The Solana blockchain is having a moment — one that respected analysts believe may turn into an extended boom, propelled by the issuance of crypto tokens by a half-dozen significant projects in the community.
Solana's renaissance may come as a surprise to some crypto pundits who predicted at the end of 2022 that the collapse of FTX and Alameda would trigger the demise of the ultra-fast blockchain so often praised by Sam Bankman-Fried before his disgrace as being the only blockchain that had the muscle to sustain mass crypto adoption.
But long-time members of the Solana ecosystem never wavered in our conviction that one of the industry's fastest, greenest and lowest-cost networks was destined to stage a full and dramatic recovery.
And with the expected surge of liquidity that will result from airdrops by projects such as decentralized exchange aggregator Jupiter and Solana pricing oracle Pyth, we believe Solana is destined to nurture the next generation of decentralized finance (DeFi).
While Solana founder Anatoly Yakovenko this month urged the Web3 world to stop using the term "Ethereum killer" and start thinking collaboration, Solana has the edge on its larger predecessor when it comes to speed and transaction costs, and its unique consensus mechanism means it consumes far less energy per transaction.
In practice, Solana can process some 5,000 transactions per second but has hit top test speeds of 65,000. This dwarfs Ethereum's current speed of 15-25 TPS. It is also one of the lowest-cost blockchains in the industry, charging just a fraction of a cent per transaction, versus Ethereum at $1+.
Importantly, Solana is a community of builders, populated with engaged and innovative developers; its performance is strong and has been improving steadily and the broader public is beginning to hear about its strong points.
But because Ethereum's long-dominant ecosystem is far larger and better-known, Solana still comes up short when it comes to measures such as liquidity, market capitalization and total value locked (TVL), the aggregate value of all crypto assets deposited in a decentralized ecosystem.
While Solana's current $665 million TVL is more than triple where it ended 2022, it is well off November 2021's $10 billion peak and a small fraction of Ethereum's, which stands at some $28 billion. This is important since higher TVL tends to attract greater liquidity, which makes markets more efficient and less volatile.
The key to increasing TVL and other key yardsticks used for the success of a blockchain network lies in attracting more high-quality tokens to the ecosystem.
That means both initial token launches by new projects and "airdrops" by existing ones. Airdrops, token releases into the wallets of new and existing users to stimulate interest, often attract new users to a blockchain ecosystem.
Token drops can also have a wealth effect as recipients change their "free" crypto into other tokens and use them to invest in other assets. So an airdrop by one project can benefit many others in an ecosystem: the proverbial rising tide that lifts all ships.
The Pyth airdrop in November enriched recipients by some $77 million, and it has done well since, with a market cap that briefly topped $740 million and is now hovering around $700 million.
Respected crypto analysis firm Messari tweeted at the end of November: "It's airdrop season for Solana DeFi. With only one official airdrop to date, and more coming along the way from Jupiter, Marginfi, Drift, Zeta, and JitoSol, we can expect an increase in liquidity and user engagement."
In a report, Messari predicted that the spate of airdrops could create a 30-80% increase in daily user numbers.
This brings us back to the all-important question of liquidity. The more buyers and sellers there are in a market, whether decentralized or traditional, the more easily transactions can be completed without big compromises on price.
The more high-quality tokens there are, the more users there are. The more users there are, the more liquidity there is and the more stable and healthy the ecosystem.
The trend seems clear: token issuance is set to rise in Solana as faith increases in the ecosystem and liquidity — a necessary ingredient for a successful launch — grows. What's more, there are now open-source tools in Solana to make token launches and liquidity incentivization easy.
With this missing piece in place, Solana is now in a prime position to take the place in the sun all of us in the ecosystem have long believed it deserves.
Taylor Johnson is a co-founder of PsyFi, a leading structured financial products provider on the Solana blockchain and one of the developers of Armada, a suite of tools that help organizations launch tokens, manage on-chain liquidity and create robust on-chain tokenomics.
(Opinions expressed in this article are the author's own.)
