State of Solana Q1 2023

Key Insights

• Solana’s market cap rebounded along with the broader market, increasing 118.1% QoQ. Solana revenue (in SOL) increased 68.7% QoQ with greater adoption of priority fees.
• Several ecosystem developments drove fee payer and transaction activity during Q1, including the BONK airdrop, several NFT collections, and DePIN applications.
• Liquid staking derivatives (LSDs) grew significantly QoQ, led by Marinade Finance, Lido, Jito, and JPool.
• The Solana Foundation's growth initiatives to invest in its ecosystem continued, including those with Grizzlython, which became the largest hackathon in Solana’s history.
• The average number of validators increased by 18.9% QoQ, signaling that the network progressed toward a more decentralized state.
• Shortly after the release of the v1.14 upgrades on February 21, the Solana network experienced an outage. Plans to improve the network's upgrade process followed.

Primer on Solana

Solana is a public, open-source blockchain that aims to deliver scalability and support smart contracts without sacrificing decentralization and security. It accomplishes this through a novel timestamp mechanism called Proof-of-History (PoH). Using PoH, the network can order and batch transactions before they’re processed through a Proof-of-Stake (PoS) mechanism. Additional design goals include sub-second settlement times, low transaction costs, and support for all LLVM-compatible smart contract languages, including Rust, C, C++, and eventually Move.

Key Metrics

Performance Analysis

Network Overview

After reaching what appeared to be a foundational user base through the end of Q4 2022, Solana’s daily Unique Fee Payers and daily transactions began to trend upward in early Q1 2023. However, daily averages for the quarter returned to Q4 2022 levels and finished slightly down (5.9% for Unique Fee Payers and 5.2% for daily non-vote transactions). With that in mind, averages were skewed downward due to a network outage on February 25.

Several ecosystem developments over Q1 drove the initial fee-payer activity, including the BONK airdrop and several NFT collections, which will be covered in more depth in the “Ecosystem and Development Overview” section of this report.

Transactions on Solana can be divided into consensus (vote) and non-consensus (non-vote). Non-vote transactions are analogous to EVM transaction counts. They represent the actual economic activity on the network.

Non-vote transactions followed a similar pattern as Unique Fee Payers, surging at the beginning of Q1, but the daily average was skewed and finished down 10.3% QoQ, going from ~22 million to ~20 million. The daily average was skewed downward due to the network outage on February 25.

Transaction activity and performance of the network were volatile during 2022 and through Q1 2023, at times for different reasons. During the first two quarters of 2022, network performance suffered from the spamming that arose from Gulfstream, Solana's alternative to the mempool for pending transactions.

As detailed in the State of Solana Q4 2022 report, the "outage" narrative stemming from Gulfstream shifted for the better as performance stabilized after network upgrades in late June. The network upgrades included QUIC, priority fees (local fee markets), and Stake-Weighted Quality of Service (QOS).

Priority fees increase the cost of spamming the network, which helped eliminate Solana's downtime issues caused by inefficient transaction processing. On average, more than 50% of daily fees were paid by users prioritizing their transactions by the end of Q1. This average will likely increase as more wallets and applications natively integrate priority fees, just as Jupiter, Solflare Wallet, and Phantom did during Q1.

Beyond the issues stemming from Gulfstream, anomalies have emerged and caused network performance issues. There were network halts due to an anomalous consensus bug in Q4 2022 and Q1 (February 25). However, just as the network upgrades appear to have solved the issues surrounding Gulfstream, Solana Labs core contributors have proposed a plan for mitigating the issues related to the more recent anomalous network outages. Details on these outages and their proposed solutions are provided in the “Ecosystem Challenges” section.

Financial Overview

After a turbulent 2022 with macroeconomic headwinds, the crypto market rebounded in January and demonstrated resilience through the quarter's end. As such, SOL’s financial performance improved.

