ECONOMIC RESEARCH PAPER ON SOLANA

INTRODUCTION

16 min readFeb 29, 2024

Every business, venture, or endeavor requires money, capital, or liquidity to strive and succeed, liquidity is the fuel driving the engines of a venture or business. In this article, I delve deeper into how this liquidity is engineered, and distributed to run the day in and day out of the Solana ecosystem, which is the economic study of the ecosystem.

ABSTARCT
Here is a detailed research paper on the state of the economics of the Solana ecosystem detailing a comprehensive report :
On the economic incentives and participation of developers ,validators and users in the solana ecosystem and how this incentives promote network growth,security and sustainability in the ecosystem,
The tokenomics ,its distribution, supply mechanisms, staking rewards, and transaction fees and how they influence the user’s behaviour, network security, and the overall economic stability of the ecosystem,
The market analysis of the solana ecosystem and how it performs in comparison to other major cryptocurrencies ,trends in its market capitalization, token price fluctuations, and trading volumes. How these trends change investors perspective and overall general view of the solana ecosystem,
Comparison of Solana against major crypto ecosystem ,on this article ,insight will be given on the two major ecosystem which are Binance smart chain (BSC) and Ethereum (ETH), their differences in technology, governance, and community engagement,
The defi and NFT impact on the Solana ecosystem and how contributes to its economic landscape ;transaction volumes, user adoption rates, and how these sectors influence the overall economic activity on Solana.
The future economic projections of Solana ecosystem ,including potential growth areas, emerging sectors within the Solana ecosystem, and how external factors (like regulatory changes) might impact its economy.
Risks and challenges facing the Solana ecosystem. including issues regarding scalability challenges, competition from other blockchains, or vulnerabilities in its economic model.

ECONOMIC INCENTIVES AND PARTICIPATION

The fundamentals of our study are understanding the economic incentives in the Solana ecosystem and how these incentives drive participation for various stakeholders within the ecosystem to foster network growth, security, and sustainability.

The Stakeholders and their Incentives

The Developers :

The developers are key players in the Solana ecosystem, without them, there will be no Dapps, or meme coins like Bonk which drives hype, volume, and market participation. They enable Smart contracts, create NFT, and build dapps. Solana has about 2500–3000 monthly active developers on the open source repositories, building across the network.

Incentives for developers can include ;

Grants: Developers are encouraged to build on top of Solana or large protocols by offering grants to builders who deserve them.

You can apply for a grant here https://solana.org/grants

These grants are issued out in hackathon events for instance, which offer exposure to projects to attract investments or VC funding

VC There have been notable such hackathons which include;

Grizzlython hackathon spanning a solid 2200 plus developers around February with prizes of up to $1m up for grabs,

The hyperdrive hackathon in October with over 4000 builders across the world and $1m in prizes & seed funding.

Solend, a money lending market also offered between 5000–30000 USDC to developers to build on their protocol.

The Solana Foundation offered up to $10m fund for small-scale grants exploring the intersection of the Solana blockchain and Artificial Intelligence, making the chain the first Layer 1 blockchain to integrate AI with a chat-gpt plugin.

Funding: Developers are exposed to VC funding by Solana Foundation itself or Venture Capital firms, these help propel the growth of the network

Just like the recent Series A funding round of $9.5m on Helius lab led by Foundation Capital with participation from Reciprocal Ventures, 6MV, Ch. 1, and Propel

Backpack raising $17m strategic Series A round led by placeholder, Robot Ventures, Amber group, Wintermute, and Selini

Revenue: Protocols built on the Solana network generate revenue as in fees for the owners of such projects, revenue accrued from NFT mints, taxes on deployed smart contracts, and fees users pay to use the project.

Airdrop: It is now a known meta to airdrop to drop tokens to developers who built, deployed, or helped test the platform before launch

The Validators :
Validations are a very crucial player in the Solana ecosystem as they help in validating transactions and securing the network. The main channels of remittances are protocol-based rewards and transaction fees.

