid for an NFT on Solana was $1,097 in October 2021, signifying 224,000 purchases. 

From a liquidity standpoint, selling NFTs on Solana might be even more attractive to artists than Ethereum because competition is less intense, and the number of transactions is still half.

Solana is backed by the high and mighty in crypto, and the project showcases promising technological innovation. Centralization risk is a caveat, but large token holders are unlikely to dump significant amounts of SOL any time soon — not while there is money to be made in DeFi, futures and NFTs.

But Solana is not the only crypto project competing with Buterin’s “world computer” which itself is a force of nature and still the main driver of innovation and value in crypto. We will therefore also take a look at projects like Polkadot and Algorand.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Importance of DeFi for Solana

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The Importance of DeFi for Solana

Thanks to the incredible speed Solana offers, and due to the timing of Solana’s market entry coinciding with “DeFi summer,” DeFi applications have always been a mainstay for this cryptocurrency. 178 DeFi projects are listed on the enterprise’s website as of September 2022.

DeFi is an integral part of any blockchain ecosystem because of the possible earnings generated. While Ethereum miners get paid handsomely via transaction fees, Solana’s business is more service-oriented. Cumulative DeFi revenue across all blockchains is set to surpass $3 billion soon, and Solana is well-positioned to grab its share of this emerging market.

Figure 1: Solana has more than 178 live DeFi projects

Source: @solanians at Twitter.com

Figure 2: Solana’s cumulative deFi revenue

Source: The Block Research, Ethereum ETL, The Graph

Total value locked (TVL) in DeFi on Solana

TVL is the total amount locked in a currency’s DeFi DApps. The best way to compare TVL is by denominating amounts in native tokens. SOL’s price has appreciated 20x since April 2021, and the dollar-denominated TVL would have increased by the same amount without additional SOL locked.

Figure 3: TVL locked in DeFi on Solana, denominated in SOL

Source: Defi Llama

A look at Defi Llama’s chart reveals healthy growth until mid-October, followed by a slump. 11 million SOL was locked at the beginning of April 2021 and 81 million SOL in October. $257.6 million of locked value grew to $14.8 billion during the same period.

Research by Messari found extraordinary growth of perpetual future trading on Solana. Notably, SOL perpetuals on Solana DeFi grew 60x compared to 13% for Bitcoin perpetuals, showing a tight focus of the ecosystem on itself.

Figure 4: Perpetual future trading volume seven-day growth

Source: Messari

Raydium and Marinade Finance are the two projects with the most value locked, while Mango Markets is the number one futures market. Serum, a DEX and a trading protocol developed by FTX exchange, is another important player. 

But certainly DeFi is not the only driver of Solana adoption. Digital artists have also embraced the platform’s low fees and created some smash hits in the process. Therefore we will take a closer look at the role of NFTs in the Solana ecosystem!

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Time to Finality for Solana

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The Time to Finality for Solana

Transactions per second are not the best metric to gauge users’ felt experience. Crypto influencer Packy McCormick stated that using Solana felt like “using the internet” in his analysis for Not Boring. But what does that mean?

The first slide in Solana’s seed round deck reads: “Solana is blockchain at NASDAQ speed.” 

Solana block times are measured below 400 milliseconds, which demands considerable network speed and node processing capacity. As a result, Solana node requirements are steep. A prospective node needs a 12 core CPU, 128GB RAM (256GB for an RPC node) and a blazingly fast 500GB SSD.

Theoretical TPS

As a proof of concept, Solana’s testnet has demonstrated 400,000 TPS on a single machine without any networking, which is almost at Nasdaq speed, where the trading servers handle up to 500,000 TPS.

Out in the wild, Solana’s testnet has reached bursts of 59,400 TPS, making it “faster than Visa.” In lab environments, 50 nodes were able to conduct 111,609 TPS on their mainnet. Real-world speed in a distributed system with nodes spread across the globe is, of course, affected by available network speeds. 