Revenue in SOL (total transaction fees paid in SOL) was supported by upticks in priority fees paid and increased by 68.7% QoQ. Simultaneously, the circulating market cap of SOL increased by 118.1% QoQ. The difference between the change in revenue vs. market cap may suggest that overall market sentiment drove value accrual more so than fundamental network utility.

For perspective, the circulating market cap of SOL was 429x the annualized revenue in USD at the end of Q4 2022 vs. 564x at the end of Q1 2023, suggesting a USD-driven move to a less favorable valuation.

To that end, a simple P/S ratio may not be enough to evaluate blockchain assets. Blockchain assets may need several unique valuation techniques. One such technique recently introduced is the Expected Demand for Security Model. This model proposes that the key driver for the value accrual of a blockchain asset is the gross demand for security by all present and future infrastructure.

Ecosystem and Development Overview

The drivers of Solana’s fundamental value accrual include its developer engagement and ecosystem growth strategy.

The Solana Foundation’s growth strategy has been at the core of expanding its ecosystem, wherein developers have raised over $600 million in seed funding over the past two years.

Ecosystem Growth Strategy

The Solana Foundation’s growth initiatives to invest in its ecosystem continued throughout the quarter, including:

• Solana Hacker Houses  - The 2023 Hacker House tour was announced in Q1 to continue providing developers a place to build, find collaborators, and learn from Solana community members.
• Grizzlython - An online, global hackathon with $5 million in prizes and seed funding across multiple Solana developer tracks. Grizzlython became the largest hackathon in the history of the Solana ecosystem.

Additionally, other organizations in the Solana community drove adoption through initiatives such as:

• Encode Club Hackathon - A four-week hackathon with $10,000 in prizes held during Q1.
• The Solana Sandstorm Hackathon - A two-week hackathon with over $200,000 in prizes catering to Solana developers of all skill levels. The hackathon concluded with dozens of winners across several development tracks.

DeFi

Along with the crypto market relief rally that began in January, TVL denominated in USD increased by 23.5% QoQ. However, TVL denominated in SOL declined by 40.7%, suggesting asset price increases in USD vs. new capital inflow drove TVL.

Although excluded from the above TVL figures to avoid double-counting, liquid staking derivatives (LSDs) continued to support Solana and its DeFi ecosystem. Marinade Finance, Lido, Jito, and JPool grew TVL by 100% or more during the quarter and finished in the top 20 by TVL. These LSDs finished Q1 with ~$205 million in TVL collectively, nearly matching Solana’s entire non-LSD DeFi ecosystem of ~$300 million.

Additionally, DefiLlama integrated SPL Governance (Realms) data during Q1. Realms ended the quarter with over $30 million in TVL that had not previously been counted until Q1. Realms is the leading platform on Solana for creating DAOs and allowing them to manage members, governance, and treasuries. Realms created 140 DAOs through Q1.

Nearly all of the top DeFi applications on Solana benefited from the market rebound throughout Q1. Solana's most prominent protocol outside Marinade Finance and Lido, Orca, was up 23% QoQ. At the same time, Raydium and Solend TVL grew by double digits.

A healthy distribution of TVL across applications consistently exists on Solana, with Orca and Raydium hosting only 24% of the total non-LSD TVL on Solana. As of quarter end, ~45% of TVL was locked across most of the “other” DeFi protocols on the network.

Other notable developments expanding and diversifying the Solana DeFi ecosystem included:

• Chicago Board Options Exchange (CBOE) - The CBOE joined the Pyth Network in Q4 and began submitting transactions on Solana during Q1.
• Parcl - A real estate derivatives platform launched on Solana.
• Homebase - Platform for tokenizing real estate released to beta on Solana.
• Meteora - Stableswap protocol launched in Q1.
• Kamino Finance - The first automated solution for Raydium concentrated liquidity market making (CLMM) went live during the quarter.
• Psylend - A new lending primitive launched on Solana.
• Hxro - A distributed liquidity layer for derivatives trading sponsored a grant program with $10,000 in prizes to build proof-of-concept derivatives applications using Hxro Network’s core protocols.

