Gracious John
All over the internet today, when you take a good look, there are various opinions surrounding DeFi.
This isn't unusual because DeFi services have attracted billions of dollars in funds, thus becoming a hotbed of crypto innovation.
Additionally, supporters of this trend believe it will become an even bigger industry, competing with the mainstream financial industry we're familiar with today.
To quote the controversial Chairman of O’Shares Investment, an Exchange Traded Fund (ETF) Company, Kevin O'Leary,
“DeFi services will disrupt the existing financial market.
For example, when you buy a stock in Switzerland, you have to pay in Swiss Francs.
But before you can do that, you have to take US dollars and exchange it into the local currency. Let's say Swiss Francs.
Every time you do that, you have to pay a certain fee and that is zero value added.
But with DeFi, you can do that with zero cost or with the next two zeros.” — Kevin O’Leary
Regardless, according to CNBC, DeFi didn't really take off as an industry until 2020.
That year, the sector saw exponential growth, with the total value deposited into DeFi products climbing 30 fold.
The chart below shows the rapid growth of DeFi products in 2020.
And as a result, globally, there are more people opting for DeFi services and with this rising demand comes the question: Why DeFi?
Why are people demanding for DeFi services?
Now, imagine a world where you can deposit into a savings account, make trades or buy insurance without going through an intermediary like a bank.
That's the promise of DeFi, an umbrella term for a range of financial products developed around the blockchain.
But with traditional finance, your funds are stored and managed by centralized institutions.
However, I'd like to group the reasons why people are opting for DeFi services into two:
1. Enhanced accessibility to diverse financial services.
DeFi offers a significant advantage over traditional financial systems: it makes financial services more accessible.
Unlike traditional systems that are centralized and often require intermediaries like banks, DeFi operates on decentralized platforms.
These platforms enable a broader range of people to access opportunities such as trading, staking, saving, gaming, and obtaining insurance or loans, without relying on traditional banking infrastructure.
2. DeFi has the potential to re-shape the future of financial structures and practices.
The future of DeFi holds significance due to its potential to redefine the terrain of financial structures.
One fundamental aspect driving the interest in DeFi services is its capacity to revolutionize financial practices.
For example, DeFi simplifies borrowing and lending processes through peer-to-peer networks.
Additionally, individuals can access insurance funds without the intervention of governmental or banking entities.
However, despite these advancements, DeFi's journey hasn't been devoid of challenges.
There have been doubts about DeFi platforms, with regulators warning that some services may be governed by limited groups of influential entities.
Hoards of random computer programmers have brought traditional financial products, such as loans to the blockchain, which has led to people being hacked.
But that’s where the Solana DeFi protocol comes in and why you might consider it.
The Solana Story
What comes to your mind first when you hear the word Solana?
For most of us, our answers will not differ from the root meaning of the word which means "Sun or Solar."
It brings to our minds the picture of how the planets revolve around the sun, to derive their energy.
This perception isn't much different from the role Solana plays as a platform that powers numerous DeFi applications within the blockchain ecosystem.
However, the actual story behind its conceptualisation is quite different.
The story of Solana is one that emphasizes the power of collaboration and teamwork.
Anatoly Yakovenko, Co-Founder of Solana, discovered blockchain transactions were slow and this happens because computers do not trust each other.
In a network where computers don't trust each other, they may not rely on the time information provided by other computers.
When computers agree on time, it fosters speed. Transactions are validated on time and added to the blockchain.
Considering Ethereum and Bitcoin. While they trust the underlying rules of the network (such as the consensus mechanism), they don't inherently trust each other's intentions or the data they provide.
Anatoly watched as blockchain systems without clocks, such as Bitcoin and Ethereum, struggled to scale beyond 15 transactions per second worldwide, when centralized payment systems such as Visa reached peaks of 65,000 transactions per second.
In November 2017, Anatoly Yakovenko wrote a paper about proof of history.
