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Why Solana is more decentralized than you think
Solana’s active validator count, almost at 2000, is much higher than other chains
It’s been twelve months since a Tweet from the Solana foundation announced the number of active validators passing 1,000, and now Solana has 1,875 active validators.
This gives Solana the most active validators of almost any Proof of Stake blockchain. (Ethereum has 8,417 nodes and 409k validators, but some node operators will run many validators, so there’s uncertainty as to how many node operators there are…)
Most validators are in the US and Germany, and this isn’t unique to Solana
Using validators.app to look at the locations of Solana’s validators, we see that almost half are located in the US and Germany. This is problematic, and unfortunately not unique to Solana: If we look at the locations of Ethereum’s nodes (not all of which are validators), the distribution is similarly dominated by the US with a 46% share, and Germany a more distant second with almost 12%. Avalanche, the only other network to boast over 1,000 validators, has over 75% of its validators in the US and Germany.
Validator geo-diversity is important
If too many validators are concentrated in the same places, the health of a blockchain becomes reliant on the regulatory regimes of those countries. Professional validators are businesses, using bank accounts and crypto exchanges, creating contractual relationships with hosting providers or data centers, carrying out payroll and HR functions, and paying tax. Changing regulations put these business activities into question. The most extreme example is the Chinese ban on Bitcoin mining in May of 2021, which forced miners to quickly relocate and caused Bitcoin’s hashrate to fall by a massive 50% in two weeks.
Changing regulation isn’t the only reason to seek out geographic diversity. In 2011, Japan’s deadly earthquake and tsunami seriously tested the resilience of data centers and the entire power grid. Everstake, currently the largest Solana validator, happens to be a Ukrainian company. Thankfully, their CEO claims to have been prepared for the war, explaining that “an important part of doing business is assessing and addressing all potential risks.”
While we can debate the exact definition of “decentralization”, it’s ideal to have validators spread across the globe - Solana and other blockchains have room for improvement in this category.
Most validators are hosted on AWS and Hetzner, and this isn’t unique to Solana
The emergence of cloud computing has made it easy to spin up blockchain nodes and validators. Pay a monthly rate to Amazon Web Services (AWS), they worry about the data center and the hardware, and all you have to do is run the client. While not the cheapest option, it’s easier and safer than running machines at home, where internet or power interruptions could lead to slashing penalties.
As these convenient hosting providers become popular, blockchains become more dependent on them. Today, over one-third of Solana validators run on Hetzner, and just under one-fifth run on OVH. Avalanche, by comparison, has a full 45% of validators running on Amazon. On Ethereum, almost a third of nodes run on Amazon, but to Ethereum’s credit, another 30% of nodes run on residential (at home) internet connections.
This is important because even the largest hosting providers are not immune to outages — AWS suffered three outages in December 2021. Over-dependence on a single hosting provider, especially a single data center, is dangerous for a blockchain. Should a large portion of nodes go offline at the same time, the network’s ability to achieve consensus is put into question, potentially causing a massive slashing event.
Lack of validator decentralization isn’t just a Solana problem
The data presented above is surprising and even a cause for concern. It’s true that the Solana network relies too heavily on the US and Germany and a small number of hosting providers. Unfortunately, this isn’t a problem limited to Solana, and on a validator level Solana may actually be one of the “least centralized” blockchains.
The overreliance of today’s major blockchains on specific countries and hosting providers significantly reduces the resilience of those blockchain networks. We should take a holistic view of our blockchains and think about how to improve their resilience before accusing any single chain of being “centralized”.
Liquid staking pools like Lido are at the forefront of this challenge, since they are responsible for assembling a diverse set of validators. Lido seeks to decorrelate the risk of network connectivity issues, operator compromise, and regulatory capture by creating a robust and diverse validator set that is legally and physically unrelated, geographically and jurisdictionally distributed, and has a variation of on-premise infrastructure and cloud providers.