Protocol-based rewards are generated from inflationary issuances from a defined inflation schedule. These rewards will constitute the total protocol-based reward delivered to validators, the remaining sourced from transaction fees. In the early days of the network, protocol-based rewards, deployed based on predefined issuance were likely the main drive behind most validating incentives to participate in the network.

These protocol-based rewards are calculated per epoch and distributed across the active delegated stake and validator set (per validator commission). The per annum inflation rate is based on a pre-determined disinflationary schedule. This provides the network with supply predictability, economic stability, and security.

Transaction fees are participant-to-participant transfers, attached to network interactions as motivation and compensation for the inclusion and execution of a proposed transaction—a mechanism for long-term economic stability and forking protection through partial burning of each transaction fee.

Token Airdrops: over the past few months, there have been retroactive airdrops which literally every user on the Solana network got eligible for, Some of the most popular ones include: Wen and Jup Drop.

NFT drop: Some projects prefer NFT drops instead of tokenized drops, users of Crossmint were the first to receive compressed NFT.https://x.com/crossmint/status/1636441281860714496?s=20

Earning Opportunities: Multiple ways to earn in the crypto space reward users showing up every day, and up and the work.

HOW THESE INCENTIVES PROMOTE NETWORK GROWTH, SECURITY, AND SUSTAINABILITY

The influx of industrial Talent: With the experience that hackathon events create, young talent is attracted to such events to build on the Solana network.

Improvement in Tech and Better apps: As taps individuals come into the Solana blockchain, the creation of better dapps set to enhance the network

Economic Stability: Validators receive a portion of the fees generated to help keep them secure. This mechanism is not only for the benefit of the validator but also for the long-term stability of the chain.

Network Congestion: As transactions are introduced, this helps reduce spam on the network by adding a cost to every transaction.

TOKENOMICS

The tokenonomics design of Solana is robust and well-planned to be fairly distributed evenly among participants of the network.

Token Distribution :

The initial token distribution of Solana (SOL) was initially done through a seed sale with 25.6% allocated to the initial seed round and 20.4% to the founding round with subsequent airdrop to users over a significant period.

Validators are offered newly minted tokens as a reward versus another blockchain with Proof of Work, Solana’s tokenomic distribution is using Proof of History as the mechanism for releasing tokens into the market.

Limited Supply of 1 billion tokens creates a need for scarcity and curbs inflation
Tokens are distributed widely across all participants of the network to promote decentralization and ownership

Supply Mechanism :

Solana has a fixed supply of 1 billion tokens, with a circulating supply of 445 million tokens, the rest of which are released over time as block rewards through an issuance inflation-based scheme. The supply mechanisms of SOL tokens are designed to incentivize validators to secure the network by staking their tokens and participating in the consensus process.

The supply mechanism of Solana is built to accommodate :

Minting of tokens to help curb inflation and balance supply against demand for the stability of the network.
Token burns to deflate the supply and increase token price value.
In the inflation-based model, the Solan network is set at an 8% annual inflation rate which is distributed through staking rewards

Staking Rewards :

Staking rewards incentivize users to stake their token over a certain period to attract yield

Solana staking rewards users with an estimated 5% interest per year, minus the validators’ commission rate. The commission rate is gradually decreasing by 15% per year, until reaching a floor of 1.5%.

This means that, on average, stalkers of Solana are earning about 5.01% if they hold an asset for 365 days. The reward rate has not changed over the last 24 hours. 30 days ago, the reward rate for Solana was 5.94%. Today, the staking ratio, or the percentage of eligible tokens currently being staked, is 68.29%.

Users are enticed to delegate their tokens to a validator to earn rewards.
These delegated tokens to the validators help in securing the network and participation in the network consensus.

Transaction Fees :

These are the small fees paid to process ‘instructions’ on the Solana blockchain. On Solana network, they are designed to be low-cost efficient

As each transaction (which contains one or more instructions) is sent throughthe network, it gets processed by the current leader validation client. Once confirmed as a global state transaction, this transaction fee is paid to the network to help support the economic design of the Solana blockchain.

