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.
After a turbulent 2022, the crypto market rebounded in January 2023 and demonstrated resilience through the end of Q1. However, SOL’s financial performance suffered in Q2 as the Securities and Exchange Commission (SEC) alleged that several exchanges unlawfully engaged in unregistered offers and sales of cryptoasset securities, including SOL.
Subsequently, exchanges such as Robinhood announced plans to delist SOL. The SEC complaint and delistings coincided with downward pressure on the value of SOL, which declined 9.2% compared to the broader market’s 1.3% increase QoQ. Solana concluded the quarter as the 10th largest cryptoasset by market capitalization, reaching $7.2 billion.
Revenue in SOL (total transaction fees paid in SOL) was supported by higher priority fees paid in Q1 2023. However, revenue in SOL decreased by 15.0% QoQ as the percentage of daily fees paid in the local fee markets declined.
Priority fees increase the cost of spamming the network. Implementing these fees helped eliminate Solana's past downtime issues caused by inefficient transaction processing. On average, ~40% of daily fees were paid by users prioritizing their transactions through Q2, down from ~50% the prior quarter.
With fewer users opting to pay priority fees, the network's average transaction fee dropped, and therefore, so did Solana’s revenue in SOL.
Nonetheless, the difference between the change in revenue versus market cap (in USD) suggests that overall market sentiment versus fundamental network utility was relatively unchanged. The circulating market cap of SOL was 550x the annualized quarterly revenue at the end of Q1 2023 and 529x at the end of Q2.
While a simple P/S ratio may provide directional insight into fundamental value accrual versus speculative market behavior, it is not necessarily adequate for evaluating blockchain assets. Other valuation techniques have also been introduced including Messari’s Expected Demand for Security Model and Multicoin’s Sum of the Parts framework.
Solana’s daily unique fee payer activity rebounded in early Q1 2023 due to the BONK airdrop and several NFT collections. The resulting activity was not sustained through the end of Q1, and fee payers returned to foundational levels seen through the end of 2022. However, fee-payer activity surged temporarily in May 2023, which coincided with user accounts interacting with an unknown program.
According to the data analytics platform Spire, the program generated an influx of new addresses that facilitated the rotation of SOL. As with the trend in Q1, the fee-payer activity did not hold, falling back to foundational levels by the end of Q2. Nonetheless, the spike in May skewed the average Unique Fee Payer metric upwards, which finished up 15.9% QoQ.
Average daily non-vote transactions increased by 24.1% QoQ but did not spike with the fee-paying activity in May. This suggests that users interacted with the unknown program but did not necessarily generate economic activity through more transactions. That said, unlike fee payers, the increase in non-vote transactions was sustained heading into Q3 2023 and was supported by DePIN and consumer-related projects including Helium, Dialect, and Tensor.
Staking on the network was stable through Q2. Total stake and average engaged stake (total stake divided by total supply) remained relatively unchanged QoQ. At the same time, the average number of validators declined by 21.1% QoQ.
The rise in validators in late Q4 2022 through Q1 2023 was caused by a large delegator who was not attentive to their stake (no stake movements even with high commission). Many operators made a second validator with 100% commission on that stake. Once the delegator redistributed the stake, those Sybil validators shut down. The decline in the number of validators also began after the network outage on Feb. 25, 2023.
In Q2, the Solana Foundation released details regarding the cause of the outage
In summary, the outage was caused by the following:
As covered in State of Solana Q1 2023, the issue was initially thought to have stemmed from the v1.14 upgrades on February 21. Subsequently, Solana Labs' core engineers implemented 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. However, after further investigation, the issue was revealed to be due to a failure of the deduplication logic in shred-forwarding services. In Q2, core engineers began working with shred-forwarding service providers to improve the resiliency and compatibility of their designs.
Solana's Nakamoto coefficient improved to 32 by the end of Q2 and remained above average compared to other Layer-1 networks.
Although a high Nakamoto coefficient and robust validator set are beneficial, they don't guarantee freedom from centralization risks. Decentralization metrics, including geographic diversity, data center ownership, and validator client diversity, also ensure a more comprehensive network health.
As highlighted in the Solana Foundation's Q1 2023 network health report, the stake on Solana remains relatively distributed among data centers through Q2. 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.