It's a way for computers that don't trust each other to keep track of time.
Anatoly started building his project using the C programming language, but Greg Fitzgerald, who knew him from their time at Qualcomm, suggested using Rust instead.
He decided to try Rust, and within two weeks, he moved all his code to Rust and liked it.
Excited about connecting all the world's transactions on a single, scalable blockchain, he named the project Loom.
Soon after, Stephen figured out a way to make it even faster by using graphics processors to check signatures, which was implemented.
In no distant time, Anatoly, Greg, Stephen, and three others decided to start a company together, which they named Loom.
But, about the same time, Ethereum based project called Loom Network, started causing confusion, as if they were the same.
To clear things up, the team decided to change their project's name. They picked Solana, inspired by Solana Beach, a small town near San Diego where Anatoly, Greg, and Stephen lived and surfed during their time at Qualcomm.
On March 28th, they created the Solana organization on GitHub and renamed Greg's prototype from Silk to Solana.
Uncovering DeFi on Solana
Decentralized Finance (DeFi) encompasses a range of financial applications on blockchain networks, providing traditional financial services in a decentralized manner.
DeFi utilizes smart contracts, which are self-executing terms, directly written as code, to automate various financial functions without the need for intermediaries.
DeFi on Solana thus refers to a collection of decentralized applications, and protocols specifically developed on the Solana blockchain.
These applications include various financial services, such as lending, borrowing, trading, yield farming, liquidity provision, among others, in a decentralized and permissionless manner.
What makes Solana amazing is its low transaction fees that serves as a foundation for their ecosystem.
Solana's transaction offers fees around 100th of a penny, thereby promoting impressive scalability and innovation for their network.
This is because low transaction fees makes it economically feasible for users and applications to execute a higher volume of transactions on the blockchain.
As a result, the network experiences increased transaction throughput, with more transactions being processed per unit of time.
This form of scalability and innovation is essential for handling growing demand and supporting the expansion of blockchain-based applications and services.
Solana also has a block time of 400 milliseconds, which means it is very fast.
Solana also projects that it can handle up to around 710,000 transactions per second, which is like 30 times the amount that Visa handles.
Solana's innovative low cost and speed are attributed to proof of history.
It's a way of integrating time into blockchain data, called timestamps.
In essence, the network doesn't necessarily have to wait to validate, check, and approve transactions.
The blockchain data comes with a timestamp, so the network can organize them based on the time order when they arrive.
But Here's the Best Part
There are some applications of DeFi that wouldn't be possible if not for Solana.
In other words, there are various decentralized applications that owe their existence to Solana, forming what's known as OPOS DeFi - an acronym for "Only Possible on Solana.”.
To provide an in-depth understanding of the unique reliance on Solana for existence, I will showcase (2) Founders sharing their insights on the experience of building on Solana.
In this noteworthy speech, I delved deep into the realms of “Only Possible on Solana”. You should get a notepad ready, because this where to take notes.
We have:
1. Mert Mumtaz- Founder and CEO, Helius.
2. Ori Kwan & Yutaro Mori- Co-founders, Orca.
Here's What They Had To Say:
1. Mert Mumtaz- Founder and CEO, Helius.
“What Solana enables is very unique in the world of blockchain.
This chain has amazing tech, but more importantly, it has an amazing community that supports you and builds with you.
The entirety of Helius' success is due to Solana.
As a developer, building on Solana right now is super exciting, because you can write code and deploy it on the blockchain and it will just run forever.
On Solana, you can build things like decentralized physical infrastructures, payment at the speed of light, new forms of finance, and digital collectibles.
Basically, all things that weren't really possible before Solana.
Solana is the fastest, most performance, most scalable and the most efficient chain out there, and it will be for a very long time.”
2. Ori Kwan & Yutaro Mori- Co-Founders, Orca.
“I think our unique journey of founding Orca would have only been possible on Solana.