It is to be noted that transaction fees are different from account rent, while transaction fees are paid to process instructions on the network, rent is paid to store data on the blockchain.

Transaction fees are calculated based on two main parts:

a statically set base fee per signature, and
the computational resources used during the transaction, measured in “compute units”

Transaction Fees on Solana are significantly low, /these attract lots of people and flood liquidity into the Solana market.
A portion of these fees are issued to Validators under an inflation-based scheme, these incentives Validators to further secure the network.

IMPACT ON THE USER BEHAVIOUR, NETWORK SECURITY, AND ECONOMIC STABILITY

User Behaviour: Low fees on Solana attract users of all kinds, degen traders and so all, developers across both trading and staking mechanisms, and the t, token is designed to accommodate validator rewards to compensate for their CPU/GPU resources necessary to process transactions.
Network Security: Transaction fees help reduce network spam by introducing real costs to transactions, staking rewards incentivize validators to maintain the network and a robust tokenomics design makes sure to curb inflation.
Economic Stability: The token design has room for balancing supply and demand through inflation and burn mechanism and a protocol-captured minimum fee amount per transaction providing long-term economic stability to the network.

MARKET ANALYSIS

There has been a rapid surge in the Solana ecosystem recently, encompassing various segments of the ecosystem, both in price, adoption rate, volume, transaction count, and active participation compared to other cryptocurrencies this year.

Comparison with Major Cryptocurrencies

Solana has achieved significant growth and higher adoption rates compared to major cryptocurrencies in the space, bitcoin, and Ethereum.

Solana is currently the number layer 1 solution in cryptocurrency with over 1000x more usage than Ethereum.

Market Trend

We have seen a shift in market trend and focus on Solana in the past few months, last bull run cycle was purely based on NFT mints, with shitcoins taking over.

PS: Memecoins was not a thing on Solana with a few handfuls taking the lead, now it drives a huge activity on the network.

The recent market trend has been in meme coins with Bonk leading the race, raking an outstanding 250x in a very short period, these have led to several factors such as the influx of ETH degen traders and meme traders into the ecosystem for people looking for an escape away from the expensive gas fees on Ethereum blockchain

Price Surge :

With an all-time low cycle of $8.28 as of Dec 28th,2022, and experiencing a %1450 surge to the current price now, against BTC, ETH, BNB, and ARP, who are only rocking a %300–%400 gain.

Trading Volume

On the 16th of December,2023, Solana flipped the Ethereum index volume which became the 1st time in history, and held the first position for a few days.

MARKET PERCEPTION OF SOLANA AND AN INVESTOR POINT OF VIEW

Solana is viewed as a dominant chain, compatible with all, and attractive due to its very cheap gas fees and escape from other layer 1’s.
Given the recent meme trend, the volume experienced in those peak degen trading activities has been normal.
At the beginning of 2022, a lot of people lost faith in the Solana ecosystem due to its high trading volatility and the trading price as of then but subsequently were proven wrong, performing 5x more than other major cryptocurrencies.
Solana chain has survived and turned out to be a thriving ecosystem.
The cutting-edge Proof of History technology is an intriguing factor for investors.
Solana blockchain has been an advocator of Depin technologies, the first layer 1 to integrate AI into its protocol.

COMPARISON OF SOLANA BETWEEN BINANCE SMART CHAIN AND ETHEREUM

Solana, Ethereum, and Binance Smart Chain are the most prominent chains in the crypto space with, these three chains significantly dominating 75% of Dex volume and transaction count. Let's take a comparative analysis of them

Technology

Every blockchain has a few “cutting-edge ”technology that makes it unique, but it depends on which one is the most scalable among them.

Solana utilizes a Proof of History (PoH) consensus algorithm that records the time between transactions. PoH acts as a decentralized clock for the network, allowing Solana to process transactions quickly and efficiently thereby achieving high throughput scalability.