Finally, client diversity is a potential solution to expanding a robust network and eliminating network outages and software-level issues. Deploying Jump Crypto's "Firedancer" client is a step towards achieving client diversity. In early Q1, the Firedancer team reached its first milestone: Transaction Ingest. In Q2, the team reached its next milestone, “fd_quic”, a Firedancer-optimized version of QUIC (the transaction messaging protocol used by Solana). fd_QUIC positions Firedancer to meet the goal of executing over 1 million transactions per second by enabling the network to receive transactions at that speed.
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.
The Solana Foundation’s growth initiatives to invest in its ecosystem continued throughout Q2, including:
Following the crypto market relief rally in Q1, TVL denominated in USD was flat QoQ, increasing by 3.8% QoQ. However, TVL denominated in SOL increased by 18.6%, suggesting new capital inflow drove TVL versus asset price increases in USD.
Although excluded from the above TVL figures to avoid double-counting, liquid staking derivatives (LSDs) continued to support Solana and its DeFi ecosystem. TVL in Marinade Finance, Lido, Jito, and JPool reversed course but stabilized after growing significantly during Q1. These LSDs finished Q2 with ~$190 million in TVL, down 7.3% QoQ.
During Q2, Solend surpassed Orca as the largest DeFi protocol on Solana. Solend released its V2 in April 2023, which included updated smart contracts with three new features: borrow weights, TWAP oracles, and outflow rate limits. Ultimately, Solend TVL grew by ~59% QoQ and contributed to the new capital inflow entering the Solana DeFi ecosystem.
Despite this growth of one protocol, there is still a healthy distribution of TVL across applications on Solana. As of quarter end, ~46% of TVL was locked across most of the “other” DeFi protocols on the network.
Other notable developments expanding and diversifying the Solana DeFi ecosystem stemmed from Grizzlython.
For the DeFi track, the first prize went to DBL DEX, an on-chain periodic double auction DEX and DeFi primitive, which was awarded $30,000 USDC.
Other DeFi Grizzlython winners included:
NFT sales volume in the secondary market denominated in USD decreased by 41.5%. Unlike in DeFi, sales denominated in SOL decreased by 43.3%. However, Q2 followed a quarter with several all-time highs. Further, unique buyers still outpaced unique sellers during Q2, totaling ~539,000 buyers versus ~524,000 sellers.
Despite declining secondary sales, Solana's developer ecosystem continues to build on new functionalities, and Solana's NFT sector continues to be primed for growth.
In Q2, the Solana Foundation announced state compression, a cost-efficient method for storing data on-chain. Compressed NFTs were the first application of state compression created in collaboration with Metaplex, Solana Labs, and other ecosystem teams. They are cheaper than their uncompressed counterparts.
During Q2, a case study on Crossmint showed that delivering NFTs to 300,000 users under normal circumstances would have cost over $74,000 (at the time of the report). With compression, the cost was less than $200.
Further, Dialect, a messaging application that allows users to send and receive messages between Web3 accounts and natively call smart contract functions, began using state compression for compressed NFTs. Compression was used to cover the minting cost of NFT stickers to thousands of its users. Dialect quickly gained popularity and witnessed a high retention rate of users. Dialect also introduced the Magic Eden Buy Now Smart Message, allowing users to share any link to a listed NFT, enabling purchases directly from a message.
Programmable NFTs also became a catalyst for NFT growth.
Additionally, Tensor launched its compressed NFT marketplace, enabling users to trade, list, and bid compressed NFTs. The marketplace gained significant market share during Q2. Tensor also integrated Dialect to power notifications for trading while also powering the Dialect-compressed NFT trades.
During Q2, other notable developments continued to expand the Solana NFT sector, including:
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.
At the start of 2023, 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 benefiting from the Foundation’s GameFi growth initiative and gaming SDK include Star Atlas, ev.io, BR1: Infinite, Aurory, and Legends of Elumia.
While games like Star Atlas are dominating gaming transaction activity, new entrants stemming from Grizzlython have also entered the fray.
For the Grizzlython Gaming track, the first prize (30,000 USDC) went to Michi, a casual roguelike dungeon crawling game powering an ecosystem of games and products.
Other GameFi Grizzlython winners included:
Other notable developments across the Solana GameFi sector included:
Beyond the DeFi, NFT, and GameFi sectors, noticeable developments continued to stem from other use cases.
In recent times, Solana has become an attractive home for several decentralized physical infrastructure networks (DePIN). Top DePIN networks include Helium, Hivemapper, and Teleport, with Render voting to migrate to Solana in the coming months. Helium, Render, and Hivemapper are particularly relevant because they migrated to Solana for its design advantages.
