What Solana’s critics got right… and what they got wrong – Cointelegraph Magazine
3 months ago Benito Santiago
Solana started the year as one of the most promising blockchains, but reports of inflated transaction volumes, high bot activity and hundreds of millions of dollars in monthly payments to network validators have become the industry's most controversial topics.
The magazine decided to separate myths from reality. Some of the claims are partially true, while others are misleading.
Table of Contents
ToggleClaim: Solana's inflation rate is too high.
Some industry watchers have criticized the network for high inflation, often citing Mesari's statistics that SOL's circulation has increased by 13.4% over the previous year.
Solana's actual inflation rate for SOL's total supply started at 8% in 2021 and has dropped to 5% as of September 6. The network plans to reduce inflation by 15% each year until it reaches its target of 1.5%.
There's a long history of startup networks growing rapidly, but support metrics threaten the current sustainability of Solana's economic model.
Solana earned $31 million in August, of which $15.5 million was written off through a 50% fee burn. The network paid out $335 million in block rewards, meaning it “spent” $319.7 million more than it took in, according to Token Terminal.
The pair had a monthly average token price of $147.76 and approximately 73,327 SOL entered the Solana economy daily in August.
“They're printing about $10 million worth of Solana every day (based on the SOL price). That's a lot of money going to validators who can easily go ahead and put a portion of that back into transaction fees to make DEX volumes much higher,” he said. Crypto teacher David Bostick, also known as DB Crypto – a vocal critic of the blockchain – tells us.
But Solana is not the only inflationary chain in the world. In reality, very few cryptocurrencies are productive assets, according to Mads Eberhardt, senior crypto analyst at Steno Research.
Even Bitcoin, the leading cryptocurrency by market capitalization, has had price inflation for over 15 years. At Token Terminal, it had a worst-ever August revenue result of $830 million.
“As with Bitcoin and Solana, inflation often slows down,” says Eberhart, adding that Solana's emission model can last as long as there is enough demand to offset it.
The good news is that Solana appears to meet Eberhardt's criteria, hitting headlines by leading the industry in categories such as stablecoin transfers and DeFi volume.
Those who do not participate will pay inflation
Solana will burn half of the fees earned, which aims to prevent inflation.
So far in 2024, Solana has earned $335.83 million and burned $167.91 million. Meanwhile, it has paid out $2.5 billion in rewards and incentives, Token Terminal reports.
Although Solana's trading revenue has grown this year, mainly due to the memecoin frenzy, SOL's price has also increased significantly, which means emissions have increased in fiat-money. As a result, the blockchain generates more SOL than it takes in transaction fees,” says Eberhart.
This release will be paid out to stakeholders, meaning SOL investors who haven't held their coins will be exposed to further dilution.
Eberhardt added: “It's worth noting that this is a characteristic of every blockchain, because none of them are currently sufficiently supported by their transaction revenue, not even Ethereum.”
Claim: Transaction volume is inflated by bots.
Critics point out that a significant portion of the transactions are inflated by bot activity rather than genuine user demand. All networks have bot activity, but even so, Solana's bot activity is high.
Solana's daily active addresses rose from around 2 million in early August to 5.5 million on September 10, Artemis data shows.
Solana is no stranger to leading the industry in statistics, but when he does, the results are often taken with a grain of salt. The success is often attributed to metrics boosted by bots through social media posts.
One contributing factor is the low transaction fees — a key selling point for Solana — making it easier for bots to use the network.
“Bots pay, to be clear,” Solana Foundation chief strategy officer Austin Federa told the magazine.
“The question of bot marketing always worries me because no one can define what is meant by a bot. By bot are generally things of low economic value. But that's the point of a network like Solana – there are a lot of things in the Ethereum ecosystem today that are not economically viable or economically feasible.
Claim: Bots are Solana's top customers.
In April, Solana made headlines when 75% of the network's transactions failed. That number dropped to 37% on Sept. 16, Dune Analytics data shows.
The high drop in Solana transactions again points to many bots making low-paying transaction attempts.
In February, the magazine investigated the mysteriously large stablecoin volume on Solana, due to failed transactions on DEXs fueled by rampant bot spam.
The top DEXs on Solana use central limit order books that record all order activity, including pending orders. This means that transaction amounts are counted even if trades are not filled or cancelled.
“So if I, for example, order $100 million and immediately remove it, it's a volume that you won't see anywhere else,” Bostick says.
“That's why they were able to accumulate more than $1 trillion in one month.”
Moreover, Solana has been popular for memecoins travel chains throughout the year, but this double-edged sword – mostly run by corrupt traders – has also brought many scammers and carpet pullers.
