Podcast Summary
Understanding Solana and Sol's Relationship: Despite criticisms, a deep dive into Solana's prioritization of high throughput and its impact on Sol's investment thesis is crucial for navigating the future of internet money and finance.
As we navigate the future of internet money and finance, it's essential to understand the best defense mechanisms to prevent negative scenarios. In this episode of Bankless, we delve into the relationship between Solana the network and Sol the asset, a topic that has puzzled Bankless' founders. The investment thesis behind Sol has been unclear to them due to Solana's prioritization of high throughput over decentralization and censorship resistance. Bankless, known for its Ethereum focus, has faced criticism from the Solana community. Nonetheless, conversations with Austin Federer, the guest on this episode, are reminiscent of Bankless' early days and may provide valuable insights for listeners. Sponsored by Kraken, the preferred exchange for 2023, this episode promises a deep dive into Solana and Sol's connection.
Exploring the Future of Crypto: Kraken Pro, Polygon 2.0, and TOKU: Kraken Pro offers a trusted trading platform for crypto, Polygon 2.0 aims to revolutionize app development with unlimited scalability and unified liquidity, and TOKU simplifies token compliance for companies. Solana's native asset, Sol, was discussed using a city zoning analogy to illustrate network frameworks.
Kraken Pro is a trusted platform for crypto traders, and Polygon 2.0 aims to provide the missing value layer for the Internet, revolutionizing app development and user adoption through unlimited scalability and unified liquidity. Additionally, TOKU simplifies token compliance for companies, making it easier to navigate complex labor laws, payroll, tax obligations, and crypto regulations. In the discussion, Austin Federa, head of strategy at the Solana Foundation, and I continued our exploration of the native assets behind the Solana and Ethereum ecosystems, focusing on Sol and its programmed values. The analogy of a city's zoning regulations was used to illustrate the unique characteristics and frameworks of different networks. Overall, these advancements and conversations highlight the continuous innovation and growth within the crypto space.
Solana vs Bitcoin: Different Blockchain Architectures for Different Use Cases: Solana offers faster transaction speeds and supports more complex apps than Bitcoin, thanks to its unique architecture that keeps everything in one global state and validates transactions in parallel. However, this design also comes with risks of a VM crash causing a consensus protocol crash.
While Bitcoin's blockchain architecture is well-suited for certain uses, like digital currency transactions, networks like Solana offer faster transaction speeds and the ability to support more complex applications, such as NFTs and social tokens. Solana's architecture is designed to keep the network fast and transactions low-cost by keeping everything in one global state and validating transactions in parallel. This is different from Ethereum's approach of creating artificial scarcity on the base layer and offloading scaling to Layer 2 solutions. Solana's design decision to flatten the VM and consensus layer into one stack allows for higher transaction speeds but also means that a crash in the VM could cause a consensus protocol crash. Overall, these are just different architectural decisions about how to scale blockchain networks and support various use cases.
Solana's Rapid Evolution and New Challenges: Solana's cheap transactions and massive throughput could lead to a new blockchain economy, with different microeconomics but similar aggregate value to Ethereum. Networks are under pressure to innovate and address reliability issues with new features like stake-weighted QoS.
The blockchain industry is evolving at a rapid pace, with networks like Solana presenting new challenges and opportunities. While Solana experienced an outage due to a block production issue, this is different from Ethereum's early days when the network was designed with long-term deflationary economics. The pressure is on networks to accelerate and figure out their unique characteristics and economic models. A relevant analogy is the shift from large software contracts to Software as a Service (SaaS), which didn't kill traditional software providers but created a new product category. Solana's cheap transactions and massive throughput could lead to a new blockchain economy with different microeconomics but similar aggregate value to Ethereum. Additionally, Solana introduced stake-weighted Quality of Service (QoS) features to address reliability issues, such as a new networking standard (QUIC) and local fee markets. These changes contribute to the evolving landscape of blockchain networks.
Solana's token economics based on transaction fees and network security: Solana's token economics revolve around its role as a transaction fee payer and network security mechanism, with a low base fee and potential advanced utility for arbitrage and priority block transmission.
