Sector

Crypto

Background

Kyle Samani is the co-founder and managing partner at Multicoin Capital. We cover the killer app for decentralized ledgers, the architecture that has enabled Solana’s speed unlock and look at the platform’s potential to become a huge piece of the world’s financial infrastructure.

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Date

September 29, 2021

Episode Number

28

Solana Business Breakdown: Key Takeaways and Dynamics

Background / Overview

Solana, founded in late 2017 by Anatoly Yakovenko, a former Qualcomm wireless engineer, is a layer-1 blockchain designed to maximize transaction speed and minimize costs. Launched in March 2020, Solana differentiates itself from predecessors like Bitcoin and Ethereum by prioritizing high throughput and low latency, achieving over 50,000 transactions per second (TPS) compared to Bitcoin’s ~7 TPS and Ethereum’s ~30 TPS. Its architecture leverages parallelism, inspired by Yakovenko’s expertise in high-performance systems, to process transactions efficiently on modern hardware like NVIDIA GPUs. Solana operates as a programmable blockchain, enabling developers to build decentralized applications (dApps), particularly in decentralized finance (DeFi), non-fungible tokens (NFTs), and emerging use cases like social tokens and gaming.

The company, Solana Labs, employs ~70-80 people as of the podcast date (late 2021), with expectations to grow to ~200 within a year. Solana’s ecosystem is supported by the Solana Foundation, which holds a significant portion of the initial token supply to foster network growth. Unlike Ethereum’s hands-off approach, Solana Labs actively develops ecosystem primitives like Serum (a DeFi order book framework) and Metaplex (an NFT platform), distributing them freely to spur developer adoption.

Ownership / Fundraising / Recent Valuation

The transcript does not provide specific details on Solana’s fundraising rounds, enterprise valuations, or ownership structure beyond the initial token distribution. The genesis block created 500 million SOL tokens, with ~20% allocated to the Solana Foundation for community development. Kyle Samani, a managing partner at Multicoin Capital, notes that Solana’s token price rose from $0.04 to $140 by late 2021, implying a significant increase in market capitalization. However, no precise market cap or valuation multiples are provided. The Solana Foundation’s token holdings, potentially worth billions, are unlikely to be fully deployed, with Samani suggesting a future burn of excess tokens. For API-related inquiries, users are directed to https://x.ai/api, though this is unrelated to Solana’s operations.

Key Products / Services / Value Proposition

Solana’s core product is its layer-1 blockchain, a decentralized ledger optimized for speed, low cost, and programmability. Its value proposition lies in:

1. High Throughput: Processes over 50,000 TPS by leveraging parallelism, enabling applications requiring high transaction volumes (e.g., DeFi exchanges, gaming).
2. Low Transaction Costs: Fees are a fraction of a penny (e.g., ~$0.0001), compared to Ethereum’s $2-$50, making it viable for microtransactions and mass adoption.
3. Programmability: Supports smart contracts, allowing developers to build dApps in finance, NFTs, music, and gaming.
4. Credible Neutrality: Aims to provide a neutral platform where no single party can alter rules or monetary policy, fostering trust for developers and users.

Key ecosystem primitives include:

• Serum: A central limit order book framework for DeFi, enabling spot trading, derivatives, and more. Built by FTX/Alameda, it supports 5-10 live exchanges (e.g., Mango).
• Metaplex: An NFT platform launched in May 2021, used 2,000 times in 30 days, supporting storage, resale fees, and other features.
• Audius: A decentralized music platform with 5 million monthly active users, logging plays and likes on Solana.
• Star Atlas: A blockchain-based game akin to Eve Online, with all assets encoded as NFTs.

Segments and Revenue Model

Solana operates as a single-segment business: a layer-1 blockchain platform. Its revenue model is based on transaction fees (gas fees) paid in SOL tokens, which are burned in part to reduce supply. Unlike traditional businesses, Solana does not generate revenue for a centralized entity like Solana Labs; instead, fees sustain the network and benefit stakeholders (validators, token holders). The burning mechanism could make SOL deflationary if transaction volume grows significantly, enhancing token value.

Key revenue drivers:

• Transaction Volume: Higher TPS drives more fee-generating transactions (e.g., DeFi trades, NFT minting, game interactions).
• Fee Structure: Fixed low fees (~$0.0001/tx) ensure affordability, encouraging adoption.
• Ecosystem Growth: dApps like Serum, Audius, and Star Atlas increase transaction demand.

Splits and Mix

No detailed splits (channel, geo, customer, product) are provided in the transcript. However, insights include:

• Customer Mix: Developers are the primary “customers” building dApps, with end-users (e.g., Audius listeners, DeFi traders) driving transaction volume. No specific demographic or geo data is given.
• Product Mix: DeFi (Serum, exchanges) and NFTs (Metaplex, Audius) dominate current use cases, with gaming (Star Atlas) and social tokens emerging.
• End-Market Mix: Financial applications (DeFi) are the largest, followed by creative monetization (NFTs, music) and speculative gaming/metaverse applications.

