Is Solana back on track?

Solana is recovering from a combo of poor market sentiment the past 6 weeks coupled with network congestion issues that led challenges transacting on the Layer 1. That said, while volumes and fees are off the end of April lows, they are nowhere near mid-March levels, when memes were out of control. And dropped transactions continue to be an issue.

Given Solana has a huge following, and is the chain of choice for meme investing, aka gambling, it’s no surprise as crypto market sentiment improves, Solana fares better. But what is the data showing us? 

Memes drove transaction volumes (Chart 1), fees (Chart 2) and wallet growth, especially in March. As we’ve highlighted in previous notes, Solana had over 2 million new wallets signed on March 18, a massive one day number. 

Volumes and fees also hit all-time one-day highs in March, with volumes totalling over $3.8bn on March 15 and fees reaching $4.4m on March 21. 

Chart 1 – Solana Network Volume (m) vs SOL Token Price (Jan 1 2024 – May 6 2024)

Source: DeFiLlama; Vikara Capital

Chart 2 – Solana Network Fees (k) vs SOL Token Price (Jan 1 2024 – May 6 2024)

Source: DeFiLlama; Vikara Capital

Regarding Solana’s network congestion, they blamed the congestion and significant increase in dropped transactions on high network demand, driven by significant increases in volumes, granted many were spam transactions, with bots attempting to prioritize their activities over those of regular users (Chart 3). 

Chart 3 – Solana Failed Non-Vote Transactions (Red) 

Source: Dune @scarn_eth

Over 75% of non-vote Solana transactions failed on April 4 and while that has fallen to 60% on May 6, it is still much higher than 2023 levels, albeit when volumes were significantly lower.

Dropped transactions are those that have taken too long to process, due to others getting there first. With Bitcoin, for example, those transactions would generally sit in the mempool (short for “memory pool”), which is the queue of pending and unconfirmed transactions on a cryptocurrency network node, until they’re eventually added to blocks in times of lower demand. But without a mempool, Solana simply lets those transactions disappear (“drop”) without processing them.

So what is the longer-term solution to Solana’s network issues? Many are banking on the release of Firedancer, a new independent validator client developed by Jump Crypto. 

Firedancer aims to significantly increase the number of transactions that the network is capable of processing each second (transactions per second or TPS), projecting a range of 600,000 to 1,000,000 TPS versus a theoretical limit of 50,000 to 65,000 TPS today.

As part of the deployment, Firedancer is introducing the first third-party client software, signalling a move towards greater decentralization within its ecosystem, which has historically been a criticism of Solana where validators were limited to its native client software. This should lead to substantial network performance improvements.

What exactly will Firedancer do to improve network outages and “dropped” transaction issues? As highlighted previously, network outages and slowdowns have plagued Solana since its launch, becoming more pronounced as volumes have increased. The Firedancer client includes several optimizations and enhancements to that aim to bolster the network’s resilience, potentially reducing the frequency and severity of these disruptions. Importantly, Firedancer is designed to support more concurrent transactions and includes support for sharding, which can improve overall performance and scalability, hopefully resolving some of the very recent issues.

The significant upgrade to the existing Solana infrastructure is due to be released in 2H2024 with the goal of enhancing the network’s performance, reliability, and scalability. 

Hopefully the Solana fan boys and girls can stay around long enough to experience what a potential game changing upgrade will do for the entire ecosystem, a big ask in cryptoland.

Vikara CO-FOUNDER & PORTFOLIO MANAGER

Mark Riccio, CFA
Vikara Capital

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