It combines Proof of History with a variant of Practical Byzantine Fault Tolerance (PBFT) called Tower BFT, this ensures the finality of transactions and makes sure they are irreversible

Solana is coded in Rust language which provides memory safety without garbage collection and runtime error. This means that you can write code without worrying about memory leaks, dangling pointers, or buffer overflows.

Solana achieves scalability with an outstanding 50,000 Transactions Per Second (TPS), which is 3,800 times faster than Ethereum and 10,000 times faster than Bitcoin

Ethereum employed the Proof of Work (PoW) Consensus mechanism which is energy intensive and replaced by Proof of Stake (PoS) and also implements shard chains to enable parallel transaction processing. Enhancements like the Beacon Chain were included which coordinates validators and manages consensus, and the introduction of eWASM (Ethereum WebAssembly) for the improvement of smart contract execution efficiency.

Binance employs a centralized consensus mechanism; the Proof-of-Stake-Authority (PoSA), with a focus on fast transaction output, compatibility, and high performance at the expense of decentralization.

PoSA combines elements of both Proof of Stake (PoS) and Byzantine Fault Tolerance (BFT) consensus mechanisms. Validators take turns validating blocks according to their stake in the network.

They are EVM-compatible ie developers can port their ETH dapps into the network, it also runs parallel to the Binance chain

Governance

Solana and Ethereum embrace a more decentralized approach towards governance whilst the Binance Smart chain is governed by Binance exchange, raising concerns on control and censorship.

Solana governance is mostly token-based governance, through on-chain proposals, thereby enhancing decentralization

Ethereum Improvement Proposals (EIP) for performing consensus votes and improving the chain.

Binance Smart Chain Network is largely centered on the Binance Exchange. But there is also a very small set of validators about 21 securing the network, they also have a major stake in the governance of the BSC chain, and holders of the BSC token are given into consideration.

Community Engagement

Community is the bedrock of any blockchain, with a community that blockchain is a wasteland

Solana is popular for its hackathon events which in turn provide grants, investments, and funding to the participants, these encourage community participation, Solana currently has the largest user base in terms of active participation, and its very low fees are very advantageous for users.

Ethereum fosters communities with events such as the Ethereum Denver which is very popular among developer communities as they come together to network and share ideas

Binance Smart Chain has a very robust user base and active on-chain participation, but community engagement is limited.

IMPACT ON THEIR ECONOMICS

Solana attracts both developers and users due to its high scalability and very low fees.

Ethereum struggles with scalability issues and very high gas fees.

Binance Smart Chain offers very fast and cheap transactions but raises the question of centralization.

DEFI ON SOLANA

DeFi is the movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols that run without intermediaries. There are about 200 known Defi protocols with about 19 built on Solana.

Solana has experienced a rapid surge in Total Value Locked and more protocols built on top of the blockchain spanning Decentralized Exchanges, DEXs, Lending and Borrowing Protocols, and Cross-chain Bridges.

Transaction Volume

As of February 2024, DeFi Llama shows that the total value locked (TVL) on Solana is $2.49b, the highest amount of TVL on Solana since June 2022. In the recent months of 2024, DeFi bots and MeV bots increased the on-chain transaction volume of Solana-based stablecoins to over $1 trillion in the first two months of the year and a market share of about 29%, a 10 % boost from December 2023 to January 2024.

User Adoption Rate

According to Token Terminal, Solana had about 900,000 daily active users on January 31, 2024, which is the highest number of active user base since 2020. While maintaining about 580,000 active users since then. In December 2023, Solana had 13.9 million active addresses, which is a 98.9% increase from the previous month. In January 2024, the number of new addresses on Solana jumped to 11.81 million, an impressive 18% increase from December last year

Impact on Economic Activity

There have been a very high amount of MeV bots on the Solana network due to high user adoption
Large Trading volumes
The influx of retail and institutional liquidity in the market

NFTs ON SOLANA

The 2021 bull run on Solana was typically pioneered by NFTs on the Solana network, with OG collections like Solana Monkey Business and Degen Ape Academy paving the frontier for a wave of euphoria of NFT mints at the time, since then there has been a rise of notable collections like Degods collection, with a subsidiary artwork named Yoots, currently when writing this article, the Madlabs NFT collection built by Backpack Exchange, a crypto wallet and exchange is dominating the NFT space on the Solana blockchain.