Solana's token economics, like Ethereum's, are based on the utility of the token as a means to pay transaction fees and secure the network. The base fee is low at 5,000 Lamports (0.00025 USD), and the Sol token's value comes from its role in the network's security mechanism. The discussion also touched upon advanced topics like arbitrage opportunities, priority in block transmission based on stake size, and the concept of Solana as a triple point asset or "ultrasound money." These advanced topics represent additional utility and impact the economics in more extreme or marginal situations. However, the fundamental basis for Solana's token economics remains its role as a transaction fee payer and network security mechanism. The triple point asset thesis, which assumes increasing demand for blockchains, can also be applied to Solana's economics. The token's inflation rate is currently set at 1.5%, and any potential transaction burn would be on top of this base inflation.
Smoother Transaction Fee Management on Solana vs Bitcoin: Solana's approach to managing transaction fees is more consistent and keeps costs low, making it a popular choice for developers building high-speed applications.
Solana's approach to managing transaction fees through a decreasing schedule is a more smooth process compared to Bitcoin's halving events. The thesis behind Solana's blockchain is that it will be widely used, requiring a base layer transaction fee to remain low. Even during times of high price and adoption, transaction costs on Solana have remained extremely low. The original economic modeling for blockchain transaction costs was based on much lower numbers than what we've seen in recent years. As demand for block space increases, networks like Solana become necessary for developers to build applications that require massive speed and performance. The value proposition of Solana is its ability to handle complex transactions all in one network, unlike Ethereum which requires fracturing liquidity across multiple roll-ups and introducing trust assumptions. While applications built on Solana may not be better or worse than those on Ethereum, they cater to different use cases. For instance, Helium cannot be built on Ethereum due to its high transaction costs and limited transactions. The Solana ecosystem consists of three pillars: collateral, burn, and staking yields. Collateral is used to secure the network, burn refers to the process of destroying tokens to reduce supply and increase scarcity, and staking yields provide incentives for holding and securing the network. Together, these pillars contribute to the overall value and functionality of the Solana blockchain.
Differences in Liquid Staking on Ethereum and Solana: Both Ethereum and Solana have unique network architectures influencing their liquid staking ecosystems, but the fundamental concept of collateralized staking and its role in DeFi applications remains consistent.
While there may be differences in the liquid staking market and ecosystem between Ethereum and Solana, the nature of collateralized staked assets (like ether and Solana's staked SOL) remains similar. The primary difference lies in the economic incentives and network architectures that have influenced the adoption of liquid staking solutions. On Ethereum, the requirement for a minimum of 32 ETH to stake and the lack of a single validator led to a more robust liquid staking ecosystem with providers like Lido and MEV-related economics. In contrast, Solana's architecture allows for stake accounts of any size, leading to a more centralized staking process with stake pools and fewer liquid staking providers. Despite these differences, the resulting conclusion is that staked assets will continue to function as collateral in DeFi applications on both networks, with the ability to transfer stake account authority to liquid staking providers to receive the equivalent liquid staked tokens. Additionally, both networks are seeing the development of systems to address the challenges of liquidity and withdrawals. Furthermore, it's important to note that Ethereum's MEV (Minimum Extractable Value) and MEV burn dynamics are significant parts of its economics, and their impact on Solana remains to be seen. Overall, while there are differences between the two networks, the fundamental concept of collateralized staking and its role in DeFi applications remains consistent.
Managing Crypto Assets and Maximizing Value in Decentralized Finance on Solana and Ethereum: Solana's faster block times and lack of a mempool make capturing MEV more challenging compared to Ethereum. MetaMask Portfolio simplifies managing crypto assets across multiple chains and addresses. Ethereum Layer 2 solutions like Mantle and Arbitrum reduce gas fees and volatility, attracting projects and decentralizing ecosystems.