There are, however, more variables to consider when judging the decentralization of a blockchain, so let’s get back to Solana, and examine the distribution of staked tokens amongst validators.
Nakamoto coefficient: Solana’s community cares about distributing stake
But it’s not just the number of validators that’s crucial to defining the decentralization of a network, but also the distribution of staked tokens among those validators. A network could have thousands of validators, but if 99% of tokens are staked with a single validator, that validator controls block production and the blockchain.
The “Nakamoto coefficient” is a metric coined by Balaji Srinivasan and named after Bitcoin’s creator, and is defined as the smallest number of validators who cumulatively stake 33% of the network’s staked tokens. In theory, depending on the network’s consensus mechanism, a collusion of these validators would be able to censor the network’s transactions or halt it altogether. Thus, a higher Nakamoto coefficient represents a higher distribution of staked tokens, and a higher degree of decentralization.
With Nakamoto a coefficient of 27, Solana has a better distribution of stake across its validators than other networks such as Cosmos or NEAR. While Polkadot has only 15% as many validators as Solana, its Nakamoto coefficient is three times as high, owing to its staking mechanism that requires even distribution of stake among validators.
The Solana community is taking steps to further improve the Nakamoto coefficient. Visitors of the block explorer Solana Beach will by default only be shown validators outside of the “superminority” of validators making up the Nakamoto coefficient. A message is shown: “cumulative stake above can halt the network — improve decentralization and delegate to validators below.”
Liquid staking pools understand the importance too, with Lido only onboarding new node operators from outside this superminority set, and Marinade similarly only delegating to validators outside the set. The Solana Foundation’s delegation program, which we’ll discuss in more detail later, also delegates stake only to validators outside the superminority set.
All of these actions, taken together, do not punish or penalize the validators with the largest stake, but rather encourage delegation to smaller validators in order to distribute staked tokens as evenly as possible. Solana’s Nakamoto coefficient has improved steadily over the past months and years, and we can assume that it will continue to improve into the future.
Validator hardware is expensive — Solana Foundation offers support
In order to achieve decentralization, a blockchain needs to make it easy for people to run nodes and validators, ideally at low cost. Because of Solana’s design philosophy — being able to scale the blockchain as hardware continues to improve — Solana validators are serious machines, with high performance hardware that doesn’t come cheap. In order to avoid validators from having to invest in expensive hardware, the Solana Foundation created a server rental program in partnership with data center companies Edgevana, Equinix, Lumen, and Stackpath. The Solana Foundation has enabled this program through a bulk purchasing agreement and doesn’t profit from sales.
No minimum stake to enter the active set
Many networks can be run on cheap hardware, but require a large amount of staked tokens to enter the “active set” of validators, who contribute to the network consensus. Over half of the networks we examined require over $100k of tokens to be staked for the validator to enter the active set. Solana validators can begin staking with 1 SOL token, but there are other barriers to entry which we’ll discuss in the next section.
Voting costs are significant — delegation from Solana Foundation can help
Solana validators can begin contributing to network consensus with 1SOL token, but they are faced with an economic challenge: a validator must constantly participate in voting transactions, with transaction fees costing about 1.1 SOL per day. (Currently ~$50/day) Therefore, for a validator to break even at a 10% commission, they need either 45k of SOL staked by 3rd parties (~$2m), or 5k of SOL self-staked. (~$225k) Currently 1,300 of Solana’s 1,875 validators have enough stake to break even on their voting costs.
In order to help validators achieve profitability, the Solana Foundation has created the delegation program, whereby 80% of the Foundation’s treasury (100m SOL) is staked to validators. In order to further decentralize the network, the Foundation’s tokens are staked exclusively to smaller validators outside the superminority set.
For the health and security of the network, it is important that Solana tokens in circulation are staked to validators, and that validators do not rely on delegations or decisions made by the Solana Foundation. But with over 75% of tokens staked, Solana has one of the highest staking ratios of any Proof of Stake blockchain, ensuring the security of its consensus and the profitability of a large number of validators.
