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What is Solana?—How does it work and where can you use it?

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

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What is Solana?
Table of Contents

Since Bitcoin started trading in 2009, there have been many new coins (called altcoins) that developers have added to the cryptocurrency ecosystem. Solana is one of the biggest altcoins that came after Ethereum.

Solana is popularly called the Ethereum killer. And like Ethereum, it has its blockchain and native cryptocurrency called SOL.

The SOL blockchain is popular for supporting decentralized finance (DeFi) projects like smart contracts, building decentralized apps (DApps), NFTs, etc.

But, just like anything new, numerous questions have accompanied the arrival of SOL – the most obvious one being, “What is Solana?”.

What is Solana (SOL)?

Solana is a decentralized blockchain platform built to challenge the Ethereum blockchain in terms of transaction speed, security, and efficiency. Anatoly Yakovenko developed the new-generation blockchain in 2017.

Yakovenko, who had formerly worked in different tech companies, including the famous Qualcomm, founded the Solana Foundation after he left his employer. He and his team would later publish the Solana whitepaper in 2017.

Because it’s decentralized, the SOL blockchain allows crypto traders to enter smart contracts, DeFi developers to build decentralized applications (DApps), and it has its own native token (SOL) that people can use to pay transaction fees on the blockchain network.

Interestingly, since it began trading in 2020, SOL has grown to become one of the biggest cryptocurrencies today. In 2021, the digital currency experienced a 25,000% price increase. That’s great, right?

The upward movement means more people are transacting on the SOL blockchain. At the same time, people are using SOL for payments and storing value.

But, there’s more to the “Ethereum Killer.” Other notable things to know about SOL are:

  • Its processing speed is faster than that of Bitcoin and Ethereum combined. The SOL blockchain completes about 65,000 transactions per second.
  • People can mint and sell non-fungible tokens (NFTs) on the Solana blockchain.
  • Developers can build Web3 apps (DApps) and games on the platform.

Now, let’s look at how it works.

How Does Solana Work?

As earlier stated, one of the major unique points of the SOL blockchain is its transaction speed. However, another big draw to Solana is its cheap transactions. Despite being able to process nearly 65,000 transactions every second, its average transaction cost is $0.00025.

So, how does Solana work exactly?

Solana’s high speed and efficiency are a result of its blockchain’s proof of history (PoH) consensus mechanism. You’ve heard of proof-of-work with Bitcoin and proof-of-stake with Cardano, but this is quite different.

The proof of history model uses a unique algorithm to validate transactions on the blockchain. It’s more efficient because it incorporates time into the blockchain to reduce network load when processing transactions.

However, Solana went a step further to create a hybrid model that combines proof of history with proof of stake. The SOL blockchain uses proof of stake to validate transactions by encouraging validators (people who will complete transactions on the blockchain) with free SOL tokens when they confirm transactions.

Then the proof of history mechanism takes out the human factor and verifies the order of blockchain transactions and the time spent between them.

Since every transaction on the blockchain has its own time stamp, validators don’t need to communicate with each other to confirm transaction times. The elimination of the communication between validator nodes reduces processing time and results in more efficiency and speed.

How is Solana Created?

According to the Solana Foundation, about 489 million SOL tokens will be circulated. But currently, we have a little over 305 million coins in the market. Like many other coins, SOL has a limited annual issuance to the market. In other words, the blockchain slowly adds new coins to the market.

Unlike Bitcoin, which people can mine, Solana uses staking to add more coins to the market. Network validators verify and complete transactions on the SOL blockchain and receive rewards in the form of new SOL crypto.

But before these validators get approval to verify transactions on the blockchain, they must first own and stake SOL in the trading pool to get transactions assigned to them. By doing so, they provide more coins for others to transact with and get trickles of additional coins added to the market for their work.

Moreover, Solana doesn’t have a fixed maximum supply like ADA and BTC. But the blockchain automatically adds new tokens to the market every year – based on its YOY inflation rate.

Uses of Solana

Solana has many use cases – depending on who’s asking. As a crypto investor or trader, your primary use of Solana is to trade and invest. Today, many top crypto investors own Solana and double as validators on the blockchain network.

But just like other digital currencies, people can use SOL to pay transaction fees on the network. For example, Web3 developers who want to build apps on the blockchain will need to pay transaction fees in the form of SOL tokens.

Another way to use SOL is to use it as payment for goods and services. Many e-commerce businesses now accept crypto payments. And as such, you can pay or receive SOL when transacting online.

Another major use of Solana is running smart contracts. Since the network partially runs using proof of stake, its validators can purchase and stake their coins to make the blockchain more liquid and functional.

What is a Solana Wallet?

Remember your bank account and how you can send, receive, and store money in it? That’s similar to what a Solana wallet is. Only you’ll be storing SOL tokens instead of fiat currency.
So, a Solana wallet is a digital wallet in which you can store, send, and receive SOL.

This means to transact with SOL or use it for any purpose, you must create a wallet. Only someone with a similar wallet will also be able to receive SOL from you.

Usually, you’ll find SOL wallets on crypto exchanges around. And they are generally in software, hardware, and online forms. You can generally purchase Solana on exchanges and move them into your wallet.

Conclusion

Solana was created to give Ethereum a run for its money. And today, it has some fantastic benefits over the Ethereum blockchain – the most notable being its transaction speed.

Presently, some big Web3 companies have adopted the Solana blockchain for their platforms.

Similarly, the blockchain’s native token, SOL, is doing well in the market. So, if you believe SOL’s price will continue to trend upward, you may want to buy and hodl some in your wallet. It’s safe to say the platform has a bright future.

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