Table: Solana TPS in a lab environment

Source: Solana.blog

Solana’s white paper claims that the theoretical limit to its capacity is even higher than 400,000 TPS and will continue to increase as network speeds and node processing capacity rise and network latency shrinks.

Solana’s performance is achieved without sharding, which is the approach that Ethereum will implement in its next iteration. With sharding, a blockchain is split up into multiple pieces that work in parallel. Still, it introduces complex problems for DeFi when assets processed on different shards are composed.

Time to finality

Transactions are only deemed final after three to 12 validators have confirmed them, depending on the desired security level. The time it takes for these three to 12 confirmations is called the time to finality. Solana takes five seconds on average, with outliers at 12 seconds — a long time for internet standards. 

Research by email client Superhuman revealed that users experience delays of more than 100 milliseconds as noticeable friction. Rival layer-one blockchain Avalanche boasts only 1.3–1.6 seconds to finality.

So it seems that Solana, despite its high speed, could never reach the point where it could build a decisive lead over its competition.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Transactions per Second for Solana

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Transactions per Second for Solana

Low fees are one of the existential selling points for Solana. As with Ethereum, the actual fee is a function of supply and demand. When demand for block space rises, the price to include a given transaction in a block appreciates accordingly. 

Solana features a much higher transaction capacity than Ethereum. We’ll cover just how much in the chapter on theoretical transactions per second.

A look at network explorer Solana Beach reveals transactions cost between 5,000 and 10,000 lamports. One lamport equals one-billionth SOL. In dollar terms, the average Solana transaction has cost $0.00025.

Actual transactions per second (TPS)

Between 2,000 and 3,000 TPS are conducted on the Solana network at the time of this report. This number dwarves Ethereum’s 35 TPS by almost two orders of magnitude.

Figure: Solana transaction breakdown

Source: Solana Beach

On Solana, 80%–90% of all transactions are used for voting and synchronization, so this number is misleading on its own. Other blockchain projects have ridiculed Solana for its inflated numbers in the past.

Avalanche CEO Sirer weighs in on Solana’s transaction numbers. Source: Twitter

Before comparing apples to apples, voting has to be factored out of transaction counts since Ethereum nodes don’t vote. Assuming the upper bound of 90% votes, Solana would still process 200–300 TPS or 10x Ethereum at a fraction of the cost.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Consensus Mechanism of Solana

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The Consensus Mechanism of Solana

Solana has a unique consensus mechanism called TowerBFT and proof-of-history (PoH). Co-founder Anatoly Yakovenko, with a background in distributed systems design, thought hard about blockchain scalability problems in 2017 after Bitcoin transactions took days when demand surged. 

According to an interview with Acquired, he discovered that most consensus issues vanish when the systems involved agree on a common timeline. Take the dreaded double-spend issue, for instance. In a synchronized system, you can assume that the first transaction is valid and the second is thus fraudulent.

Solana implements a surprisingly straightforward method of synchronizing nodes. It uses a sequential hash that runs over itself continuously, creating a rhythm that all nodes follow.

Proof-of-history uses recursive calculations where the previous output is used as the next input. Only with the output of the current function “X” will a validator be able to calculate the output of the next function “Y.” All validators need to solve the same function “X” and then be able to derive the output for the next function “Y” around the same time. Like this, Solana creates synchronization across its network.

Figure: The proof-of-history flow of control

Source: Binance Research

Besides PoH, Solana uses its version of the practical Byzantine fault tolerance (PBFT) consensus mechanism called Tower. PBFT is an industry standard.

Programming language

Solana uses Rust, a recent, functional programming language for programs that run on top of its blockchain and base layer.

Rust has seen a remarkable rise in popularity for blockchain applications thanks to its performance advantages. From a purely technical point of view, it seems like a clear winner compared to Ethereum’s Solidity.

However, the lack of tooling, libraries and knowledgeable developers means that many wheels need reinventing to get DApps off the ground. The advent of the Anchor framework has ameliorated that somewhat by reducing the amount of work necessary just to get started by 80%.