Notably, the successful migration of the Helium network catalyzed user activity during Q2. The Helium rewards application became one of the most popular applications among new and recurring users on Solana. Helium also launched its blockchain-based cell carrier during the quarter.
Hivemapper continued to experience traction in Q2. It collected more than 620,000 miles of unique street-level imagery during Q1, and by the end of Q2, that number more than quadrupled to over 3 million miles. For perspective, it took Google from 2007 to 2019 to collect ~10 million miles of unique road data.
Other notable developments across other use cases, infrastructure, and tooling included:
While expanding DeFi remains a focus for the Solana ecosystem, the growth strategy to broaden the Solana ecosystem into other sectors is in full force. As detailed in a recent Messari deep dive and user analysis, there has been a notable shift in user activity away from DeFi applications towards other applications, including those in the NFT, GameFi, and other consumer-related sectors.
Further, data sources tracking the events in Solana Labs' Solana GitHub repository can measure developer involvement. According to Electric Capital's Developer report, more than 2,000 developers were building on Solana in 2022 — second in developer activity only to the Ethereum ecosystem. The entire Solana ecosystem saw 16x growth in full-time developers since 2018. However, the total number of developers declined to 1,475 in 2023 as of June 1, 2023.
Aside from the ecosystem developments and growth strategies mentioned above, other aspects of Solana’s strategy pushed forward through Q2. Three strategic elements stood out during Q2 in particular:
During Q2, Solana Labs introduced validator client V1.14.
This release unlocks several new features, including:
The V1.14 upgrade to the Solana Labs validator client was adopted by 97.4% of stake within days of the release.
A series of developments and integrations rolled out to improve the user and developer experience.
Notable developments aimed at ushering in users and developers included:
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 Q2 included:
Q2 did not present any adverse outcomes from technical challenges or network upgrades, and the network did not experience any network degradation. However, the Solana ecosystem faced challenges that were more regulatory in nature.
As mentioned, the SEC filed lawsuits against crypto exchanges, including Binance.US and Coinbase. It charged the exchanges with trading cryptoasset securities, including SOL. Subsequently, some exchanges such as Robinhood announced plans to delist SOL.
In response, the Solana Foundation stated that it believes SOL is not a security and is instead the native token to the Solana blockchain, a robust, open-source, community-based software project that relies on decentralized user and developer engagement to expand and evolve.
While the outcome of the SEC actions is unpredictable, a negative result could result in additional exchange delistings. Such a resulte would ultimately bring volatility and liquidity concerns to Solana’s native asset SOL.
The road ahead continues to reflect what the Solana ecosystem has been outwardly working on for several quarters. These developments include continued network upgrades, advancement of Solana Mobile, and several other initiatives to improve performance, reliability, resiliency, and security.
Notable developments over the near term include:
Ultimately, Solana’s plans for 2023 continue to be wide-reaching, and the network looks to remain competitive through 2023.
SOL’s financial performance suffered in Q2 as the Securities and Exchange Commission (SEC) alleged that several exchanges unlawfully engaged in unregistered offers and sales of cryptoasset securities, including SOL.
Solana had a mix of positive and negative metrics over the quarter. Revenue in SOL decreased by 15.0% QoQ as the percentage of daily fees paid in the local fee markets declined. At the same time, fee-payer activity surged in May 2023, which coincided with user accounts interacting with an unknown program. Average daily non-vote transactions increased by 24.1% QoQ but did not spike with the fee-paying activity in May. The increase in non-vote transactions was sustained heading into Q3 2023 and was supported by DePIN and consumer-related projects, including Helium, Dialect, and Tensor. Staking on the network was stable through Q2, while the average number of validators declined by 21.1% QoQ.
Looking forward, expanding DeFi remains a focus for the Solana ecosystem, but there is also a comprehensive growth strategy to broaden the Solana ecosystem into other sectors. Despite the regulatory challenges presented in Q2, Solana looks to remain competitive, continue its growth strategies, build community, and pursue its robust plans for 2023.
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James believes that the future of finance and economics will be algorithmic, decentralized, and distributed efficiently on a global scale. He is a Research Analyst with Messari focusing on Layer-1 protocols and previously held traditional finance positions at Northwestern Mutual and U.S. Bank. James also has experience as an analyst at research firms like Morningstar.
About the author
James believes that the future of finance and economics will be algorithmic, decentralized, and distributed efficiently on a global scale. He is a Research Analyst with Messari focusing on Layer-1 protocols and previously held traditional finance positions at Northwestern Mutual and U.S. Bank. James also has experience as an analyst at research firms like Morningstar.