Solana on its own two legs

Has FTX’s downfall pushed Solana in the right direction — toward independence? FTX’ collapse has forced a move to a decentralized Serum fork and Wormhole bridge, and the decreased price of SOL will remove validators solely dependent on the Solana Foundation for stake. Meanwhile in the developer community, steps are being taken to wane Solana Labs’ role as the central developer of the Solana blockchain.

Previous Work

‍Be sure to read our previous research about Solana here:
→ Why Solana is more decentralized than you think
→ Proof of Stake blockchains are part of a green future

Introduction

With FTX and Alameda gone and the price of SOL below $15, can Solana Labs and Solana Foundation continue to support Solana? Is Solana’s continued success dependent on a high token price? What does a future Solana look like that is less dependent on FTX, Solana Labs, and the Solana Foundation?

The collapse of FTX may mark the beginning of Solana’s broader decentralization, a necessary step if Solana is ever to stand on its own two legs and be run independently by its community. To date, Solana has moved quickly thanks to Solana Labs developing the chain, FTX, Alameda, and Jump building out DeFi primitives, the Solana Foundation supporting validators, and Solana Ventures and the Foundation investing into ecosystem projects.

What will follow is a transformation of Solana’s DeFi and validator landscape. While challenging in the short term, Solana is now on the path to broader decentralization and independence from the powerful forces that created it.

Serum DEX independent of FTX & Alameda

The original vision for Solana was a blockchain that could enable financial infrastructure like NASDAQ. Project Serum brought this vision to reality with a central limit order book (CLOB) exchange, standing out in a DeFi world dominated by Automated Market Maker (AMM) protocols, and providing backend liquidity for many Dapps and dexes on Solana.

Alameda and FTX played a key role in developing Serum, and shortly after FTX’s collapse the community realized that Serum’s upgrade keys remained with an unknown entity at FTX. The project’s codebase needed to be forked: Mango Markets founder Maximillian Schneider quickly assembled a team and began the Open Serum project.

Already used by Raydium & Jupiter, Open Serum, aka OpenBook, will be governed by the “council” of the OpenBook DAO. The community is hashing out on Twitter what the token model for OpenBook should look like, and how it should differ from Serum.

This is a positive development for Solana DeFi, as the governance and liquidity of Serum DEX is now in the hands of the community. Rewards and yield will flow back into the community instead of Alameda, and the community can shape the evolution of the dex to a larger extent than was possible with Serum.

Bridges independent of FTX

Another key piece of Solana DeFi infrastructure originally built by FTX is the Sollet wallet, which featured a bridge to allow non-Solana based assets like BTC and ETH to be used on Solana’s chain and DeFi protocols. Sollet’s bridge was officially deprecated in October 2021, to be replaced by the Wormhole V2 bridge built by Certus One (who was later acquired by Jump). But at the time of the FTX collapse in November 2022, millions of dollars worth of bridged assets still existed on Sollet, and took a huge hit.

Now, Wormhole is the primary bridge on Solana, not only in name but also in practice. The Wormhole bridge was built by Certus One, who was later acquired by Jump. In its current state, the bridge is largely decentralized and not overly dependent on Jump: It will continue operating as long as the 19 guardians continue to operate. The documentation explains that “Verifiable Action Approvals (VAAs) are the key piece of data in the Wormhole ecosystem … The VAAs are signed by the Guardians and need 13/19 signatures to be considered authentic.”

Away from the Sollet bridge and onto the Wormhole bridge is a positive development for Solana. Jump is heavily invested in the success of Wormhole, but the bridge’s operation is not dependent on the survival of Jump in the same way that the Sollet bridge was dependent on FTX.

Solana blockchain’s development independent of Solana Labs

As the price of SOL fell from $30 to $15 following the FTX collapse, the Solana community asked what this meant for Solana Labs and the Solana Foundation. In an effort to reassure that community, Solana founder Anatoly tweeted that Solana Labs has over 30 months of runway left, but this raised more alarm. Solana Foundation Head of Communications Austin Federa walked back the comment, stating that Solana Labs has “much more” than 30 months of runway, and the Solana Foundation has over $100m in cash, so there should be no cause for concern.

What is concerning is that the continued development of Solana’s blockchain is still largely dependent on Solana Labs. This has given the advantage of speed, with new updates to the Solana validator client released every week or two. But over time, the continued development of Solana’s blockchain will have to become less reliant on Solana Labs and accept more contributions from community contributors and other teams.

There are other teams working on validator clients for Solana: Jito’s MEV-focused client is live, although it’s a fork of the Solana Labs client. More notable is Jump Trading’s Firedancer, a completely new Solana validator client being built from scratch. Once Firedancer is completed, Solana will become the only blockchain besides Ethereum to have multiple validator clients built from the ground-up by separate teams. But what about the ability for independent developers to contribute to Solana clients?