This next article will look at the question if Solana is able to scale. What is the network’s transaction speed in theory and practice? And what are the advantages and disadvantages of the design choices involved?

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Staking and Lending with Solana

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Staking and Lending with Solana

SOL holders enjoy a variety of options for putting their tokens to work. Non-custodial staking is available in the Exodus wallet or with the native Solana-CLI command-line tool. Staking rewards are around 6%–6.5% APY at the time of writing.

Custodial staking is possible on Binance Earn, Kraken and FTX and, typically, offers fewer earnings. Binance Earn offered 6.5% APY this November 2021.

Then there’s lending on platforms such as Solend or Tulip Finance. Even staked SOL can be lent on Tulip, albeit for a meager 1.79% yearly yield, while Solend offers 3.87% for supplied SOL.

Lending becomes more exciting when providing stablecoins. Solend offers 24% on USD Coin (USDC), and Tulip grants 15% APY on USDC-USDT pairs via Raydium.

Solana initial coin distribution breakdown

The degree to which Solana is decentralized was the subject of heated controversy on Crypto Twitter this autumn. The pièce de résistance is the number of tokens held by the team and by VC backers. Solana has an initial token supply of 500 million SOL with a yearly inflation rate of 1.5%.

Binance Research found out that the team holds 12.79%, and VCs bought 29.15% of all tokens during the seed and funding sale, a total of 41.94%.

Figure: Solana initial token supply distribution

Source: Binance Research

The pie chart doesn’t include the $314.15-million token sale that Polychain Capital and a16z completed in June 2021, and the exact amount of tokens involved was not published. The exchange price for SOL was $30–$40 in the months ahead, though it’s probably fair to assume that a steep discount was applied, given the scale of the purchase. Presupposing a $20 token price, 15.7 million SOL or 3.14% of the initial supply would have changed hands. 

Staking validators have to pay transaction fees on voting and syncing transactions but earn staking rewards as well as block rewards. Running a viable validator requires a stake that produces rewards in excess of transaction costs. In September 2021, the minimum stake required had surpassed $1 million — a significant barrier to entry for new validators. 

Despite that, almost 1,200 validators are operational at the time of this writing. The top 19 validators control 33% of all SOL staked and could theoretically halt the network if they colluded.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Solana vs. Ethereum

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Solana vs. Ethereum

Solana’s implementation is fundamentally different from Ethereum’s. On the latter, programs can hold state; on the former, they cannot. A program’s state is the data it uses.

For example, one piece of data could be an incremental counter that assigns a number to NFTs as they are minted. This incremental counter would be stored in a program’s state on Ethereum, which Solana cannot do.

Instead, Solana uses accounts to store and access data. Accounts can also store multiple addresses to send and receive tokens. Like Ethereum with its ERC-20 standard, Solana also supports tokens built atop it.

Unlike Ethereum, every token needs an address of its own, which is then part of an account. It is a bit similar to Bitcoin’s HD wallets in practice, but with a different implementation and functionality.

To make a long story short, we will look at active accounts instead of unique addresses. Though this number is difficult to pinpoint accurately, research from CoinDesk and Solana Beach arrives at a substantiated estimate of 1.2 million active accounts.

Solana protocol revenue and price-to-sales ratio

One of Solana’s most vital selling points is its low transaction fees. Currently, a transaction costs $0.00025. Transactions on Solana are a bargain compared to Ethereum, where a Uniswap trade frequently costs over $100. Conversely, these low fees lead to lower protocol revenues. 

Source: Token Terminal (Y-axis has a log scale.)

The Graph reports earnings of just $3.2 million for Solana, while Ethereum miners gained $1.5 billion in the 30 days leading up to Nov. 16, 2021.

Looking at the price-to-sales ratio, Solana lands on a multiple of 30,909x earnings, while storage protocol Filecoin has a multiple of “only” 514x.

Solana is in a difficult position from a price-to-sales perspective. On the one hand, it needs low fees to remain attractive for traders and financial applications. On the other hand, SOL’s price is hard to justify at this point.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

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