What is Solana? How does it work? – Forbes Advisor

Solana is a cryptocurrency that was designed to work similarly to and improve upon Ethereum. Named after a small coastal town in Southern California, Solana is the brainchild of software developer Anatoly Yakovenko.

Yakovenko first proposed the innovative blockchain in 2017, and Solana launched in March 2020. It has quickly become a popular crypto, ranking among the top 10 cryptocurrencies by market capitalization.

In recent news, the Solana ecosystem experienced a hack on August 2nd. Blockchain investigators and crypto investors claim that it was a private key compromise that allowed hackers to steal Solana tokens, known as SOL, from Slope, Phantom and TrustWallet. Users reported that their funds were being drained from these “internet-connected” wallets.

Solana Status, which is run by the Solana Foundation, tweeted about the incident: “After an investigation by developers, ecosystem teams and security auditors, it appears that affected addresses were at some point created, imported or used in Slope mobile wallet applications. This exploit was isolated to one wallet on Solana, and hardware wallets used by Slope remain secure. While the details of exactly how this happened are still under investigation, key private information was inadvertently transferred to an application monitoring service.”

Estimates of the damage vary, with reports that more than $6 million in digital assets have been stolen.

What is Solana?

Solana is a fast-growing blockchain with striking similarities to Ethereum – often referred to as an “Ethereum killer.”

Like Ethereum, the SOL token can be purchased on most major exchanges. The real value of the token is to perform transactions on the Solana network, which has unique advantages.

The Solana blockchain uses a proof-of-history consensus mechanism. This algorithm uses timestamps to define the next block in Solana’s chain.

Most early cryptocurrencies, such as Bitcoin and Litecoin, use a proof-of-work algorithm to define the blocks in their chains. Proof of work uses a consensus mechanism that relies on miners to decide what the next block will be.

However, this proof-of-work system is slow and resource-intensive, leading to the use of enormous amounts of energy. This is one reason for Ethereum’s upcoming merger, where the network will convert to a proof-of-stake system.

Unlike the previous proof-of-work mechanism, proof-of-stake uses staking to define the next block. Staked tokens are held as collateral by the blockchain until validators reach a consensus on the chain’s next block.

According to Konstantin Anissimov, CEO of crypto exchange CEX.IO, Solana “uses a mix of time-tested cryptographic strategies and fresh innovations to address the shortcomings of crypto’s first-wave solutions.”

Powered by its unique combination of proof of history and what are referred to as delegated proof-of-stake algorithms, the main problem Solana sought to solve was Ethereum’s scalability issues. Delegated proof-of-stake is a variant of the more traditional proof-of-stake algorithm.

For those who need a refresher, the proof-of-stake mechanism is a process of transactions to create new blocks in a blockchain using a system of validators.

Solana provides users with several benefits with its delegated proof-of-stake mechanism.

The history algorithm adds a layer of security to the network, says Christian Hazim, analyst at ETF provider Global X.

Essentially, Solana addresses two of three problems identified by Ethereum co-founder Vitalik Buterin in his blockchain trilemma of scalability, security and decentralization.

Although Buterin originally claimed that Ethereum would address all three aspects of this trilemma, most experts believe that the network only addresses two factors: security and decentralization.

However, Solana is designed to address two parts of the trilemma: security and scalability. SOL’s proof of history algorithm provides unique security for the network. While the speed at which the Solana platform performs calculations provides increased scalability.

What makes Solana unique?

Using a unique blend of proof-of-history and delegated proof-of-stake, Solana offers exponentially faster transaction speeds than its closest competitors, Ethereum and Cardano (ADA), at a fraction of the cost, says Anissimov. delegated proof of stake.

Unlike proof of work, which uses the miners themselves to define the next block in a chain, or proof of stake, which uses staked tokens to define the next block, proof of history uses timestamps in its definition of blocks for the Solana chain.

This innovative system allows validators on the blockchain to vote on the timestamps of different blocks in the chain. This keeps the chain relatively decentralized while enabling faster and more secure calculations.

How does Solana work?

Solana works with a combination of proof-of-history and delegated proof-of-stake protocols.

The reason for this combination of protocols, says Bryan Routledge, associate professor of finance at the Tepper School of Business at Carnegie Mellon University, is that Solana tries to “process a lot of transactions quickly.”

Routledge points out that trying to process transactions quickly usually requires centralization. For example, Visa uses a large network of computers to keep processing speed on track. Bitcoin, on the other hand, Routledge says, “processes transactions very slowly” to remain decentralized.

Since the whole point of blockchain technology is to provide decentralized systems, Solana tries to process transactions at speeds similar to a large, centralized company like Visa, while maintaining the decentralization of Bitcoin. This speed provides increased scalability since the environmental and financial costs of Solana’s systems are lower.

The speed at which blocks are added to Solana’s blockchain requires additional layers of blockchain security. This is where Solana’s proof-of-history algorithm comes into play. This algorithm timestamps each block in such a way that maintains the security of the system.

Solana’s SOL tokens are then staked and used as collateral to process transactions on the network. These transactions include everything from validating smart contracts to using Solana as a non-fungible token (NFT) marketplace.

One of Solana’s big breakthroughs came in August 2021, more than a year after Solana launched when Degenerate Ape Academy became the first major NFT project on the Solana NFT Marketplace. In the first three weeks of that month, Solana’s price jumped from about $30 to $75 in value.

Solana’s all-time high was in November 2021, when it peaked at nearly $260 during the height of the crypto bull run.

Solana vs. Ethereum

Solana and Ethereum have some things in common, but they also have strong differences. Here is a brief overview of where the two platforms overlap and where they diverge:

In addition, Hazim mentions that it is important to note that Solana Labs, Solana’s technology company, is working on several interesting products. These include Solana Pay, which allows cheaper, safer and faster transactions.

Solana Labs has also launched the Solana Mobile Stack. This Android toolkit opens up the possibility of mobile expansion. Solana expects to launch its mobile phone, the Solana Saga, in early 2023.

Investing in Solana

Like most of the world’s major cryptocurrencies, SOL tokens can be traded on a variety of platforms. This includes centralized exchanges such as Binance.US, Coinbase and Kraken, to name a few. In some cities around the world, SOL tokens are even available in crypto and NFT ATMs.

After purchasing SOL tokens, investors will want to store SOL tokens in a crypto wallet after purchasing them. Contrary to what the name suggests, crypto wallets are not where the cryptocurrencies themselves are stored. Rather, it is where owners store the keys to their cryptocurrencies. These wallets can either be stored online or offline. (The safest option for storage is offline with a cold wallet.)

SOL tokens also have many use cases. Among other things, they can be used for peer-to-peer payments, trading, and as an incentive to secure the Solana network as a validator.

However, as with all cryptocurrencies, investors should consider speaking with a financial advisor before investing in Solana.

Cryptocurrencies are highly volatile and extremely risky investment vehicles. Investors should be sure that they can afford to lose the money they invest in SOL, even if they believe in Solana’s potential.