Solana after the FTX collapse: Can it still “kill” Ethereum?

Among the top cryptocurrencies, Solana is probably the one that has suffered the most in the crypto winter. One of the most successful Layer one protocols of the last bull market, Solana allows record fast and cheap transactions and it was even called an Ethereum killer. But because of its connection with Sam Bankman Fried, Solana was hit hard by the collapse of the FTX crypto exchange. The Sol token fell to record lows last November and some major projects have left the platform since then. So the big questions now, will Solana recover from this CR and does it still have what it takes to win the layer one race? I tried to find out in my conversation with Austin Federa, the head of strategy at the Solana Foundation. I'm Giovanni. On this show we challenge the ideas that shape the world of crypto. In each episode we assess a macroeconomic outlook, a crypto narrative or a potentially disruptive technology. Only the most solid ideas will make it to the other side. 2022 was pretty rough for Solana. That's, that was largely because of what happened with ftx. So the fact that SBF was heavily involved in a lot of Solana based projects, the fact that FTX held a large amount of Sol token, that also had an impact. What is the lesson that the Solana foundation drew from the FTX collapse?

Yeah, I think the collapse of FTX took pretty much everyone by surprise from folks in the industry to folks in the media. You know one of the things though is that it's, Sam was not an FTX was not like intricately involved in the Solana network. It was one of many places that they had been investing in building on and you know, if you look at kind of where they've made investments, they, I think They've made about 109 investments based on the data that the, the bankruptcy firm has put out. Twenty of those were in Solana based projects, but the majority were not, you know, they, they invested over $40 million in a lot of Solana competitors as well. So I think the, you know, the, the, the assumption that like FTX was intricately involved with the Solana network is one, because it was a network Sam was an early proponent of, but it didn't, you know, they weren't critical to the network operations or sort of the ecosystem. I think what we've seen, you know, in the, in the, I guess we're coming up on two months since the FTX implosion is that the Solana community is stronger than ever. There's more on chain transactions than before. FTX collapsed. There is actually more validators operating on the network than before. You've seen Solana has the most active users of any chain at this point. And so the community staying power is here and markets will do what markets will do. But that's sort of separate from the core fundamentals and the technology of the network.

Yeah, I believe that that was largely like reputational issues. Don't you think that for the health of Solana and a lesson could be not being so tightly associated with any single, I would say crypto personality? Because that, that's a point of weakness.

You know, part of the yin and the yang of an open, permissionless, decentralized blockchain is you can't control who buys what and you can't control what they build on the network. And so, you know, the, the, the. I think you're right that from a reputational perspective, you know, the external perception was that there was a very close relationship between, you know, the Solana network and ftx, which, which wasn't the case.

You mentioned the fact that there are very good statistics. So according to a recent report by Electric Capital, Solana is seeing a record level of new developers contributing to the blockchain every month. So why are developers moving so much into Solana despite the headwinds in terms of price that we witnessed in the.

Last couple of months? You know, I think one of the things about Solana is it's not EVM compatible. It's a new runtime environment, it's a new programming language that you have to use. And so that means the folks building on Solana have a reason to build on Solana. They're looking at the characteristics of the network, its high transaction capacity, its fast scalability, settlement. You know, it's fast throughput. And they're saying that these are a series of characteristics that mean I can build a different type of product on Solana than I can build elsewhere. And sometimes that's economic difference. Right. That whatever things decrease by orders of magnitude. You can build new types of products and services that aren't transaction constrained.

We saw two top NFT projects that were active on solana, which were DGODs and utes that announced they are going to migrate from Solana into respectively Ethereum and Polygon. They announced it last month and they are supposed to make this transition in 2023. So that was taken as a big blow because those were like two of the top NFT projects on Solana. So some interpreted it as sort of exodus of NFT projects. How do you interpret this phenomenon. And how does Solana plan to invert this trend?

Yeah, look, I think if you look at the decision of those founders to do that, that wasn't a community vote. That was sort of a unilateral decision by the organization that runs that project, which it's their purview to make. I think NFT projects are inherently more portable than code based projects because at the end of the day NFTs are an amazing use of a blockchain, but they're, they're not using a lot of the underlying technology that makes the network a differentiator from another network. I think NFT projects are the most portable types of projects in crypto. You know, I think we have not seen some sort of mass exodus of projects. You know, D gods and Utes were two of the highest volume traded projects on the network and you know, we wish them success in whatever they're doing next.

