Anatoly Yakovenko Reflects on Solana’s Breakout Year

Crypto Briefing sits down with Solana Labs CEO and co-founder Anatoly Yakovenko at the first edition of Solana Breakpoint.

Solana Heads to Lisbon

Regardless of where you’re looking in the cryptocurrency space, you’re never far away from young, buzzy energy, promises of world-changing technology, and staggering wealth. With crypto’s biggest ever bull run still in full swing, there were clear signs of all three at the first edition of Solana Breakpoint, one of several crypto conferences that took place in Lisbon between October and November. 

This was Solana’s first major conference, and it landed during a major year for the industry. Cryptocurrencies have attracted the interest of institutions, politicians, and TikTok influencers at once in 2021, and Bitcoin isn’t the only horse they’ve been betting on: an explosion in DeFi, NFTs, and dog-themed meme coins proved clearer than ever that the market places value on more than one crypto asset. Of all the projects that saw rapid growth amid the boom, Solana’s was arguably the most significant. 

Solana is a high-speed blockchain for running smart contracts—programs that execute transactions such as sending assets from one party to another. It’s drawn comparisons to Ethereum, the world’s second-biggest cryptocurrency, because it offers similar use cases like yield farming—a key component of DeFi—and NFT trading. Many of the apps running on Solana share striking similarities to those built on Ethereum. 

At Breakpoint, teams of excitable 20-somethings talked about how they’d graduated from Silicon Valley to Solana to focus on building what’s become known as “Web3,” a crypto buzz word referring to a revolutionary, decentralized version of the Internet that can’t be controlled by Google or Facebook. Day proceedings featured a string of big announcements and guests: at one talk, Solana announced a partnership with the crypto-friendly Brave browser. At another, FTX CEO and vocal Solana advocate Sam Bankman-Fried talked about how the network could become a hub for GameFi—another crypto buzz word—and decentralized social media. Once the daytime proceedings wound up, party hosts dished out complimentary sushi and champagne to early believers celebrating their newfound riches (SOL is up over 15,000% this year, far outpacing BTC and ETH). 

Solana’s Ascent 

When Crypto Briefing caught up with Solana Labs CEO and co-founder Anatoly Yakovenko on the first day of the event, he looked like he’d already gone through a week of panel discussions and after parties. He was still jet lagged after flying in from San Francisco and had just arrived from two talks on the main stage, but he spoke with obvious enthusiasm about Solana’s breakout year. “It was definitely unexpected,” he said, reflecting on the network’s sudden blow-up. “In a lot of ways we took the hard path; Solana’s not EVM-compatible, it takes a lot of work to build something, and maybe that was an advantage because all of our competitors were EVM-compatible and there’s no differentiation.” 

“EVM-compatible” blockchains are those that are based on the Ethereum Virtual Machine, Ethereum’s decentralized computing engine. Many smart contract blockchains opt for EVM compatibility because of Ethereum’s strong network effects, but Solana takes a different approach. Where Ethereum smart contracts are written in the Solidity programming language, Solana developers use Rust. Yakovenko thinks this has been key to its success. “What people forget is that engineers are genuinely curious people,” he said. “They don’t like to do the same thing that everyone else is doing. And when there’s an alternative, there’s maybe a higher chance that they’ll explore it.” 

Solana differs from Ethereum and other blockchains in many other ways. Instead of trusting transaction timestamps, Solana incorporates a new timing mechanism called Proof-of-History that works in tandem with its Proof-of-Stake protocol structure. Proof-of-History creates a cryptographic proof that provides the order and time of transactions without waiting for confirmations from validators. Because of Proof-of-History, Solana is significantly faster than other blockchains – it claims to process about 65,000 transactions per second (Ethereum can currently handle about 15 tps, while Bitcoin handles only 5 tps). Transactions are also far cheaper on Solana than other chains because it has faster block times and bigger blocks. Ethereum is hoping to become more scalable without compromising on decentralization by spreading the network’s traffic across new chains called shards and Layer 2 solutions like ZK-Rollups, but the slow development process has helped other blockchains like Solana, Avalanche, and Binance Smart Chain thrive.