NFTs

Similar to DeFi, Solana’s NFT ecosystem also experienced an upturn. The total number of daily new NFTs increased from 2.6 million to 2.9 million QoQ, representing an 11.8% increase.

Along with the uptrend in new NFTs, NFT sales volume in the secondary market denominated in USD increased by 35.5%. Unlike in DeFi, sales denominated in SOL increased by 19.3% and reached all-time highs, suggesting sales activity wasn’t purely accrued by asset price increases in USD. Further, unique buyers continued to outpace unique sellers during Q1, with a total of 889,000 buyers vs. 887,000 sellers.

As highlighted in Q4 2022, in addition to the continued optimization of Metaplex’s Digital Asset Standard, Metaplex moved forward with several key initiatives, including:

• Launching no-code solutions for less technical creators.
• Enhancing its popular, open-source minting solutions such as Candy Machine (V3).
• Enabling creators to enforce royalties.

Notably, Metaplex collaborated with Solana Labs to develop compression for NFTs.

Crossmint and programmable NFTs with royalty enforcement became a reality and catalysts for NFT growth in Q1.

Further, Render Network cited NFT compression as a reason to consider migrating to Solana.

Other notable developments across the Solana NFT sector included:

• Catalina Whales - A Solana NFT project that announced a record deal for a virtual band with Def Jam Records.
• Minty Fresh - An NFT minting app built and launched by Solana Mobile, allowing users to mint NFTs directly from Saga.
• Dialect - Their Genesis Mint, powered by compression, allowed the project to mint thousands of NFT stickers at a fraction of the cost, creating a free mint for end users.
• Solflare Extension - A prominent Solana wallet, went live with compressed NFTs.
• MOOAR - A multichain NFT marketplace and launchpad launched GNT for public testing on Solana. GNT is a generative NFT tool to enable Artificial Intelligence (AI) NFT generation and minting.

GameFi

In addition to the Solana Foundation's growth initiatives mentioned above, Solana Ventures continues to be a factor with its $150 million fund to boost the network's gaming ecosystem. The fund has attracted additional investment funds (notably, Magic Eden's Magic Ventures) and has positioned Solana to grow its GameFi ecosystem.

During Q1, the  Solana Foundation also released details on a gaming SDK for the cross-platform gaming engine Unity. The Solana SDK, created by Magicblock, establishes a framework for developers to enable digital collectible creation, transaction signing, account authentication, and wallet management.

Some highly anticipated games include Star Atlas, ev.io, BR1: Infinite, Legends of Elumia, and Aurory. Aurory's open alpha beta went live during Q4, and the game saw transactions averaging about 5,000 per day during Q1.

Other notable developments across the Solana GameFi sector included:

• Octo Gaming - A mobile app that enables players to compete and monetize time spent playing mobile games launched on Solana.
• Vital Systems - A gameverse with interoperable NFTs across all its games launched Lowlife Forms NFTs on Solana through Magic Eden.
• Halliday - A platform that allows game players to obtain and use gaming NFTs but pay in installments later went live on Solana.

Other Use Cases, Infrastructure, and Tooling

Beyond the DeFi, NFT, and GameFi sectors, noticeable developments continued to stem from other use cases.

As a recent Messari report highlighted, the Sandstorm and Grizzlython initiatives saw applicants build projects for various sectors. Still, the most notable trend of development was at the application-tooling level.

Several other highlights emerged, including those with Hivemapper. Hivemapper continued to experience traction on the heels of Q4 2022 and collected more than 620,000 miles of unique street-level imagery during Q1. For perspective, it took Google from 2007 to 2019 to collect ~10 million miles of unique road data.

Interestingly, the Hivemapper dashcam uses the Helium Network for location verification, and this capability went live during Q1.