While Solana and Ethereum both have mechanisms for capturing MEV (Maximal Extractable Value) in decentralized finance transactions, the process is much more challenging on Solana due to its faster block times and lack of a mempool. This means that opportunities for MEV are more inconsistent and dependent on market movement and on-chain activity. On the other hand, MetaMask Portfolio offers a convenient solution for managing crypto assets across multiple chains and multiple addresses, making it easier for users to engage in DeFi activities. Additionally, Mantle, a DAO-led web 3 ecosystem, is building on Ethereum Layer 2 using a cost-effective data availability solution, reducing gas fees and volatility. Projects building on Mantle can apply for grants to help expand and decentralize the ecosystem. Arbitrum, another Ethereum scaling solution, has already attracted 100 projects and is becoming a hub for web 3 gaming and social dApps. Overall, the decentralized finance landscape is rapidly evolving, and understanding the unique challenges and opportunities of different blockchain networks and ecosystems is crucial for maximizing value in this space.
Democratizing MEV on Ethereum and Solana: Ethereum aims to distribute MEV benefits among Ethereum holders through decentralized technology, while Solana uses stake-weighted QoS to prioritize transactions and reduce MEV's impact.
Ethereum's approach to MEV (Maximal Extractable Value) is to democratize it by putting it into the Ethereum asset, rather than letting a central party own and control it. Arbitrum Orbit, a new technology, allows developers to build their own layer 3 projects with Arbitrum's secure scaling technology, providing interoperable customizable permissions and dedicated throughput. This approach aims to eliminate MEV as a centralized force and distribute its benefits among the holders of Ethereum, the most decentralized component of the Ethereum network. Solana, on the other hand, uses stake-weighted QoS (Quality of Service) as a counterpoint to MEV, allowing validators with a certain percentage of stake to prioritize their transactions. MEV clients on Solana are open-source, and a significant percentage of the network is using them. Ethereum's philosophy is to democratize MEV, while acknowledging the challenges of fully eliminating it due to human self-interest. The future of MEV on both networks remains to be seen, but the approaches taken reflect their unique perspectives on decentralization and the role of economic incentives.
Ethereum's MEV Handling: Burn or Share?: Ongoing debate on Ethereum's MEV handling; some propose burning, others sharing; Ethereum's current system uses an 'implied oracle' for MEV extraction; potential social punishment for not burning MEV; Ethereum's history shows flexibility but overall vision consistency; original Ethereum 2.0 plan included shards architecture for multiple chains
Ethereum's handling of MEV (Minimum Extractable Value) is a topic of ongoing debate. While some argue that MEV should be burned to maintain fairness and decentralization, others propose alternative solutions like JITOSOL where MEV revenue is shared among stakeholders. Ethereum's current system uses an "implied oracle" to determine MEV extraction, but it's not a true on-chain oracle like Chainlink. Some suggest that Ethereum may socially punish those who don't burn MEV, but this would be a significant departure from the Ethereum social contract. Ethereum's history shows that it may not execute proposed updates exactly as planned, but it generally stays true to its overall vision and roadmap. The original plan for Ethereum 2.0 included a shards architecture, which would have allowed for multiple chains to execute smart contracts and sync up every 20 minutes, making it a middle ground between Solana and Ethereum's current rollup-centric roadmap.
Ethereum's roll ups evolving from separate entities to execution shards: Ethereum's roll ups, once seen as centralized entities, are now more controlled by Ethereum layer 1, syncing together every 20 minutes, leading to a compromise on decentralization. The eventual goal is a decentralized roll up ecosystem, but it may still be several years away.
Ethereum's scaling solution, roll ups, are evolving from separate entities to execution shards enshrined in the Ethereum layer 1. These roll ups, such as Arbitrum, Optimism, and Polygon, were previously seen as centralized entities controlled by their respective teams. However, they are now more controlled by the Ethereum layer 1 protocol, and every execution shard syncs together every 20 minutes. This shift from separate synchronous chains to asynchronous ones has led to a compromise on decentralization. While Ethereum critics argue that Ethereum has become highly centralized due to roll ups, it's important to note that Ethereum's roadmap has always been about scaling, and this transition was necessary. The eventual goal is to have a decentralized roll up ecosystem, but it may still be several years away. In the meantime, the pace of innovation on networks like Solana is impressive and serves as a reminder of the relentless drive for progress in the blockchain space.
Ethereum and Solana: Different Histories, Similar Challenges: Both Ethereum and Solana face unique challenges but should be seen as competitors to grow the crypto space, not threats to each other.