A DeFi and NFT Hub

Solana’s high-speed, low-cost capabilities have proven particularly popular for the emerging DeFi sector. DeFi protocols use blockchains to replicate traditional finance activities like lending and trading, and the space has seen rapid expansion since early 2020. There’s currently over $250 billion locked in DeFi across various Layer 1 ecosystems. Over $100 billion of that is on Ethereum, but the rest of it can be found on other blockchains like Solana. Yakovenko thinks the rising value of the space was inevitable because he sees DeFi as “the killer app” for blockchains. “The idea of running decentralized markets is the core innovation [of blockchain technology],” he said. “I think that running it goes to censorship resistance—it’s this idea that I can coordinate arbitrary information globally without any intermediaries. So it just makes sense that it would take off.” 

Solana’s DeFi ecosystem works differently to most others. Solana-based DeFi apps are integrated into Serum, a decentralized exchange that aims to offer a similar experience to centralized exchanges by using a central limit order book. “A lot of folks [building on Solana] like Serum because it’s a thing that they’re familiar with coming from a traditional finance background,” Yakovenko said. “So a lot of TradFi folks look at Serum and understand it and are able to build those projects.” 

“The idea of running decentralized markets is the core innovation.”

Though DeFi’s ongoing growth has been one of the major crypto developments of recent years, another groundbreaking innovation has eclipsed its rise over the last few months. NFTs, otherwise known as non-fungible tokens, exploded into mainstream consciousness in 2021, catching the attention of Grimes, Steph Curry, Christie’s, and a new wave of crypto entrants at once. NFTs offer a way for creators to sell content by ascribing ownership to their work, be that a picture of an ape, a song, or a digital clothing item. NFT hype accelerated in March when Beeple sold an Ethereum-based NFT for $69 million at a Christie’s auction. By autumn, trading volumes on marketplaces like OpenSea had soared, while Facebook, Twitter, and Visa had all taken steps toward adopting the technology. 

Besides Ethereum, Solana is currently the biggest hub for NFTs. Earlier this month, the Solana-based Phantom wallet hit 1 million active weekly users, many of whom have joined the platform specifically to collect NFTs. While Solana’s low fees have been key to attracting NFT collectors, Yakovenko believes that the cheap entry cost of using NFT-focused apps like Metaplex could open up doors for a generation of emerging creators. “With Metaplex, anyone can mint their own NFT, and it’s much cheaper than what you can do on Ethereum. That cost matters to newer artists that aren’t established yet,” he explained. 

Minting an NFT on Ethereum can cost hundreds of dollars, whereas minting fees on Solana usually come in at fractions of a cent. Many newer NFT adopters appear to have noticed the vast difference: there have already been over two million NFTs minted on Solana to date. Like on Ethereum, the most valuable pieces on Solana trade for thousands of dollars on the secondary market. 

The Nakamoto Coefficient

The Ethereum community defends the costs of using the network by arguing that decentralization is expensive. Solana currently has fewer full nodes than Ethereum with around 2,000 in operation, and the hardware required to run one costs thousands of dollars. However, Solana’s biggest proponents say that it achieves sufficient decentralization without the exorbitant fees. “The hard part with decentralization is it’s not well defined,” Yakovenko said. “As an engineer, I always thought of it as how many replicas are there? There’s like 12,000 for Bitcoin and 2,000 for Solana—it’s not there yet but it’s in the same ballpark.” 

Equally important to Yakovenko and the team behind Solana is the idea of censorship resistance: the blockchain’s ability to reverse or block transactions. “We look at the Nakamoto Coefficient, because that translates into guarantees for users: that no one’s messing with their transaction, and the cost of transactions is low,” he explained. 

“If you don’t maximise the Nakamoto Coefficient, then you’re not building decentralization.”