With that in mind, the Helium community's Readiness Working Group delayed Helium Network's migration to the Solana network to Q2 2023. The delay was due to several reasons geared around allowing more time for seamless integrations across the ecosystem.

Development Activity

During Q4 and after the FTX implosion, Twitter was fraught with rumors that Solana development was faltering and that a mass exodus of Solana core devs was underway.

However, active programs in a given period indicate ecosystem development. As more applications have launched and grown their user base, active programs have increased and stabilized. For perspective, there were 58,000 unique active programs in Q1 2022 vs. 96,000 in Q1 2023. Unique active programs were down 5.2% from Q4 2022.

Further, data sources tracking the events in Solana Labs’ Solana GitHub repository can measure developer involvement. According to Electric Capital's 2022 Developer report, more than 2,000 developers were building on Solana in 2022 — second in developer activity only to the Ethereum ecosystem and up 83% from 2021. The entire Solana ecosystem has seen a 16x growth in full-time developers since 2018.

Staking and Decentralization Overview

Staking and decentralization of the network continued to improve through Q1. Total stake and average engaged stake (total stake divided by total supply) remained stable. At the same time, the average number of validators grew 18.9% QoQ.

Solana's Nakamoto coefficient of 31 at the end of Q1 remained above average compared to other Layer-1 networks.

Although a high Nakamoto coefficient and growing validator set are beneficial, they don't guarantee freedom from centralization risks. As the Solana Foundation's Q1 2023 network health report highlights, decentralization metrics, including geographic diversity, data center ownership, and validator client diversity, also ensure more comprehensive network health.

The analysis findings concluded that the stake on Solana was relatively distributed among data centers through Q1'23. No single hosting provider hosted one-third of the active stake. Further, the network was geographically distributed, with no single country hosting one-third of the active stake. These findings were consistent with those in the State of Solana Q4 2022 report.

Finally, client diversity is the theoretical solution to Solana's latest network outage and software-level issues. The theory is that if two or more different clients run simultaneously, the likelihood of them all containing the same bug simultaneously approaches zero. If one client has a bug, like in the recent network halt on February 25, validators can quickly switch over to the bug-less client. This would allow the network to stay running while teams work on debugging the faulty client.

Deploying Jump Crypto's "Firedancer" client is a step towards achieving client diversity. In early Q1, the Firedancer team reached their first milestone: Transaction Ingest. The Jito-Solana client, aimed at optimizing validator revenue via efficient MEV extraction, was also running more than 8% of Solana's stake during Q1. Finally, Solana’s first light client, Tinydancer, was introduced during the quarter.

Qualitative Analysis

Key Events, Catalysts, and Strategies for Ecosystem Growth

Aside from the ecosystem developments and growth strategies mentioned above, other aspects of Solana’s strategy pushed forward through Q1. Two strategic elements stood out during Q1 in particular:

• User access and experience — Attract developers and users with improved access and experience.
• Community — Acquire developers and drive adoption through community building.

User Access and Experience

A series of developments and integrations rolled out to improve the developer and user experience.

Notable developments aimed at ushering in developers and users:

• Coinbase - Coinbase's L2, Base, includes bridge support for Solana while Coinbase Wallet also added multichain support for Solana.
• Move - Move is a platform-agnostic smart contract language. During Q1, the Solana Labs VM team made progress on a Move compiler for Solana. Devs were able to compile and link Move code into a Solana VM binary. Once fully implemented, it may attract developers to Solana’s library of LLVM-compatible smart contract languages.
• Hello Moon - Launched the Hello Moon Developer Platform to enable developers to engage directly with on-chain Solana data. Hello Moon also released a new feature that includes free RPC services for the Solana ecosystem.
• Solana Mobile - Shared details regarding the upcoming Solana dApp Store that will ship with Solana’s smartphone, Saga. The Solana dApp began accepting app submissions and approved several by the end of Q1, and will begin shipping to consumers on April 20, 2023.
• Kin Foundation - Debuted a Solana-based on-ramp tool for app developers.
• Brave - Solana dApp support was made available on Brave for iOS and Android during Q1.

