How can Solana make a comeback?

The cryptocurrency market has had a turbulent journey over the past 21 months. The bear market that began in early 2022 left its mark on almost every project, especially Solana.

Throughout 2022, Solana has been dealing with challenges such as network outages and the collapse of FTX. This year, SOL's market value plummeted by about 93%, and TVL also decreased by 96%. As the year is coming to an end, Solana's prospects in 2023 are not optimistic, and people are speculating that it is about to fall into a death spiral.

Despite the challenges it has faced in the past, Solana’s future appears bright.

The narrative around network performance and failures has shifted. Solutions like the local fee market have helped improve network uptime while also accruing value to Solana’s native token, SOL. Advanced technologies like state compression and compressed NFTs are ushering in new use cases, while growth catalysts including grant programs and the emergence of Solang, Neon EVM, and artificial AI are on the horizon.

Below, let’s take a deeper look at Solana’s health and prospects.

Now

Network Status

As of 2023, the narrative around “outages” has shifted. Aside from a brief network outage in February caused by an unusual consensus error, Solana has maintained 100% uptime so far this year, and total daily transaction volumes have continued to rise.

The network performance improvement comes from remediation measures taken to address network spam issues stemming from Gulfstream, Solana’s alternative mempool for managing pending transactions. Network upgrades include QUIC, stake-weighted quality of service (QOS), and a local fee market (priority fees).

Priority fees raise the barrier to entry for spamming the network. The integration of these fees has proven to be helpful in eliminating Solana’s historical downtime issues, which were largely attributed to suboptimal transaction processing.

By 2023, approximately 42% of daily fees will be paid by users who opt-in to prioritize their transactions. This average will rise as more wallets and applications adopt priority fees, such as platforms like Jupiter, Solflare Wallet, and Phantom.

Furthermore, priority fees only play a partial role in eliminating downtime. They also play a driving role in revenue generation, thereby improving value capture. Agreement revenue (in SOL terms) increased by approximately 42% compared to the previous year.

Given that Solana burns 50% of all transaction fees, priority fees also serve as an additional positive force for value accumulation. After a sharp decline of 92% throughout 2022, SOL's market value has recovered approximately 111% year to date, despite downward pressure from the recent SEC charges that SOL is a security.

Ecosystem Highlights

What is the current state of the Solana DeFi ecosystem after it suffered a setback during the FTX debacle in late 2022?

TVL in USD has recovered this year, increasing by 41%. However, TVL in SOL has fallen by about 26%, indicating that the growth in TVL has come mainly from the appreciation of USD asset prices.

Nonetheless, it is worth noting that Liquid Staking Derivatives (LSD) have played an important role in supporting Solana and its DeFi landscape throughout 2023. While they are not included in the above TVL statistics to prevent double counting, platforms such as Marinade Finance, Lido, and Jito have all seen significant triple-digit growth in SOL TVL. As a result, Solana’s TVL is now firmly in the top ten.

While the expansion of DeFi remains a core goal of the Solana ecosystem, there has also been a clear shift in user engagement away from DeFi and toward a wider range of applications. This includes NFTs, gaming, and various consumer-facing areas.

What’s driving this?

In April this year, the Solana Foundation released an economic method for on-chain data storage - state compression. Metaplex, Solana Labs, and other major ecosystem contributors worked together to achieve state compression for the first time in the NFT field. Compressed NFTs have lower fees than their uncompressed counterparts.

Following this development, the information platform Dialect and Access, an application designed for content creators to monetize, also adopted the state compression technology for compressed NFTs. These applications quickly attracted user interest, resulting in an average of hundreds of thousands of transactions per month.

In addition, Tensor has launched a compressed NFT market, which provides users with the ability to trade, list, and bid on compressed NFTs. The market accounts for a large portion of the transaction volume, accounting for about 40% of the market share so far this year.

In the wake of the FTX incident, Twitter has become a hotbed of speculation that Solana’s momentum has run out and that an exodus of Solana core developers is imminent.

However, despite a significant decline in August, available data shows that the number of GitHub developer software repositories has basically maintained year-on-year growth, and preconceived rumors that there will be a large-scale exodus of Solana developers in 2023 are exaggerated.

future

So what factors will keep the Solana network and its ecosystem on a positive growth trajectory? There are several factors worth considering going forward, including:

● Neon EVM: Solana’s Neon EVM went live in July. This development enables Ethereum-based applications to run on Solana without changing their existing codebase.

● Solang: In July, Solana Labs released Hyperledger Solang. This new compiler enables developers to build projects on the Solana network using Solidity, bridging the gap between EVM developers and the Solana ecosystem.

● Eclipse: Eclipse aims to combine the Ethereum ecosystem and Solana’s execution environment.

With the potential gateways listed above, there may be room for Solana development and user activity to grow through network effects.

● Move: Although still in its early stages, the introduction of Move as a smart contract language on Solana has the potential to stimulate more developers to participate in the Solana ecosystem.

The Solana ecosystem will also receive capital injections from recently announced growth initiatives including:

● Convertible Grants: The Solana Foundation recently launched Convertible Grants to support projects within the Solana ecosystem. This mechanism will convert into investment if the project reaches specific milestones and growth goals.

● AI: The Solana Foundation recently launched a $10 million AI grant fund, and the ecosystem may be about to expand into the field of artificial intelligence.

Finally, details recently emerged about the assets held on FTX’s balance sheet:

● FTX: The recent court ruling on the FTX token sale will prevent the market from flooding with SOL sales as liquidations will be subject to quantity limits.

in conclusion

The Solana network’s consistent 100% uptime and value accrual through priority fees, coupled with a growing ecosystem marked by technical breakthroughs such as state compression, makes the network’s past performance issues and the FTX crisis irrelevant. Upcoming catalysts, including grant programs, Solang, the Neon EVM, and the emergence of artificial intelligence, offer hope for the future.