Historical mix shifts suggest DeFi led initial growth (Serum launched August 2020), with NFTs and music gaining traction by 2021 (Audius, Metaplex). Future shifts may favor gaming and social tokens as adoption grows.

KPIs

Key performance indicators include:

• Transactions per Second: >50,000 TPS, a significant leap from Bitcoin (7 TPS) and Ethereum (30 TPS).
• Transaction Fees: ~$0.0001/tx, stable due to high capacity, avoiding Ethereum’s fee spikes at high utilization.
• Ecosystem Adoption: 5-10 Serum-based exchanges, 2,000 Metaplex uses in 30 days, 5M Audius monthly users.
• Token Price Growth: $0.04 to $140 (2018-2021), reflecting market confidence.

These KPIs indicate acceleration in adoption and scalability, with no signs of deceleration noted.

Headline Financials

Solana does not report traditional financials like revenue or EBITDA, as it is a decentralized protocol. Instead, financial metrics focus on token economics and network activity. Key figures:

• Initial Token Supply: 500M SOL tokens.
• Inflation Rate: 7% initially, decreasing to 1.5% over 10 years.
• Token Price: $0.04 (2018) to $140 (2021), implying a market cap of ~$70B at 500M tokens (not adjusted for circulating supply).
• Transaction Fees: ~$0.0001/tx, partially burned to reduce token supply.
• Free Cash Flow (FCF): Not applicable in a traditional sense. Validators earn fees and inflation rewards, but no centralized FCF is generated.

No long-term financial charts are provided, but token price growth and TPS suggest strong revenue potential if adoption continues.

Value Chain Position

Solana operates at the infrastructure layer of the blockchain value chain, analogous to a cloud provider like AWS for traditional software. It provides the underlying ledger and compute resources for dApps, sitting upstream of application developers (e.g., Serum, Audius) and end-users (e.g., traders, music listeners).

• Primary Activities: Transaction processing, consensus (proof of stake/history), smart contract execution.
• Supply Chain: Relies on validators (nodes) running hardware (CPUs, GPUs, SSDs) and internet bandwidth. No physical supply chain.
• Go-to-Market (GTM): Developer-centric, with Solana Labs building free primitives (Serum, Metaplex) to lower barriers to entry. Community-driven marketing via the Solana Foundation.
• Value-Add: High throughput, low fees, and programmability enable scalable dApps, differentiating Solana from slower, costlier blockchains.

Solana’s upstream position maximizes economic leverage, as it captures fees from all transactions across diverse applications, similar to how AWS benefits from broad cloud adoption.

Customers and Suppliers

• Customers: Developers building dApps (e.g., FTX for Serum, Audius team) and end-users (e.g., DeFi traders, Audius listeners). No specific customer concentration data.
• Suppliers: Validators provide compute, storage, and bandwidth. Hardware (NVIDIA GPUs, SSDs) and internet providers are indirect suppliers. No supplier concentration noted.

Pricing

• Contract Structure: Transaction fees are fixed, low (~$0.0001/tx), and paid in SOL. No long-term contracts; fees are per-transaction.
• Pricing Drivers: Low fees are enabled by high throughput and parallelism, minimizing resource contention. Fees remain stable even at high utilization, unlike Ethereum’s exponential fee spikes.
• Price Sensitivity: End-users and developers prioritize low fees, making Solana attractive for high-volume, low-value transactions (e.g., music streaming, NFT minting).

Bottoms-Up Drivers

Revenue Model & Drivers

Solana generates “revenue” through transaction fees, paid in SOL and partially burned. Key drivers:

• Volume: >50,000 TPS supports high transaction volumes, driven by DeFi (Serum exchanges), NFTs (Metaplex), and applications like Audius (5M users).
• Price: Fixed low fees (~$0.0001/tx) ensure affordability, encouraging adoption.
• Mix: DeFi dominates, with NFTs and gaming growing. No precise revenue split provided.
• Growth: Organic growth from developer adoption (e.g., 2,000 Metaplex uses in 30 days) and user engagement (e.g., Audius’ 5M users). No M&A noted.
• Stickiness: Low fees and high throughput create switching costs, as developers build on Solana-specific infrastructure (e.g., Serum, Metaplex).