It was the only technology that allowed us to focus our energies on what I think is the fun part, creating cool products.
Solana has a way of recording data & accessing data that is incredibly fast, reliable, secure, affordable and decentralized.
With Solana, you actually don't need to spend any of the effort that currently, people are doing right now to create a product that provides scalability and performance.
If you get those things out of the box, you have room to spend your mental energy on innovation.”
How to use DeFi on Solana?
The Solana ecosystem provides users with a rich variety of protocols to explore.
These protocols but not limited to these, range from Lending & Borrowing platforms, Decentralized Exchanges (DEXs), Automated Market Makers (AMMs), and Yield Farming.
Now, let's examine each of these individually:
- Lending and Borrowing platforms.
Lending and borrowing are done through smart contracts, which are like digital agreements that are stored on the blockchain.
The contract specifies the terms of the loan, such as how much money is being lent, the interest rate and when the loan needs to be repaid.
Once the contract is created, it cannot be changed, so both parties know exactly what they're agreeing to.
To find someone to lend and borrow from, you can use Solend, which is Solana's greatest lending and borrowing platform.
Solend was created with two primary objectives: to become the most secure, and user-friendly financial platform on the Solana blockchain.
As an autonomous interest rate mechanism, users can both earn interest on their deposited assets and borrow assets from Solend.
However, just like with any crypto project out there, there are risks associated with Solend.
Solend provides loans using cryptocurrency as collateral, but the market for cryptocurrency can be highly volatile.
Since Solend requires borrowers to put up more cryptocurrency than the loan's value (over collateralized), if the value of the collateral drops significantly, funds may be liquidated (sold off) to cover the loan.
It's essential for users to monitor their loans closely due to these risks.
Despite the risks, Solend offers opportunities in decentralized finance (DeFi) and potential profits for users.
2. Decentralized Exchanges (DEXs).
A decentralized exchange is a peer-to-peer system that empowers individuals to exchange their cryptocurrencies and tokens in a decentralized manner, facilitated by smart contracts.
These contracts replace traditional or centralized authorities such as the stock exchange market. The stock exchange market usually sets rules, but with smart contracts, it operates with codes.
One of the key advantages of a decentralized exchange platform is the absence of requirements such as submitting your social security number, fingerprint, or even your username, commonly known as KYC (Know Your Customer).
To use a DEX on Solana, Serum is a renowned DEX that stands out for its rapid trading capabilities.
With Serum, trades can be executed quickly without experiencing significant delays, thanks to Solana's high throughput capacity.
Serum stands out for its remarkable feature which enables cross-chain transactions.
While conventional DEX platforms limit users to swapping tokens within the same blockchain, Serum empowers users to seamlessly trade assets across different blockchains, without the need for intermediaries.
This cross-chain operability opens up opportunities for traders to access a broader range of assets and liquidity pools.
3. Automated Market Maker (AMM).
Trading cryptocurrency typically requires a peer-to-peer system, but this isn't the case with Automated Market Makers (AMMs).
Instead of searching for someone to swap your cryptocurrency with, AMMs offer a storage room where cryptocurrency is readily available for trading.
This storage room is known as a Liquidity pool.
Essentially, an AMM functions as an automated trading system, eliminating the need for a second party or user involvement.
Raydium is built on the Solana blockchain and is an Automated Market Maker (AMM).
Its native token is RAY and it is used to incentivize liquidity providers, qualify for new project launches, and participate in governance.
Additionally, Raydium offers faster transactions and lower gas fees than the Ethereum network.
4. Yield Farming.
Yield farming is the process of putting your cryptocurrency in the most optimized spot, so that it will earn you free crypto.
Yield is a financial term that means what you get for investing.
Farming is used because it represents the possible exponential growth you can receive by finding the right place to invest your crypto.
There are various forms of yield farming such as liquidity provision, lending and borrowing, leveraged lending, etc.
But on the Solana blockchain, Tulip protocol is the first decentralized yield aggregation platform, with auto-compounding vault strategies.