Community

Outside of hosting global hackathons and allocating financial capital, the Solana community continued to educate developers and connect human capital to the ecosystem through non-financial means.

Notable community engagement efforts during Q1 included:

• Winter School of Solana 2023 - A nine-week, community-run certificate program certifying Solana developers.
• Solana Development Bootcamp - A 16-week, community-run curriculum with live classes, mentorship, and education in Solana development.

Further, at the end of Q1, the Solana Foundation shared details about Solana’s annual conference Breakpoint. Solana Breakpoint 2023 will occur from October 30 - November 4, 2023, in Amsterdam.

Ecosystem Challenges

Despite Solana's progress towards its long-term goals and continued adoption, Q1 presented some challenges.

Shortly after the release of the v1.14 upgrades on February 21, the Solana network experienced significant performance degradation on February 25. While consensus was still running, the network was not processing user transactions.

The outage eventually led to an intervention by the validator community to restart the network. Validator nodes entered vote-only mode, a ‘safe mode’ designed to help the network recover in the event of data unavailability.

The engineers debugging the issues recommended restarting the network. The validator community agreed and decided to downgrade to the previous stable release, v1.13.6. The community collectively restarted the network using an older slot on February 26. The network resumed user transactions, and it was confirmed that no user transactions were rolled back or impacted.

The cause of the outage has not been publicly released, because the cause was still being verified on testnet as of the end of Q1.

In response to the issue, Solana Labs' core engineers shared plans to improve the network's upgrade process, i.e., by enhancing the conventions required for upgrades and by stress testing new versions via testnet before going live on mainnet.

Other plans include:

• Collaborating with validators to test and find exploits.
• Forming an adversarial team to help find exploits and run clusters for adversarial simulation.
• Improving the restart process by enabling nodes to automatically discover the latest optimistically confirmed slot and share the ledger if it is missing.

The Road Ahead

The road ahead continues to reflect what the Solana ecosystem has been outwardly working on for several quarters. These developments include continued network upgrades to improve performance, reliability, resiliency, and security.

As highlighted at the end of 2022, developers rallied behind a list of initiatives, including:

• Asynchronous Block Production
• Diet Clients / Light Clients
• Multiple Leaders per Slot
• Formal Verification
• Additional Smart Contract Languages

The Solana Foundation also highlighted what the Solana community will tackle in 2023 and beyond.

• Solana Mobile - The Solana dApp Store became a permissionless marketplace for mobile dApps and began accepting the first applications in January. Expect Saga devices for the general public to ship in 2023.
• Firedancer  - Expect progress on Firedancer. If implemented successfully, Solana would be the only other smart contract network besides Ethereum to have more than one independent validator client. One of the benefits of validators using one of two entirely different software packages is improved network resilience.
• Token-22 - This is a new token standard on the horizon. This new standard will enable the development of new applications, like collecting royalties on transfers and confidential payments.

Ultimately, plans for 2023 are wide-reaching, and Solana looks to remain competitive through 2023.

Closing Summary

During Q1, market sentiment shifted, and as a relief rally ensued, Solana user activity showed renewed strength. Daily Unique Fee Payers and transactions bounced back from the Q4 lows and remained steady through Q1. Increased stake amounts and a growing validator set signaled that the network progressed toward a more decentralized state.

A healthy distribution of TVL across DeFi applications remained consistent, while LSDs experienced significant growth. New NFTs and games continued to launch and experienced traction. Use cases in the DePIN (Decentralized Physical Infrastructure Networks) space continued to drive incremental network activity QoQ.

Despite Solana's progress toward its long-term goals, Q1 presented some challenges. The Solana network experienced significant performance degradation and required a restart. Subsequently, plans to improve the network's upgrade process were developed.

Despite the challenges, Solana looks to remain competitive, continue its growth strategies, build community, and pursue its robust plans for 2023.

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