While Ethereum and Solana are both significant players in the blockchain space, they have unique histories and challenges. Ethereum, as a more established network, has faced different hardships than Solana, which is still earning its stripes. Ethereum's decentralized nature and grant funding for independent client teams during its early days allowed it to weather financial struggles and continue growing as a movement. Solana, on the other hand, faced similar financial difficulties but as a newer network still building its ecosystem. Today, Solana is making strides with multiple validator clients in development. Despite their differences, neither Ethereum nor Solana should be seen as threats to each other. Instead, they should be viewed as competing with nation states and other layer 1 networks to grow the overall crypto pie. The market cap may be a boring aspect, but it's a crucial part of the competition. Ultimately, both networks have the potential to make significant impacts in the world of smart contracts and decentralized applications.
Ethereum's Values and Scaling Challenges: Ethereum's decentralized values require a larger market cap for global reach, but high transaction fees can be a barrier. Ethereum's unique property is cryptography, which minimizes taxation and maximizes value transfers. However, each layer introduces risks and potential capture points. Minimizing these points is key for Ethereum's long-term success.
Ethereum, as a decentralized ecosystem, encodes values such as pluralism, decentralization, and power to the individual into its native currency, ether. To scale these values to the world, Ethereum needs a higher market cap. However, high transaction fees can be a barrier to reaching a global audience. The Ethereum network can be compared to the traditional financial ecosystem, with each layer having potential taxation and value capture points. The unique property of Ethereum is the use of cryptography, which allows for minimized taxation and maximized value transfers across networks. However, each layer introduces potential risks and points of capture. It's important to note that the risk of settling transactions on the base layer is not zero. Ethereum's future could be an integrated, fair system that delivers value, or it could be a system where values are extracted by large corporations. To minimize potential capture and interference, reducing the number of points of capture is a good objective for Ethereum's long-term system architecture.
Two Approaches to Decentralization: Ethereum vs Solana: Ethereum and Solana have contrasting views on decentralization and preventing capture. Ethereum prioritizes control at the protocol level, while Solana advocates for distributed control across multiple networks. Both acknowledge the risk of capture, but believe their respective approaches increase overall ecosystem resilience.
Solana and Ethereum, two major players in the blockchain world, have different approaches to achieving decentralization and preventing capture. While Ethereum believes that keeping control at the deepest layer of the protocol is the most effective way to prevent capture, Solana argues that distributing control across multiple networks reduces the risk of corruption. Ethereum's perspective is that even if a single network is compromised, the impact would be contained, and the rest of the ecosystem would remain secure. Solana, on the other hand, believes that having multiple networks increases the overall resilience of the ecosystem. However, both perspectives acknowledge that no blockchain is immune to capture, and the risk increases as market cap grows larger. The conversation also touched upon the potential for market cap capture, where large entities could buy up significant stakes in a blockchain network, potentially leading to control and manipulation. Ultimately, both Ethereum and Solana are striving to build decentralized ecosystems, but their approaches highlight the ongoing debate in the blockchain community about the best way to achieve true decentralization.
A comparison of Ethereum and Solana's approaches to security and decentralization: Ethereum and Solana share similarities in their commitment to security and decentralization, but their approaches differ, with Ethereum being more centralized and Solana requiring validators to run things bare metal, making it harder to capture but more difficult to set up.
While Ethereum and Solana are different blockchain platforms, they share similarities in their approaches to security and decentralization. Ethereum, being more centralized with a large percentage of its nodes running on AWS, is potentially more vulnerable to capture. Solana, on the other hand, requires validators to run things bare metal, making it harder to capture but more difficult to set up. Both platforms are exploring different solutions to prevent potential issues, and the future of blockchain security remains uncertain. It's important for all of us to stay informed and understand the risks involved in crypto and DeFi, including Ethereum and Solana. As the conversation between Austin and the speaker highlighted, Solana's decentralization and security model differ from Ethereum's, but both share a commitment to preventing bad scenarios. The Bankless audience gained valuable insights from this discussion, as it provided a deeper understanding of Solana's ecosystem and the values it brings to the table. Remember, crypto is risky, but the potential rewards make it an exciting frontier. Stay informed and stay with us on the Bankless journey.
