Solana Explained — The High-Speed Blockchain Challenging Ethereum

What Solana Is and Why It Matters

Solana is a high-performance Layer 1 blockchain designed from the ground up to achieve internet-scale speed and throughput at an extremely low cost. It operates as an open-source project maintained by the Geneva-based Solana Foundation, with development primarily led by Solana Labs in San Francisco. The network's core thesis is that a blockchain can be exceptionally fast and inexpensive without making unacceptable compromises on decentralisation or security.

The project was founded by Anatoly Yakovenko, a former senior engineer at Qualcomm with deep expertise in distributed systems and compression algorithms. Yakovenko's background informed Solana's unique architecture, which focuses on optimising every layer of the network for performance. Frustrated by the low throughput of Bitcoin and Ethereum, he began work in late 2017 on a new model for ordering transactions. This research culminated in the publication of the Solana whitepaper and the introduction of Proof of History.

After several years of development and funding rounds, the Solana mainnet beta launched in March 2020. Its arrival coincided with a growing demand for alternatives to Ethereum, which was struggling with network congestion and prohibitively high gas fees. Solana's promise of sub-second finality and sub-cent transaction costs quickly attracted developers and users.

During the 2021 bull market, Solana usage exploded. It rapidly rose to become the fourth-largest crypto asset by market capitalisation, establishing itself as a primary competitor to Ethereum for DeFi, NFTs, and other on-chain applications. Its ability to handle high transaction volumes made it a magnet for projects that were economically unviable on Ethereum, cementing its place as a critical piece of Web3 infrastructure. For historical analysis of crypto market cycles and speculative manias, see Bubblepedia →

Proof of History — Solana's Core Innovation

At the heart of Solana's performance is its core innovation: Proof of History (PoH). This is not a consensus mechanism itself, but rather a cryptographic clock that helps the network agree on the passage of time and the order of events. In traditional blockchains like Bitcoin or Ethereum (pre-Merge), nodes must communicate extensively to agree on which block of transactions to add next. This communication overhead is a major bottleneck that limits throughput.

PoH solves this problem by creating a trustless, verifiable record of events over time. It functions as a Verifiable Delay Function (VDF), a cryptographic process that requires a specific sequence of steps to compute. The function takes the output of one step as the input for the next, creating a long, unbroken chain of hashes. This process effectively timestamps each transaction before it is submitted to the consensus layer.

Here's how it works operationally:

1. A leader node (elected via Proof of Stake) sequences user transactions and timestamps them using the PoH generator.
2. The leader bundles these timestamped transactions into a block and broadcasts it to validator nodes.
3. Validators can then verify the sequence and passage of time embedded in the block's PoH hash chain in parallel, without needing to communicate with one another about transaction order.

This pre-consensus ordering mechanism drastically reduces the workload for validators. By combining PoH with a Proof of Stake (PoS) consensus layer for finality (known as Tower BFT), Solana can process transactions in parallel across thousands of nodes. This parallelisation is what enables its theoretical maximum throughput of 65,000 transactions per second (TPS). While this figure is a theoretical ceiling, real-world sustained throughput on the network often ranges between 2,000 and 4,000 TPS, which is still orders of magnitude higher than most competitors.

Proof of History is fundamentally an optimisation. It doesn't change the core principles of Byzantine Fault Tolerance, but it dramatically reduces the communication overhead required to achieve it. By providing a common, verifiable clock, it allows the network to spend less time agreeing on 'when' and more time processing 'what'.

Solana vs Ethereum

As the two leading smart contract platforms, Solana and Ethereum represent different philosophies in blockchain design. Ethereum prioritises decentralisation and security, historically accepting scalability trade-offs that are now being addressed through a rollup-centric roadmap. Solana, in contrast, was built with a "monolithic" approach, optimising the base layer for maximum performance from day one.

This table summarises the key differences between the two networks as of early 2024.

Solana's NFT and DeFi Ecosystem

Solana's low transaction fees and high speed have made it a fertile ground for applications that require high volumes of micro-transactions. This is most evident in its thriving NFT and DeFi sectors.

After Ethereum, Solana is consistently the second-largest blockchain for NFT trading volume. Marketplaces like Magic Eden quickly became the dominant platform, offering a user experience closer to a traditional web marketplace than the clunky, expensive interfaces on Ethereum at the time. The combination of cheap minting and trading led to a Cambrian explosion of NFT collections, from blue-chip projects like DeGods and y00ts to thousands of smaller, community-driven launches.

In Decentralised Finance (DeFi), Solana hosts a range of protocols that take advantage of its low-latency design. Automated Market Makers (AMMs) like Raydium and Orca offer fast, cheap swaps. Raydium is particularly notable for its integration with the Serum central limit order book, creating a hybrid model for deeper liquidity. Liquid staking protocols are also immensely popular, with Marinade Finance leading the way by allowing users to stake their SOL for a yield while receiving a liquid token (mSOL) to use in other DeFi applications.

More recently, Solana has become the platform of choice for the 2023-2024 meme coin frenzy. Coins like BONK, Dogwifhat (WIF), and POPCAT have achieved multi-billion dollar valuations, driven by the ease and low cost of trading them on Solana-based decentralised exchanges. This retail-driven activity has brought immense volume and attention to the network. Furthermore, the launch of the Solana Mobile 'Saga' phone, a crypto-native smartphone, underscores a broader strategy to onboard the next generation of users through integrated Web3 experiences.

The Network Outage Problem

Solana's greatest strength—its performance—has also been the source of its most significant challenges. The network has suffered several high-profile outages and periods of degraded performance, raising questions about its reliability and resilience under stress.