This makes it possible for users to redeploy their rewards in the same pool or somewhere else, to earn the highest reward.
Originally launched as the SolFarm protocol in the spring of 2021, the project raised $5 million during a private token sale founding round led by Jump Capital and Alameda Research.
Tulip offers high speed and lower gas fees, which allows users to onboard and offboard their funds pretty fast.
Tulip connects two groups of people: lenders, who earn an auto-compounded variable deposit rate yield, and borrowers, who wish to increase their yield by paying to borrow additional assets, which then get deposited into a farm.
Tulip vaults are supported by Solana-based Automated Market Maker (AMM), Raydium and Orca.
Projects like Tulip and others built on the Solana blockchain shows that innovation is alive and well in crypto.
What are the challenges of DeFi on Solana?
Solana proponents have often referred to the layer 1 blockchain as an "Ethereum killer," yet a more fitting label could be "bear market resilient."
According to DefiLlama, its assets have grown to around $1.6 billion. Sol has surged by 450% in the past year, far surpassing Ether's 82% gain.
Still, there are major issues:
1. Security risks.
Solana has faced persistent challenges with outages on its blockchain network, hindering efforts to establish it as a dependable transaction processor.
To quote Lucas Bruder, Jito Labs CEO, in a podcast with Bankless,
“There are a lot of spam and arbitrage transactions that are failing on Solana.” — Lucas Bruder
These power outages can potentially lead to delays in transaction confirmations, thus making the network vulnerable to attacks such as double spending.
2. Liquidity.
According to the West Island report in (2023), it was found that Solana's liquidity in dollars was the highest it had been since the FTX collapse.
However, when measured using Solana's own currency (native units), its liquidity was the lowest.
This difference suggests that Solana's value externally might be high, but its use within its ecosystem, using its own currency, is low.
The low liquidity of Solana's native currency within its ecosystem indicates limited effectiveness for transactions, and other functions within the Solana network.
3. User adoption.
The challenge with Solana's widespread adoption lies in education.
Despite its advanced features and capabilities, navigating Solana can be daunting for newcomers.
One of its crucial challenges is creating user-friendly wallet integration to facilitate mass adoption.
A Glimpse into the Future of DeFi on Solana
Looking ahead, Solana is poised to continue navigating challenges through innovative approaches like airdrops, validators and Jitosol.
Airdrops, characterized by the distribution of free tokens, aim to pique interest among users towards new protocols.
This strategy has proven highly beneficial for the Solana ecosystem, driving substantial user adoption.
Laine, a Solana validator, said in a follow-up post on X, "we’re building a new version for validators to upgrade."
The Solana foundation added that, "the new validator software release includes a patch to fix an issue that caused network nodes to halt in maintaining the network."
Validators refer to entities that use computing power to uphold a blockchain and handle transactions.
Therefore, effectively using validators is expected to enhance the security of the Solana ecosystem.
Another wave of solution driving the future of Solana is the release of Jito, a new infrastructure on the ecosystem.
Jito's purpose is to efficiently derive maximum Extractable Value (MEV) on the Solana blockchain.
However, the purpose of Jito is not only to extract MEV. It lets validators choose how much they want to share with stakers and join the Jeto network, a new system for easily staking assets.
In Jito, there's a token called Jitosol, which makes staked assets more liquid.
As Solana moves forward, its effective use of airdrops, validators, and Jitosol will likely strengthen its position as a top blockchain platform, encouraging more people to join and expand its ecosystem.
Conclusion
In conclusion, Solana stands as a pinnacle of technological achievement, boasting the world's most performant blockchain.
With its agile, solution-driven environment, Solana operates at the forefront of blockchain infrastructure, cryptocurrency, and decentralized applications.
As it continues to push boundaries and address challenges, Solana solidifies its position as a cornerstone of the digital landscape, shaping the future of decentralized technologies.