What is Solana and how does it work? A beginner's guide by Digimagg

Solana (SOL) is a cryptocurrency crafted to enhance and emulate Ethereum's functionality. Named after a quaint coastal city in Southern California, Solana is the brainchild of software developer Anatoly Yakovenko. Originally conceptualized in 2017, Solana officially launched in March 2020. Currently, SOL has gained significant traction, ranking as the 11th largest cryptocurrency by total market capitalization.

What is Solana?

Solana operates as a blockchain often dubbed as an "Ethereum killer," given its notable similarities to Ethereum. Like Ethereum, the SOL token is available for purchase on most major exchanges. However, the true value of the token lies in facilitating transactions on the Solana network, which boasts unique advantages.

The Solana blockchain employs a proof-of-history consensus mechanism, a distinctive feature setting it apart. This algorithm utilizes timestamps to determine the subsequent block in Solana's chain.

Contrary to earlier cryptocurrencies like Bitcoin and Litecoin, which rely on a proof-of-work algorithm, Solana's approach differs. Proof of work entails miners determining the next block, a process known for its sluggishness and heavy resource consumption. Ethereum transitioned to a proof-of-stake system to address these issues, significantly reducing energy usage.

In contrast, proof of stake, utilized by Solana, employs staking to define the next block. Tokens staked as collateral are held by the blockchain until validators agree on the chain's next block, representing a more energy-efficient alternative to proof of work.

Delegated proof of stake in Solana

Konstantin Anissimov, the Chief Operating Officer at crypto exchange CEX.IO, highlights Solana's utilization of "a blend of established cryptographic strategies and innovative solutions" to overcome the limitations of earlier cryptocurrency systems.

Solana tackles Ethereum's scalability challenges by employing a distinctive combination of proof of history and delegated proof-of-stake algorithms. Delegated proof-of-stake, a variation of the traditional proof-of-stake mechanism, involves validators in the transaction validation process.

This approach offers users several benefits. The proof of history algorithm enhances network security, as noted by Christian Hazim, an analyst at ETF provider Global X.

Essentially, Solana addresses two of the three issues outlined in Ethereum co-founder Vitalik Buterin's blockchain trilemma: scalability and security. While Ethereum primarily focuses on decentralization and security, Solana's design emphasizes scalability and security. The proof of history algorithm provides unique security features, while the platform's rapid computational speed enhances scalability.

What sets Solana apart from other blockchain platforms?

Solana stands out from its competitors, Ethereum and Cardano (ADA), by leveraging a distinctive combination of proof of history and delegated proof of stake mechanisms. According to Anissimov, this blend enables Solana to achieve significantly faster transaction speeds at a fraction of the cost.

In contrast to proof of work, which relies on miners to determine the next block, or proof of stake, which uses staked tokens for this purpose, proof of history employs timestamps to define blocks in the Solana chain. This innovative approach enables validators to vote on the timestamps of various blocks, ensuring both decentralization and enhanced security, while facilitating faster computations.

How does Solana work?

Solana operates using a blend of proof-of-history and delegated proof-of-stake protocols, aimed at facilitating rapid transaction processing, according to Bryan Routledge, associate professor of finance at Tepper School of Business, Carnegie Mellon University. Typically, achieving high transaction speeds entails centralization, exemplified by Visa's extensive network of computers. Bitcoin, on the other hand, prioritizes decentralization, resulting in slower transaction processing.

Solana aims to strike a balance between speed and decentralization, akin to Visa's efficiency combined with Bitcoin's decentralized nature. This swift transaction processing enhances scalability while minimizing environmental and monetary costs.

To maintain the security of Solana's blockchain amid rapid block additions, the proof of history algorithm timestamps each block securely. SOL tokens are staked and serve as collateral for processing transactions on the network, including smart contract validation and participation in Solana's non-fungible token (NFT) marketplace.

In August 2021, Solana experienced a significant breakthrough with the launch of Degenerate Ape Academy, marking a pivotal moment for the Solana NFT marketplace. This event contributed to Solana's notable price surge from around INR 2,496 to INR 6,241 within three weeks. Solana reached its all-time high in November 2021, peaking at nearly $260 amid the crypto bull run.

Solana vs. Ethereum

Solana and Ethereum share certain similarities but also exhibit distinct differences. Here's a brief overview of their commonalities and disparities:

Furthermore, Hazim highlights the noteworthy efforts of Solana Labs, the technology company behind Solana, in developing several intriguing products. Among these is Solana Pay, aimed at enabling more cost-effective, secure, and rapid transactions.

Additionally, Solana Labs has introduced the Solana Mobile Stack, an Android toolkit that paves the way for mobile expansion. Solana anticipates the release of its mobile phone, the Solana Saga, in early 2023.

Solana investment

Similar to other major cryptocurrencies worldwide, SOL tokens are tradable on various platforms, including centralized exchanges such as Binance.US, Coinbase, and Kraken, among others. In select cities globally, SOL tokens are also accessible through cryptocurrency and NFT ATMs.

Following the acquisition of SOL tokens, investors typically opt to store them in a crypto wallet. Contrary to its name, a crypto wallet doesn't store the cryptocurrencies themselves but rather holds the keys to access them. These wallets can be either offline or online, with offline storage using a cold wallet being the safest option.

SOL tokens offer numerous utility cases, including peer-to-peer payments, trading, and serving as an incentive for securing the Solana network as a validator.

However, as with any cryptocurrency investment, it's advisable for investors to consult with a financial advisor before delving into Solana. Cryptocurrencies are known for their high volatility and inherent risks, so investors should only invest funds they can afford to lose, even if they have confidence in Solana's potential.