Solana 101: Proof of History Explained

What is Solana?

So, what’s Solana? Good question. We’re here to help you understand.

Solana is a third-generation blockchain and one of the newest, most exciting competitors in the decentralized application (Dapp) sector. Its high speed, low fees and strong venture capitalist backing helped it rise meteorically into the top ten cryptocurrencies in the world between 2020-21. (1)

Created in 2017 by Anatatoly Yakovenko and officially launched in 2020, Solana’s main innovation is something called proof of history (PoH), which enables its blockchain to process transactions many multiples faster and cheaper than some of its main rivals such as Ethereum and Cardano. (2)

While this all sounds great—and is on many levels—it’s worth talking a step back and reviewing the problems that Solana is trying to fix and what the implications are so that we can better understand it as an asset.

Let’s take a look.

The blockchain trilemma

The blockchain trilemma is a concept first articulated by Ethereum creator Vitalik Buterin. It outlines the three main challenges inherent in building cryptocurrency blockchains: decentralization, security, and scalability. (3)

Managing to accomplish all three things in equal measure is a problem that most blockchains are trying to solve at some level.

The issue, though, is that with the current technology available, it’s difficult to achieve any of the two without sacrificing the third.

Understanding decentralization and security

Have you ever caught yourself lying in bed wondering: “…but where IS the blockchain?” Don’t worry, us too. The answer, as it turns out, is: it’s in nodes.

Think of nodes (aka validators) as computers run by a disparate group of people all over the world who have an interest in maintaining a certain cryptocurrency network. One of their most important functions is to verify and record transactions on their blockchain. They do this by communicating with other nodes to achieve consensus, and agree on what information should be added to the blockchain and what shouldn’t.

We’ve gone over the two most popular ways for nodes to gain consensus when we broke down proof of stake and proof of work mechanisms with the differences between Bitcoin and Ethereum.

The important takeaways from all this node talk, though, are these: first, the more nodes there are and the more spread out they are, the more secure the network is against hackers, electricity outages or other systemic issues. (4)

Second, as a blockchain matures and grows, these nodes have to store and verify an increasing amount of information and talk to an increasing number of other nodes to achieve consensus.

This can result in congestion, throughput issues and high network fees.

And this is where we circle back to the trilemma. It’s simply very difficult to get a high degree of security and decentralization without sacrificing speed. That’s why the most popular, secure, and decentralized cryptocurrency in the world, Bitcoin, is also one of the slowest. Currently, it can handle processing 5 transactions per second (tps). That’s compared with 10-30 tps for Ethereum and 1500 tps for a centralized, traditional payment processor like Visa. (5)

What Solana brings to the table

Solana attempts to improve on the scalability issues inherent in proof of stake and proof of work by introducing something called proof of history (PoH). You can’t exactly think of PoH as a consensus mechanism in and of itself. Rather, it’s used in conjunction with proof of stake in order to drastically increase the efficiency of verifying and recording transactions on the Solana blockchain.

How this is achieved can get intimidatingly technical rather quickly. At a high level, however, what is important to understand is that PoH uses an algorithm to centralize the timestamping of blocks on the blockchain. This allows node operators to agree on the time certain transactions have taken place without having to interact with each other and verify it among themselves. (6)

In networks like Ethereum and Bitcoin, agreeing on the time of transactions isn’t a given. Time has to be verified among nodes along with transactions in order for information to be added permanently to the blockchain. (4)

By having a function that eliminates the necessity for nodes to agree on the time, Solana validators have less to process and transmit in each block. This allows for faster transactions times. Shockingly fast. Solana has a purported capacity to process 65000 tps. (5)

The high throughput and corresponding low fees that this lack of congestion entails, has seen Solana attract widespread attention and explode in popularity. It now boasts hundreds of Dapps on its platform and, most notably, has become one of the most important platforms for non-fungible tokens (NFTs) in the form of digital collectables, music, and art. (7)

Untested waters: why everybody isn’t jumping over to Solana

Solana’s innovations aren’t trivial and have got a lot of people excited. And a vibrant ecosystem of developers, Dapps, and users have sprung up around the Solana network to testify to this reality.

While Solana has a lot to offer, and promises to continue growing, the fact remains that it is very new. It’s only been fully functioning since 2020. Compared with Bitcoin, which has over a decade of stress-testing its network under its belt, Solana simply has not had a long enough history for us to fully understand the implications of the technology it uses.

The decentralization and security of the network, in particular, have been put under scrutiny by some in the crypto community. They cite Solana’s high involvement with venture capitalists during its Initial Coin Offering as well as a temporary shutdown of the network in 2021 as evidence that the degree to which it is decentralized and secure is debatable. (5)

Looking forward: our take

While some people have labeled Solana as an “Ethereum Killer,” we don’t see the battle between these two blockchains as a zero-sum game. Ethereum has first-mover advantage and is the undoubted leader in blockchains offering smart contract capabilities and Dapp development. For the most part, it does what it is supposed to do, and it does it well. However, its popularity, decentralization and relatively high level of security has resulted in backlogs and very high network fees.

This leaves room for upstarts like Solana to propose new solutions to well-acknowledged problems. Though the fundamentals of Solana have not been as tested as Ethereum or Bitcoin, it is innovating in interesting ways that could have far-reaching consequences.

There’s very likely room for both these platforms as the adoption of cryptocurrency continues to increase globally.

Sources

(1) "Launch and initial token distribution,” Messari: https://messari.io/asset/solana/profile/launch-and-initial-token-distribution

(2) “Solana,” Coin Desk: https://www.coindesk.com/learn/solana/

(3) “What is Solana and how does it work?” Coin Telegraph: https://cointelegraph.com/news/what-is-solana-and-how-does-it-work

(4) “Understanding a blockchain node: an overview,” Blockchain Council: https://www.blockchain-council.org/blockchain/blockchain-nodes/#:~:text=Blockchain%20nodes%20are%20network%20stakeholders,network%20transactions%2C%20known%20as%20blocks.

(5) “Solana could be the Visa of crypto networks. Not so fast, says Visa,” Barron’s: https://www.barrons.com/articles/solana-could-be-the-visa-of-crypto-networks-not-so-fast-says-visa-51642091862

(6) “What is Solana?” Binance Academy: https://academy.binance.com/en/articles/what-is-solana-sol

(7) “A complete simple guide to the top NFT blockchains,” NFT Now: https://nftnow.com/guides/complete-simple-guide-to-top-nft-blockchains/

• The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.
• Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader and the viewer is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.