Ever since the 2021 NFT bull, Solana remains Layer 1 with the largest NFT user base and a 15% NFT market share. Tensor currently leading the NFT marketplace and Magic Eden is following behind with prospects of an airdrop on both marketplaces.

Transaction Volume

With an all-time sales volume of $5b as of February 24th,2024, this increase indicates a significant change in the perception of digital artwork. With over 2.2 million buyers and 1.6 million sellers, Solana boasts nearly 43 million NFT transactions

Solana maintains an average of $ 10m-$15m daily trading volume, with February month sales at $160m, these show its underlying vibrant NFT community.

User Adoption

The preliminary growth in the Solana network NFTs market has been the driving force that brought the network into the retail limelight.

Impact on Economic Activity

With over $1.1b paid in creators' revenue, these help in generating income various income streams

Revenue Generation in Fees for different protocols on the Solana blockchain

The exponential growth of the user base and the initial flock of users in the early 2021 bull are still on the Solana network.

FUTURE ECONOMIC PROJECTIONS
Potential Growth Areas and Emerging Sectors

Solana became the 1st layer 1 blockchain to integrate AI into its platform, not just in the recent hype on AI technology. AI is a novel technology and still has a long way to go, with Solana pioneering the next-generation tech on its blockchain.

Depin Technology stands for Decentralized physical infrastructure networks (DePINs), which are blockchain protocols that build and operate physical hardware infrastructure in an open and decentralized manner, the industry covers infrastructure for data storage, wireless connectivity, energy, data collection, and more.

Public Goods have become a common topic with Cubik pioneering the industry on issues concerning public goods, there have also been some good platforms like Stokepile with the aid of quadratic funding, Solana appears to be leading in that sector which is believed to be a novel market area

Real World Assets (RWA) allows investors to diversify their portfolio .parcl is an example of such a project on Solana which focuses on Homebase Real Estate.

The path to RWA adoption and different categories

The chart above shows the predicted exponential curve of RWA on Solana it is expected to skyrocket as “Tokenization of illiquid assets to reach $16T”

RISKS AND CHALLENGES FACING THE SOLANA BLOCKCHAIN

Technical Instability: It is common to experience network outages on the Solana network during high economic on-chain activities, these outages were more rampant during the NFT bullrun market and NFT mint mania, which could be as a result of the limited amount of validators on Solana, network outages disrupts transactional activities and the liquidation of assets during high market volatility, it also poses a major issue and can be detrimental to Community sentiment.

Market Volatility: Market volatility is also a concern for the Solana chain, both for the main $Sol token and meme tokens on the network. Liquidations are more prevalent, for some actors these might not be healthy.

Regulatory Policies: With the recent pandemonia of SEC cases against Crypto assets and Securities, it is with no doubt that these policies pose a great threat to Decentralized networks and can influence decision-making on the network.

Competition from other Blockchains: With Ethereum perceived as the almighty superior chai, with its large validators network, its high gas fees, and OG top-tier developers on the network, it is a superb feat for Solana to maintain the leading layer 1 chain for so long, in a long time.

Phishing Attacks: Where it is good, there is also the bad, Solana is popular for housing one of the notorious Web3 scammers on the network, with these parties raking in 9 figures in profit every year.

Flash Loan Attacks and MeV Bots on Solana: Since the recent spike in on_chain activities on Solana ,they amount of MeV bots have increased ,this was not common as of December 2023,when they chain was quite novel to this amount of user participation it experiences now.

REFERENCES :

Stakeholders and Incentives :

The Developers: https://solana.com/news/2023-state-of-solana-developer-ecosystem

Grants: https://thedefiant.io/solend-gra