Fraudsters have been creative with their memecoin projects, often using bots to automate countless tokens and launder their amounts, resulting in many of them being pulled to the carpet.
Coinbase “Protocol Strategist” Victor Bunin asked how so many memecoins with little liquidity were generating massive 24-hour trading volume on Radium, the largest Solana DEX with a total value of $840.89 million locked in.
For example, a token pair with liquidity as low as $1 saw $7.9 million in daily trading volume and generated $19,811 in payouts.
Can someone explain to me what is going on with the @Raydium protocol? Seeing very low TVL, but very high volume pools. $100m+ daily volume with $100 TVL.
Are people supplying their own fluid in moderation, squeezing the volume, and then withdrawing their fluid? pic.twitter.com/cVpahcYcpB
— Viktor Bunin 🛡️🇺🇸 (@ViktorBunin) July 24, 2024
Solana's adjusted voiceless transaction volume is higher than most blockchains, but the demand for network usage can be misleading, as a significant portion of these transactions are assumed to be inflated by bot activity.
“Bot interest is not the same as other types of interest — we can measure moral equality, but economic equality, they're the same,” says Federa.
Claim: Solana's real TPS is much lower than claimed.
Solana's theoretical peak is rated at 65,000 TPS, but in practice it ranges from 2,500 to 3,500 TPS, according to Solscan data.
However, not all transactions represent user activity.
Duncan Townsend, a smart contract engineer at 0x, explains to the magazine Solana that voting transactions—which are simply validators voting to validate blocks—are part of TPS.
He can't think of another chain that does this and agrees with criticism that voice transactions don't reflect user activity and misrepresent network usage by including them.
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On September 16, the network's average non-voice TPS was around 450, according to Solscan—much lower than the 3,274 TPS reported the same day, which includes voice transactions.
“This number is still very high compared to other networks,” Townsend said, comparing Solana's size to Ethereum and Layer-2 networks. The TPS of the Ethereum ecosystem including all L2s is about double.
According to Federa, one of the reasons voice transactions contribute to the network's TPS is because the move costs a fee, a model unique to Solana.
Because Solana's network fees are so low, the network can charge these voice transactions like any other transaction.
“One thing it does is make surers know what the transaction costs are,” Federa told the magazine.
“In most networks, validators have an incentive to push the transaction price as high as possible and argue, and because it makes less money for them, they have an incentive to directly oppose any effort to make transactions cheaper,” he adds.
Basically, Solana validators have the same incentives as users to keep transaction fees as low as possible, which is a key selling point for the network.
in Solana Block
Solana's voiceless TPS is still higher than most blockchains, but some of the “high demand” comes from activities that don't reflect real user interaction.
“If you try to sift through a block and see what the actual shopping is, you'll be stuck for an hour because there's so much junk in there,” Bostick told the magazine.
In December, X user Dave analyzed four consecutive Solana blocks, starting with block 237254804. The user excludes transactions that may be considered “transactions” on other chains, such as asset movements or account creation.
The analysis found that the four blocks reported 5,914 transactions in a 1.6-second window, but only 28 transactions — or 17 per second — met the criteria for real user interaction.
Solana's long-term success must balance inflation and demand.
Inflation isn't a particular problem for Solana, Eberhardt pointed out.
“But at least the rate of inflation is usually known in advance — sometimes for many years — and in many cases it's set in stone,” Eberhart says.
He added that cryptocurrencies are likely to perform best due to low inflation and high transaction revenue.
“These two assets ensure that holders can be rewarded with money, just like stocks – a trend that is gradually becoming the default as more institutions begin to operate in the space.”
The network is designed to reduce inflation over time, and if Solana can grow real demand, it could eventually reach sustainability.
While Solana benefits from its low fees and high theoretical input, critics argue that bot activity often inflates the volume of transactions, creating an inaccurate picture of the network's demand. In response, Federa argued that bot activity also represented a network interest.
Current high TPS numbers do not necessarily reflect true user activity, and Solana's long-term viability depends on ensuring that user demand keeps pace with the inflationary model.
But Federa Solana's inflation model is not set in stone, and if necessary, the public can vote to adjust it.
“There are very few governments in the world that are self-sufficient – they all need taxes to sell, or like an oil boom,” Federa says.
He added: “Certain public services and infrastructure require a certain amount of work on networks.”
So if Solana is currently experiencing 5 percent inflation, Federa said, Solana landowners will have to produce better on both stacking and defi farms to insulate themselves from inflation.
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John Yun
Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed to the crypto media outlet Forkast as an editor and covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.