The Nakamoto Coefficient aims to measure the degree of decentralization of blockchains by highlighting the number of colluders that would be required to shut down a network. A higher Nakamoto Coefficient denotes a more decentralized network. Solana’s score is 19, which is far higher than most of its competitors. Alongside the Nakamoto Coefficient, the Solana community often points to its ultra-cheap fees during discussions over the network’s degree of decentralization. “If you don’t increase the number of nodes and reduce the costs of censorship resistance, then it’s not a network worth running,” Yakovenko said. “That’s a spicy take: if you don’t maximize the Nakamoto Coefficient, then you’re not building decentralization.”

The Nakamoto Coefficient is one of the most widely accepted analysis methods for measuring decentralization, but it’s been criticized because it doesn’t take account of other important factors. In Solana’s case, its centralized characteristics include the costs of running a node, its lack of core nodes, and the way the coin supply was distributed. If you want to run a validator node on Solana, you need to buy the hardware and participate in consensus through voting, which can cost up to 1.1 SOL per day—around $90,000 annualized at today’s prices. That means you’d need to stake around $1 million worth of SOL just to break even (the Solana Foundation helps by contributing SOL to node operators, and smaller investors can delegate their tokens to pools). Moreover, the Solana Foundation is the blockchain’s only core node developer, and a large chunk of the SOL supply went to insiders on launch. 

Solana’s Place in the Decentralized Future

Solana’s level of decentralization was called into question in September when the network suffered an 18-hour outage due to a bot attack on the decentralized exchange Raydium. Yakovenko and team gathered node operators in a Discord server to restart the network; critics argued that the reboot highlighted Solana’s dependence on a small number of entities. 

“The true core idea of decentralization is that safety in numbers comes from this principle that the network can continue as long as one copy is available,” said Yakovenko. If one copy is always available, the network is theoretically resistant to government-level censorship. The Raydium bot attack may have stalled the network for several hours, but it didn’t cause a shutdown. “What folks saw is that when things go wrong, the network can still continue. It’s already decentralized enough for that.” The team fixed a number of bugs following the incident, and the network is getting “faster and more stable.” 

Despite the September setback and the critiques from certain camps, the buzz surrounding Solana has never been greater. The last hackathon event welcomed over 500 teams and the energy throughout Breakpoint was palpable. Naturally, a big part of the excitement can be attributed to Solana’s recent price performance: when SOL started rallying earlier in the year, talk of the latest “Ethereum killer” made its way across Crypto Twitter and into mainstream media publications. Yakovenko, though, seems to reject this narrative. 

Eth2 is a wild and crazy design. It hasn’t been tried before, it’s already has and will force a ton of new innovation. I can’t imagine a world where Solana succeeds because eth2 fails.

— anat◎ly 🦀🤿🏒 🤙 (@aeyakovenko) November 3, 2021

“There’s this idea that there’s an Ethereum killer. But the reality is open source projects can’t be killed,” he said. For Yakovenko, Solana is unkillable because it already has enough passionate people behind it—the kind of geeks “that just wanna code and build this stuff for fun.” 

“This stuff” refers to the applications running on the base chain. Today, those applications typically let you take out loans, provide liquidity to decentralized exchanges, trade assets, or buy NFTs permissionlessly without relying on any intermediary, but a world where other use cases for blockchains like Solana emerge may not be far off. 

Yakovenko says he hopes that the market will flourish and that the technology will gain wider adoption, not only on Solana. The way he sees it, it will be up to users “to pick the best environment for the applications that they want to use,” whether that’s Solana, Ethereum, or another chain altogether. In other words, one network may become the home of the Web3 equivalent of Facebook or micropayments-powered gaming in the Metaverse, while another could settle transactions between governments, host artwork from this generation’s Basquiat, or maybe even facilitate use cases that don’t exist yet. 

But will Solana be one of them, and can it live up to all of the world-changing promises? Nothing is certain and things can change overnight in crypto, but it has a better chance than most. 

Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies.