Grayscale Building Blocks | December 2021

An Introduction
to Solana

grayscale.com
 Introduction 3

Solana’s Approach 4

Practical Applications 6

Brief History 12

Advantages 13

Potential Risks 14

Summary 15
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 Introduction

1 Solana is a next-generation internet platform (Web 3.0) structured as a publicly

traded blockchain-based crypto network. Solana’s open-source software network
2
coordinates decentralized computers across the globe into a fully unified, user-
3 owned and operated cloud platform. Solana supports high-speed and low-cost
transactions on a single-layer blockchain alleviating the need for additional scaling
4 solutions that other networks typically require.

5
SOL is the native token of the Solana network and represents a piece of ownership
6 in the ecosystem. The SOL token is utilized for (i) powering Decentralized
Applications (dApps), (ii) making payments, (iii) paying network fees, (iv) providing
7 network security via staking, and (v) facilitating network governance.

FIGURE 1: SOLANA SUMMARY STATISTICS

As of November 29, 2021

Asset Solana (SOL)

Price (USD) $206

Market Cap (USD) $63 billion

Circulating Supply (SOL) 304 millions

Current Supply (SOL) 510 millions

©2021 Grayscale Investments, LLC

Current Inflation Rate 7.5%

Maximum Supply Uncapped

Market Segment Web 3.0 Cloud Economy

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 Solana’s Approach

1 The Solana network is designed to provide developers with a highly

performant Web 3.0 cloud platform that offers scalability at the Layer 1
2 blockchain level. This approach aims to remove the complexities of Ethereum’s
3 Layer 2 solutions by optimizing for speed, cost, and decentralization, from a
political and geographic standpoint. Specifically, these features quantify to:
4
• Speed: 400 millisecond block times
5 • Cost: 0.000005 SOL (~$0.001) per transaction.
• Decentralization: 2,242 global nodes.
6

7 Solana is able to achieve this level of performance by leveraging a unique

architectural approach that has eight core innovations and by optimizing for a
different set of technology trade-offs. These trade-offs include relatively lower
decentralization (compared to networks like Ethereum), which has allowed for
network disruptions like the denial of service attack on September 14th, 2021,
which took Solana’s full functionality offline for ~24 hours. Nevertheless, Solana
has continued to attract users who favor the network’s design choices. As a
result, Solana is expanding the size of the Web 3.0 blockchain cloud computing
market by enabling:

• New Users: Solana empowers previously underserved cost sensitive

users to access existing crypto applications like Decentralized Finance
(DeFi), Non-Fungible Tokens (NFTs), and other Web 3.0 dApps.

• Increased Usage: Solana allows users to more actively adopt Web 3.0
applications by lowering transaction costs and increasing transaction
speeds.

• New Applications: Solana enables new applications to emerge or

become more mainstream.

Technology trends often appear in cycles, and the impact Solana is having on
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the Web 3.0 cloud computing market has similarities to the previous computing
platform innovations that accelerated overall internet adoption:

• Mainframe to PCs: During the mainframe era, computers were large

and expensive, which limited their access to academic researchers at
select universities. The advent of the personal computer (PC) changed
this dynamic by lowering costs and opening access for a new wave of
consumers. Solana’s lower fees are having a similar impact today.

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 • On-Prem to Cloud: During the on-premises era, organizations had to
own and manage servers and other computer infrastructure to access
software functionality. The move to cloud computing reduced this
burden by off-loading the processes involved with on-prem hosting
while increasing application agility. Solana is having a similar impact
today by giving developers a single platform powerful enough to run
Web 3.0 dApps while removing the complexities of Layer 2 scaling
solutions.
1

2 • Desktop to Mobile: During the desktop era, the dominant applications

were designed for computing platforms that were stationary and
3 limited in the applications they could support. The move to mobile
changed this dynamic by giving developers a computing platform that
4 was on-the-go, which enabled the development of new applications,
like Uber. Solana is having a similar impact today by increasing Web 3.0
5
cloud scalability and giving developers a new infrastructure medium to
6 design dApps.

7 The Web 3.0 cloud computing market is a large and fast-growing opportunity
for networks like Solana, Ethereum, and others. Multiple Web 2.0 cloud
providers—including AWS, Google Cloud, Microsoft Azure, Alibaba Cloud, and
Tencent Cloud—have achieved success by serving different customer needs.
The Web 3.0 cloud market is following a similar path with networks like
Ethereum and Solana emerging as leading contenders in the space.
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 Practical Applications

1 The Solana cloud economy has seen rapid growth over the past year, pushing
the total value of the ecosystem to over $110 billion. The ecosystem consists of
2 the Solana Network (SOL) and the assets issued on top of the network, which
3 the SOL community has jurisdiction over. These include assets like the Digital
Businesses (smart contract dApps), Digital Dollars (dollar-backed stablecoins),
4 or Digital Goods & Art (i.e. NFTs) issued on the Solana Network. The following
is an overview of the distribution of value between these categories:
5
• Solana Network (SOL) has captured most of the digital economy’s
6
value with a market cap of $73 billion or ~65%.
7 • Digital Businesses (dApps) on Solana’s network represent ~1/3 of the
economy’s value at $35 billion or ~30%.
$35B
• Digital Dollars (Stablecoins) circulating within the Solana economy
stand at $4 billion or ~3% of the economy.
• Digital Goods & Art (NFTs) based on Solana represent $1 billion in
value or ~1% of the total economy’s assets.

FIGURE 2: SOLANA CRYPTO ECONOMY MARKET VALUE1

$1B

$4B

Goods & Art (NFTs)

$35B Goods & Art (NFTs)
Dollars (Stablecoins)
Solana
Economy Value Dollars (Stablecoins)
Businesses (dApps) Businesses (dApps)
$113B
©2021 Grayscale Investments, LLC

Network (SOL) Network (SOL)

$73B

1. Solscan, CoinGecko, Solanalysis (Date: 11/9/2021)

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 Solana has managed to build a large and fast-growing community of users. The
most popular Solana wallet, Phantom, has seen Monthly Active Users (MAUs)
grow from 200,000 in August 2021 to 1.2 million in October 2021. Comparing
Phantom to the most popular Ethereum wallet, Metamask, Solana user growth is
roughly where Ethereum was in October 2020.

FIGURE 3: SOLANA PHANTOM & ETHEREUM METAMASK MONTHLY ACTIVE USERS2

1

2
12M 12M

3 10.4M
10M 10M
4

Ethereum Metamask Wallet MAUs

Solana Phantom Wallet MAUs

Ethereum Metamask Wallet MAUs

5
Solana Phantom Wallet MAUs

8M 8M

6
6M 6M
7

4M 4M

2M 2M
1.2M 1.3M
0.2M 0.3M
0M 0M
Solana
Solana Solana
Solana Ethereum
Ethereum Ethereum
Ethereum Ethereum
Ethereum
Phantom
Phantom Phantom
Phantom Metamask
Metamask Metamask
Metamask Metamask
Metamask
August 2021 October 2021 May 2019 October 2020 August 2021
Aug 2021 Oct 2021 May 2019 Oct 2020 Aug 2021

Developer interest in Solana has been rising sharply over the past year since
the network launched. Open-source developer attention is a key metric for
Web 3.0 cloud networks since it is these builders who create the application
ecosystems that ultimately attract users to the network. To that end, Solana
hackathon events continue to draw an increasing number of developer
registrations and project submissions, fueling further dApp ecosystem growth.
©2021 Grayscale Investments, LLC

2. Phantom Wallet, Consensys, Metamask

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 FIGURE 4: HACKATHON REGISTRATIONS (LEFT) & PROJECT SUBMISSIONS (RIGHT)3

400
15,000
350
13,000

12,000
300

2 9,000

200
3
6,000
4
100
5 100
3,000
3,000 60
6
1,000
7
- -
Solana's Inaugural Solana X Serum Solana Season Solana's Inaugural Solana X Serum Solana Season
Solana’s
Hackathon Solana
(Oct. DeFi X Hackathon
Hackathon Solana(May Solana’s
Hackathon (Oct. Solana
DeFi X Hackathon
Hackathon Solana(May
Inaugural
2020) Serum DeFi
(Feb 2021) Season
2021) Inaugural
2020) Serum DeFi
(Feb 2021) Season
2021)
Hackathon Hackathon Hackathon Hackathon Hackathon Hackathon
(Oct 2020) (Feb 2021) (May 2021) (Oct 2020) (Feb 2021) (May 2021)

Solana is primarily a smart contracting platform or general-purpose crypto

cloud platform for the development of dApps. The Solana community has
built a large ecosystem of over 500 dApps in the short time since the network
launched. Solana dApp projects across DeFi, Web 3.0, and NFTs include:

• DeFi: Use cases include open order book exchanges,

automated market makers, lending and borrowing platforms,
asset management software, and payments.

• Web 3.0: Use cases include Solana domain name services,

data privacy web browsers, and off-chain data oracles.

• NFTs: Use cases include minting platforms, marketplaces,

gaming, music streaming, social media, and Distributed
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Autonomous Organizations (DAOs).

3. Solana, Solanias

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 FIGURE 5: SOLANA DECENTRALIZED APPLICATION (DAPP) ECOSYSTEM4

6 The Total Value Locked (TVL) in Solana DeFi protocols has risen over the past
year and reached nearly 6% of the total TVL across all crypto projects. This
7 success is attributable to growing user interest in Solana, a rising number of
applications, strong SOL performance, and the increasing issuance of Solana-
based digital dollars (~$4 billion stablecoin market cap).

FIGURE 6: SOLANA TOTAL VALUE LOCKED (TVL) & SHARE OF TOTAL CRYPTO TVL5

$18B 7%

$16B
6%
$14B
5%
$12B

$10B 4%

$8B 3%
$6B
2%
$4B
1%
$2B

$0B 0%
Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21
Solana TVL (LHS) Total Cry pto TVL% (RHS)

Solana TVL (LHS) Total Crypto TVL% (RHS)

©2021 Grayscale Investments, LLC

Finance is not the only sector of the Solana digital economy that has experienced
growth -- Solana’s consumer sector has been emerging as well. Non-Fungible
Tokens (NFTs) representing ownership of digital property, such as art, consumer
goods, or other assets, have also seen growth over recent months. The market
value of Solana-based NFTs has risen to over $1 billion. Solana NFT monthly sales
volume has risen to ~$250 million while unique buyers have increased ~4x over
the last three months to ~60,000.

4. Solana
5. DeFi Lama (Date: 11/9/2021)

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 FIGURE 7: SOLANA NFT SECONDARY SALES & UNIQUE BUYERS6

$300M 80,000

$247 $245 70,000

$250M
59,030
59,030 60,000
$200M
50,000
$160 40,613
40,613
$150M 40,000

1 30,000
$100M
14,578 20,000
14,578
2 $50M
10,000
3 $0M 0
Aug-21 Sep-21 Oct-21
4
Total Sales (LHS) Unique Buyers (RHS)

5
Solana’s network revenue has increased over the past year as users,
6 applications, and usage have continued to grow. Total fees paid by Solana users
for transactions such as sending payments, running smart contract programs,
7
issuing new assets, and voting on network consensus were ~$4.5 billion during
November 2021 -- up over 100x since the start of the year.

The Solana protocol reduces the SOL supply by eliminating 50% of total
transaction fees, while the remaining 50% is paid out to the network’s computing
infrastructure providers (validators) who are incentivized to stake SOL tokens.
Since fee revenue reduces supply while fees paid to stakers create an incentive
for holding the token, these economics underpin SOL’s fundamental value model
and make the digital token a productive capital asset.

FIGURE 8: SOLANA MONTHLY REVENUE & MONTHLY ANNUALIZED REVENUE7

$6M $70M
$62M
$60M
$5M $54M

$50M
$4M $45M

$40M
$3M
$30M
©2021 Grayscale Investments, LLC

$2M
$20M
$14M
$1M
$6M $10M
$5M $5M $4M
$0.5M $1M $2M
$0M $0M
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21
Supply-Side Revenue (LHS) Protocol Revenue (LHS) Monthly Annualized Total Revenie (RHS)

Supply-Side Revenue (LHS) Protocol Revenue (LHS) Monthly Annualized Revenue (RHS)

6. Cryptoslam
7. Tokenterminal (Date: 11/3/2021)

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 As a result of Solana’s revenue-based supply reduction mechanism, the future
total supply of SOL is not known. While the total SOL supply will vary depending
on network revenue, the rate of new token issuance is programmed into the
Solana protocol.