In October, Jacob Creech (Solana Foundation developer relations lead) proposed a process for improvements to Solana called Solana Improvement Documents. This was highlighted by Solana Foundation validator relations lead Tim Garcia in the weekly Solana Validator community call on November 10th. Tim is leading a plan to communicate development plans among other teams, starting with a call between all the internal and external teams working on validator clients. This will serve to network the various contributors and improve the process by which independent developers can propose changes and contribute to the development of the Solana client.

The model for community-led, open source development is Ethereum, which has a well-funded Foundation but also a strong community of researchers and developers. Community development efforts are organized according to a clear project management framework, with the possibility to propose and vote on changes to Ethereum and new features via Ethereum Improvement Proposals. (EIP) The drawback to Ethereum’s approach is a slower speed of development, with Ethereum drawing criticism for lacking a concrete roadmap for major events like “The Merge” or the upcoming Shanghai upgrade. This is in contrast to Solana’s faster approach, which draws criticism for being too centralized. An ideal approach is likely to be somewhere in the middle, with Solana Labs facilitating development but including a broad range of community members in the effort.

On the whole, the Solana Foundation is actively attracting more developers to the ecosystem with initiatives like Solana U and Super Team Germany. New developers can write code in already familiar languages like Rust, Python, Typescript, and can even port EVM code with environments like Neon. Developer and activity metrics continue to grow on Solana and Solana-based projects.

Over time, as more teams are formed to develop Solana blockchain clients and a wider variety of community developers are included in the effort, Solana’s reliance on Solana Labs will decrease, making the chain more likely to survive and thrive into the future, regardless of the health of Solana Labs as an organization.

Validators independent of Solana Foundation

The recent drop in the price of SOL tokens to $15 completely reshaped the economic landscape for validators. Our previous research on Solana decentralization showed an impressive network of validators — over 1,500 validators operate from a mix of countries and hosting providers. However, the high cost of validator operation has necessitated the Solana Foundation’s active support in the validator space: the server rental program secures low-cost hardware in high-quality data centers, while the delegation program allocates stake from the Foundation’s treasury to validators. So, while the validator network is in good shape, it’s largely thanks to the ongoing support of the foundation.

Now, with SOL tokens at $15 breaking even at a 5% commission on a $500/month server requires 145,000 SOL staked, far beyond the baseline 25,000 SOL allocated by the Foundation. Economic reality dictates a limited number of validators that can profitably operate on the Solana network, with Cogent Crypto estimating that ~200 Solana validators are currently profitable.

With $15 SOL, a typical validator with $500/month of server costs needs 145,000 SOL delegated to them to break even, according to the calculator from Cogent Crypto. If all of the ~360M staked SOL tokens were distributed evenly, there could be ~2,500 validators with the 145,000 SOL needed to break even. In other words, at $15 SOL, there can be a maximum of 2,500 profitable validators.

But stake is far from evenly distributed: the top 28 validators control 33% of the stake, and the top 150 validators control 66% of stake. The extreme long-tail distribution of stake guarantees that most validators fall below the 145,000 SOL breakeven mark and are losing money.

If the price of SOL remains low, it’s likely that the number of active validators will begin to fall over time, until an economic equilibrium is reached. The community should ask themselves whether an ideal Solana network is one with a large number of potentially unprofitable validators, or a smaller number of economically robust validators, who are not reliant on stake delegation from the Foundation. This change in mindset was already adopted by liquid staking pool Marinade in the middle of 2022, when they realized that their goal of 10,000 network validators was economically unrealistic. In the future, we may see the Solana Foundation similarly reducing the number of validators in the delegation program in order to increase the token delegation to each validator.

It’s worth noting that Solana’s 1,800 active validators is ten times the number on most other chains, as we showed in our previous research, and even a significant decrease in the number of validators is unlikely to affect network stability.

There is hope in the long term, though: as the SOL token supply becomes more broadly distributed via staking rewards and unlocked investor tokens, tokens will be staked more broadly across the validator set. Over the next 5 years, the supply will grow by 23% to over 685M SOL tokens, of which 28% will be newly created staking rewards. (Shown in dark blue at the top of the accompanying graphic from Messari) As these tokens become available in the supply and the market, they are free to be staked to staking pools and independently run validators.

Conclusion: Hope for a community-led Solana?

Solana’s design choices are controversial: the implementation of a hardware-intensive proof of stake algorithm, Solana Labs’ central role in the development of the chain, the Solana Foundation’s role in supporting the validator ecosystem, and the role of FTX, Alameda, and Jump in building out DeFi infrastructure.

Now though, FTX’ collapse has forced a move to a decentralized Serum fork and Wormhole bridge, while the decreased token price will remove validators solely dependent on the Solana Foundation for stake. Meanwhile in the developer community, steps are being taken to wane Solana Labs’ role as the central developer of the Solana blockchain.

A Solana built and operated by the community would be a future-proof Solana, and even in these darkest of times, there is a light at the end of the tunnel for Solana.

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