Solana was experiencing a lot of outages and that was basically one of the main problem of the Solana blockchain. Anatoly Yakovienko, the founder of Solana also acknowledged that that was an issue. He called it Solana's curse. What has been done to fix this issue and or how are you planning to do fix this issue in the course of 2023?

We've made some substantial investments over the course of the last 18 months in core network features that are addressing a lot of those performance and reliability issues that users felt last year and especially in the first, you know, quarter of last year. One of those major ones is the, is something called local fees and priority fees. So what priority fees do is they, they, they're state specific. So if there's a really high demand for an NFT mint, you may see the cost to transact go up from 0.00025 to maybe $0.10 for a transaction. But that fee will only spike for that one piece of state. For that NFT mint or for that one trading pair. It won't have any ability on. It won't have any impact on the cost to send a transaction via Solana pay or you know, to, to stake or unstake tokens. Those will continue to be charged that kind of base layer fee. On Ethereum you can buy your way to the front of the line, right? You can submit a transaction with a really high gas fee and you're basically paying for a fast lane pass to get to get up to the front before priority fees shipped on Solana. The only way to do that was to spam the network with a bunch of duplicate transactions and hope one of your transactions lands. So by by doing things like local fee markets and priority fees, there's now better optionality for developers who are, you know, or traders who are trying to make money to not have to spam. In fact, you know, it's like why would you send a hundred transactions if you can just send one transaction and pay 50 times more for that one transaction but be guaranteed it will land? That's just one piece of Cortech, you know, quic, which was a change in how validators communicate from a networking standpoint that also helped give more more flow control optionality for spam prevention.

Those issues that we saw in terms of outages were mainly related to the fact that if you maximize speed and low cost transactions then you might suffer some issues in terms of stability of the network. So some people think that it's much better to work on a layer two solution on Ethereum. So basically developing speed low cost transactions on this layer 2 while relying on the stability and the security of the layer 1, which is Ethereum.

Look, the thing about rollups and layer 2s and those type of solutions is we've heard a lot about them for a number of years at this point and they haven't delivered the performance or the user friendliness that folks have been looking for and asking for. That doesn't mean they couldn't get there someday. But the security of a, of a layer 2 is only post settlement. So until it actually writes those transactions back to the layer one, you're not actually inheriting any of the security of Ethereum until you get to that point. Now for some of the layer twos that can be seven days. For some of the layer twos that's, that's much less time. But the shorter that time differential, generally speaking, the higher the less of a discount you get for using the layer 2. The major innovation apart from smart contracts is this idea of atomic composability that I can establish program to program trust without any human involved with no counterparty risk and no bridge risk. And that was one of the major things that made defi possible on Ethereum that made Ethereum successful in the early days. Layer 2 Scaling Solutions Break composability, rollups break composability. If I want to transact between one layer two to another layer two, that is a bridge operation either back through the main chain or going L2 to L2. And the minute you're using a bridge, you're using a trusted system. Bridges are not Trustless, trustless bridges don't exist today. And a lot of the zero knowledge bridge solutions out there are still trust solutions just with a zero knowledge proof wrapper around them. And so a lot of the questions here are basically are layer two is living up to the promise that they have? I think the answer today is no, but that doesn't mean they won't in the future. What we've seen is that developers don't want to deal with all of that. They would much rather just build something on one global state that's fast, efficient, scalable.

We're excited to see how Solana is going to rise again in 2023. If you had to point out the milestones that the Solana foundation want to achieve in 2023, what would those be?

I think when we look forward to 2023, one of the really big milestones I'm looking forward to is the second Validator client, Fire Dancer, getting deployed on mainnet. I think there's a, there's a bunch of other sort of infrastructure layer and foundational level technologies that are going to make the Solana network easier to develop on, easier to interface with. One of these is like, you know, there's a, there's a, a program called Provable Actions and NFT compression which is going to make it possible to mint 100 million NFTs on Solana for about $1,000. That's disruptively cheap that, you know, that is a, I think a hundred x order of magnitude cost reduction that opens up that infrastructure for all sorts of things.

I really appreciate you being on our show. I hope to see you very soon and yeah, best of luck for 2023.

Excellent. Thanks very much. Appreciate it.