The Solana Mainnet Beta went live in March 2021. At that time, the supply of
SOL was 500 million. During February 2021, the SOL supply inflation rate was
changed from 0.1% to a new initial inflation rate of 8%. The 8% initial inflation rate
1
is scheduled to decrease at an annualized dis-inflation rate of 15% until reaching
2 the long-term inflation rate of 1.5%. As of November 2021, there are ~509 billion
SOL in circulation and the total inflation rate is estimated at ~7.3%.
3

4 FIGURE 9: SOL SUPPLY ISSUANCE SCHEDULE8

5
800M

6
700M
7
600M

500M

400M

300M

200M

100M

0M
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Public Auction Solana Foundation Grant Pool Communit y Reserve Seed Sale Founding Sale Val idator Sale Launch Sale Founders Stak ing Rewards

Public Auction Founding Sale

Solana Foundation Validator Sale
Grant Pool Launch Sale
Community Reserve Founders
Seed Sale Staking Rewards
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8. Messari

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 Brief History

1 Solana’s founder Anatoly Yakovenko first conceived of the project and the key
elements of its technology approach in late 2017. An internal testnet of the Solana
2 network and the official whitepaper were released in early 2018. Solana Labs,
3 the development company behind Solana, raised a series of financing rounds
over the course of 2018 to early 2020. The Mainnet Beta version of the Solana
4 software protocol launched in March 2020.

5
FIGURE 10: SOLANA FINANCING HISTORY9
6

7 Seed Founding Validator Strategic Coinlist

Round
Sale Sale Sale Sale Auction

Date 4/5/2018 6/3/2018 7/9/2019 1/2/2020 3/23/2020

Amount
$3,170,000 $12,630,000 $5,700,000 $2,290,000 $1,760,000
Raised

Token
$0.04 $0.20 $0.23 $0.25 $0.22
Price

Number
79,250,000 63,150,000 25,333,333 9,160,000 8,000,000
of Tokens
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9. Not Boring Capital, Messari

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 Advantages

1 Solana has several competitive advantages:

2 • Team: Solana has a strong core technical team comprising alumni

3 from Qualcomm, Google, Dropbox, and Apple.

• Technology: Solana has a novel technology approach offering high

4
scalability and low transaction fees, which differentiates it from other
5 networks.

6 • Community: Solana has a strong and active community of users,

developers, industry partners, and investors.
7
• Ecosystem: Solana has established a large and fast-growing
ecosystem of dApps, with new use cases emerging.
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 Potential Risks

1 Solana faces several possible risks specific to the network, from crypto industry
competitors and external factors, which include:
2

3 • Competing Networks: Solana faces competition from other blockchains

with smart contact functionality such as Ethereum, Binance Smart Chain,
4 Internet Computer Protocol, Avalanche, and others.

5 • Economics and Valuation: Solana network fee revenue is still relatively

low compared to other blockchains, such as Ethereum. Unless fees grow
6
from new applications, increased usage, or higher fees, the valuation
7 may not be supported based on cash-flows value.

• Level of Centralization: The Solana network could become overly

centralized if one or a group of entities one day gain control over a large
share of the SOL token supply. Solana may require more specialized
equipment to participate in the network and fail to attract a significant
number of users, which may harm the network’s decentralization.

• Regulatory Uncertainty: Solana could face scrutiny from various

regulators, which to date have often only identified Bitcoin and Ethereum
as assets excluded from being classified as securities.

• Network Security: Solana leverages several new technology

approaches. The Solana consensus mechanism uses a new blockchain
technology that is not widely used, and may not function as intended.
There may be flaws in the cryptography underlying the network,
including flaws that affect the functionality of the Solana Network or
make the network vulnerable to attack. Solana’s economic incentives
may not function as intended, which may cause the network to be
insecure or perform sub-optimally.
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 Summary

1 Crypto networks like Solana are platforms for the next era of the web and wave
of the cloud. Web 3.0 dApps are providing novel benefits and seeing strong
2 consumer demand. However, many of the leading blockchain cloud computing
3 platforms today are slow and expensive to use or require complex additional
scaling solutions. This dynamic has limited mass adoption for many parts of the
4 crypto economy. Solana takes a unique technology approach that optimizes
trade-offs to prioritize for high scalability, making Solana transactions faster and
5 cheaper than many other networks. Solana has gained a large, fast-growing
active user base, developer community, and dApp ecosystem, which has been
6
fueling the network’s rapid growth. The Web 2.0 cloud computing market is
7 a $350 billion annual revenue and $4.6 trillion market value opportunity and
Solana has positioned itself as a leading Web 3.0 challenger that is already
beginning to take market share.

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 About Grayscale Investments, LLC

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