Notable incidents include:

• September 14, 2021: A 17-hour outage caused by a massive influx of transactions from a Grape Protocol IDO, overwhelming the network's processing capabilities and leading to a fork that required a coordinated validator restart.
• January 2022: A series of incidents where the network performance was severely degraded for hours and sometimes days due to duplicate transactions and arbitrage bot activity.
• May 1, 2022: A 7-hour outage triggered by millions of transactions per second from NFT minting bots attempting to use the 'Candy Machine' program. This exhausted validator memory, causing block production to halt.
• February 25, 2023: A nearly 20-hour outage related to a subtle bug in how the network handled large, complex blocks during a software upgrade.

These outages stemmed from a combination of factors. The early architecture lacked effective fee markets to prioritise transactions under load, meaning low-value spam could choke out legitimate activity. The sheer speed of the network meant that when problems arose, they cascaded much faster than on slower chains.

Solana's history of outages highlights a fundamental engineering trade-off. By pushing the boundaries of performance on a monolithic chain, the system becomes more 'brittle'. Liveness faults, where the network halts, become the primary failure mode, whereas slower, more conservative chains tend to experience safety faults or extreme fee spikes under stress.

In response, Solana developers have been implementing major upgrades. These include QUIC, a Google-developed networking protocol to better manage data flow; localised fee markets that allow specific high-demand applications (like an NFT mint) to have their own fee lanes without jamming the entire network; and Stake-Weighted Quality of Service (QoS), which prioritises transactions from validators with a higher stake, preventing any single entity from overwhelming the network with spam.

The FTX Effect

No account of Solana's history is complete without discussing its deep and complex relationship with FTX and Alameda Research. Sam Bankman-Fried was one of Solana's earliest and most vocal supporters. Alameda Research was a significant early-stage investor, and the FTX exchange heavily promoted the Solana ecosystem, building its own DeFi protocol (Serum) on the chain and listing a wide array of Solana-based tokens.

This close association was a double-edged sword. While FTX's backing provided immense capital, liquidity, and visibility that fueled Solana's 2021 rise, it also created a massive systemic risk. When FTX collapsed in November 2022, the contagion hit Solana harder than almost any other major asset. The price of SOL plummeted from around $38 to as low as $8 in a matter of days.

The market feared that the bankrupt estate of FTX/Alameda, which held tens of millions of SOL tokens (many of them locked in vesting schedules), would be forced to liquidate its holdings, creating insurmountable selling pressure. Confidence in the network's future evaporated overnight, and many declared the project dead.

The collapse of FTX was an existential test for Solana. It forced the developer and user community to prove the network's value proposition was independent of its largest and most powerful backer. The subsequent recovery demonstrated a level of resilience that few critics thought possible, forging a stronger, more decentralised identity in the process.

Despite the catastrophic price action, the core Solana network continued to operate. The Solana Foundation, now free from the shadow of FTX, stepped up communications, and developers on major projects like Magic Eden, Phantom, and Marinade publicly reaffirmed their commitment. As the market slowly realised that Alameda's locked tokens would not be instantly dumped, and as developers continued to ship improvements, confidence began to return. Throughout 2023 and into 2024, Solana mounted one of the most remarkable comebacks in crypto history, with its price rallying from the single-digit lows to over $200, far surpassing its pre-FTX levels.

How to Buy and Hold Solana in Australia

As a major crypto asset, SOL is readily available on most global exchanges. For Australian investors, acquiring and securely storing SOL involves a few straightforward steps.

Buying SOL

The most common way to buy Solana is through a major centralised exchange. These platforms offer AUD deposits via bank transfer, PayID, or debit card, providing a simple on-ramp from fiat currency to crypto. Two of the largest and most reputable options are:

• Binance: The world's largest crypto exchange by volume, offering deep liquidity and a wide range of trading pairs for SOL.
• Coinbase: A publicly-traded and highly regulated exchange known for its user-friendly interface, making it a good choice for beginners.

After creating an account and completing identity verification, you can deposit Australian dollars and purchase SOL on the spot market. Remember to use a strong, unique password and enable two-factor authentication (2FA) for your exchange account. A good way to secure your online accounts is to use a VPN, like NordVPN, to protect your internet traffic.

Storing and Staking SOL

While exchanges are convenient for buying, it is critical not to store significant funds on them long-term. The principle of "not your keys, not your crypto" applies. For secure self-custody, you should withdraw your SOL to a personal wallet.

• Software Wallets: The standard software wallet for the Solana ecosystem is Phantom. It's available as a browser extension and mobile app, providing an intuitive interface for storing, sending, and swapping tokens, as well as interacting with NFTs and DeFi apps.
• Hardware Wallets: For the highest level of security, a hardware wallet is essential. These physical devices keep your private keys offline, immune to malware and hacking attempts. A Ledger device can manage SOL through its dedicated Solana app, often in conjunction with the Phantom interface.

Once your SOL is in a self-custody wallet like Phantom, you can participate in staking to help secure the network and earn rewards, typically yielding 5-7% APY. You can delegate your SOL directly to a validator or use a liquid staking protocol like Marinade Finance to receive a tokenised version of your stake (mSOL) that can be used elsewhere in DeFi while still earning staking rewards.

Australian Tax Treatment

In Australia, Solana (SOL) is treated as a Capital Gains Tax (CGT) asset by the ATO. A CGT event occurs when you dispose of your SOL, such as selling it for fiat, trading it for another crypto, or using it to pay for goods and services. Income earned from staking SOL is typically considered ordinary income, assessable at your marginal tax rate at the time it is earned. Keeping detailed records is essential for tax compliance. You can use a portfolio tracker like Koinly to simplify this process. For a complete guide, see our article on Australian crypto tax. Learn More