Solana’s tokenomics enable a strong foundation and ecosystem funding at the possible expense of decentralization
A common criticism of Solana was their choice to sell many tokens to investors in private rounds, and only 1.6% to the public during an ICO.
While the Solana tokenomics were unusual in that regard, the Solana Foundation regularly published transparency reports outlining the movement of tokens and the dates on which investor tokens would be unlocked. In April of 2020, though, there was controversy over a loan made to market makers which had not been announced to the public but was discovered using a block explorer. (Some of these tokens were later burned, but the community seems to have lost some trust in the Foundation regardless.)
After the public sale in March 2020, Solana launched mainnet beta, and SOL began trading on public exchanges in April. Now was opportunity for the public to purchase tokens in the open market, with tokens trading between $0.50 and $0.75 in April, May, and June of 2020. These prices represented a 2–3x markup from the private sales, but were far shy of the $200 price SOL would eventually climb to over the course of 2021.
The common criticism that remains is the Solana Foundation’s decision to keep a large portion of tokens under their control. 11% of the initial token supply was allocated to the foundation, with another 37% under their control via the community reserve fund. Over time, newly created tokens will be issued to token stakers, the total token supply will increase, and the Foundation’s shares will become a smaller portion of the token supply. By 2027, the Foundation will allocation of 7.7% of token supply, with the community reserve representing 25.5% of tokens. (The supply issuance is best understood using the interactive chart from Messari)
The Solana Foundation has used their token allocation to support investment in the ecosystem, undertaking activities like the previously discussed server program and delegation program, as well as the funding of ecosystem projects — According to Crunchbase, the Solana Foundation has made 15 investments, and Solana Ventures, (the venture arm of Solana Labs) has made 52 investments. They have also funded countless in-person events like Hacker Houses and Summer Camps around the world, bringing together developers and giving rise to new ecosystem projects.
Critics argue that Solana’s decisions have increased centralization of the blockchain by solidifying the importance of the Solana Foundation, the founders, and investors in private rounds. Supporters argue that Solana’s choices gave the Solana Foundation the funding and authority it needed to successfully lead software and ecosystem development efforts, and the explosive ecosystem growth and associated token price development in 2020 and 2021 speaks to the success of these decisions.
The question for Solana users and investors is whether they value a blockchain and token led by a strong, well funded development foundation or whether they prefer more decentralized leadership with more even token distribution.
The Solana blockchain is decentralized, let’s focus on dApps and users
With over 1,800 active validators globally distributed to a similar extent as other chains, and a Nakamoto coefficient of 27, the Solana network is one of the more decentralized blockchain networks running today. But as we explained in a blog post, we chose to build the initial version of our DeFi wallet Ultimate on Solana because of scalability, low fees, and an ecosystem growing at a record-level speed.
At Unstoppable Finance we are builders, focused on making pragmatic and unbiased choices that lead to the best DeFi user experience for our users. We need to be confident in the blockchain’s decentralization, but we can’t afford mentality of “decentralization above all else”.
Smart contract blockchains exist to enable applications and use cases. We’re more than satisfied with the level of decentralization of Solana’s blockchain, and impressed with the growth of its ecosystem and community. We recognize Solana’s strong on-chain metrics, which even compare favorably to Ethereum.
We are also encouraged to see Solana sharing our vision for mobile, eager to onboard the next wave of crypto users by creating a next generation user experience. With the “Backpack” project exploring the use case for xNFT applications, or the Saga phone which seeks to meet users where they are, Solana believes in a mobile enabled future for blockchain and web3, as we do.
Our goal is to be multi chain
The initial version of our Ultimate wallet runs on Solana, but an Ethereum integration is the next step on our roadmap. We are believers in competition, and are grateful to live in a multi-chain world where so many teams explore the limits of blockchain technology.
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