Cost Structure & Drivers

Solana’s cost structure is decentralized, borne by validators rather than a central entity. Costs include:

• Variable Costs: Compute (CPU/GPU cycles), storage (SSD writes), and bandwidth for transaction processing. These scale with transaction volume but are minimal due to parallelism and efficient protocols (e.g., Turbine).
• Fixed Costs: Validator hardware (servers, GPUs), internet connectivity, and software maintenance. These are relatively low, providing operating leverage as transaction volume grows.
• Contribution Margin: Not applicable traditionally, but low variable costs per transaction suggest high margins for validators.
• EBITDA Margin: Not reported, as Solana lacks centralized financials. Validator profitability depends on fee revenue and inflation rewards.

No precise cost breakdown (% of revenue or total costs) is provided, but low fees and high throughput imply significant operating leverage.

FCF Drivers

• Net Income: Not applicable; validators earn fees and rewards, not a centralized entity.
• Capex: Validator hardware (servers, GPUs) is the primary capital expenditure, considered maintenance capex. No large capex cycles noted.
• Net Working Capital (NWC): Minimal, as blockchain operations involve no inventory or receivables. Cash conversion cycle is near zero.
• FCF: Not centralized. Validators’ cash flow depends on fees, rewards, and hardware costs.

Capital Deployment

• M&A: No acquisitions noted. Growth is organic via developer adoption.
• Token Allocation: The Solana Foundation’s 20% token share (100M SOL) is used to fund ecosystem growth (e.g., grants, developer tools). Excess may be burned.
• Buybacks: Not applicable, but token burning reduces supply, mimicking buybacks.

Market, Competitive Landscape, Strategy

Market Size and Growth

The layer-1 blockchain market is part of the broader crypto ecosystem, valued at ~$2T in 2021 (based on Bitcoin, Ethereum, and others). Solana targets DeFi, NFTs, gaming, and social tokens, with:

• DeFi: $100B+ in total value locked (TVL) industry-wide, growing rapidly.
• NFTs: $10B+ in 2021 trading volume, with Solana’s Metaplex capturing early share.
• Gaming/Metaverse: Nascent but potentially massive, with Star Atlas as a test case.
• Market Growth: Driven by adoption (e.g., 5M Audius users), developer activity, and macro trends (e.g., financialization of social interactions).

No precise market size or growth rates are provided, but Solana’s TPS and low fees position it to capture significant share in high-volume segments.

Market Structure

The layer-1 blockchain market is fragmented, with key players including:

• Bitcoin: ~7 TPS, focused on store-of-value.
• Ethereum: ~30 TPS, dominant in DeFi and NFTs but constrained by fees and speed.
• Solana: >50,000 TPS, emerging in DeFi, NFTs, and gaming.
• Others: Polkadot, Avalanche, Cosmos (sharding-based), and roll-up solutions.

The market requires high minimum efficient scale (MES) due to network effects and developer ecosystems, favoring a few dominant players. Solana’s high TPS and low fees lower MES, enabling broader adoption.

Competitive Positioning

Solana positions itself as the fastest, cheapest layer-1 blockchain, targeting developers and high-volume applications. It competes on:

• Performance: >50,000 TPS vs. Ethereum’s 30 TPS.
• Cost: ~$0.0001/tx vs. Ethereum’s $2-$50.
• Ecosystem: Free primitives (Serum, Metaplex) vs. Ethereum’s community-driven approach.

Risks include disintermediation by zero-knowledge roll-ups, though Solana could integrate these to extend scalability.

Market Share & Relative Growth

No precise market share data is provided, but Solana’s rapid adoption (e.g., 5-10 Serum exchanges, 5M Audius users) suggests faster growth than Ethereum in specific segments (DeFi, NFTs). Its TPS advantage drives volume growth beyond market averages.

Competitive Forces (Hamilton’s 7 Powers Analysis)

1. Economies of Scale: High TPS and low fees leverage fixed validator costs, creating operating leverage. Solana’s single-shard design maximizes scale without sharding’s complexity.
2. Network Effects: Developer adoption (e.g., Serum, Metaplex) and user activity (e.g., Audius) create a flywheel, attracting more dApps and users.
3. Branding: Emerging as the high-performance blockchain, though less established than Ethereum.
4. Counter-Positioning: Solana’s non-EVM architecture and focus on speed differentiate it from Ethereum, challenging the status quo.
5. Cornered Resource: Proof of history and Turbine protocol provide unique technical advantages, though not exclusive.
6. Process Power: Parallel transaction processing, inspired by Yakovenko’s Qualcomm background, is a core competency.
7. Switching Costs: Developers face high switching costs after building on Solana’s infrastructure (e.g., Serum, Metaplex), though Ethereum’s larger ecosystem remains a threat.

Strategic Logic

• Capex Bets: Minimal, focused on validator hardware. No large capex cycles noted.
• Economies of Scale: Solana’s single-shard design avoids sharding’s latency costs, targeting MES without diseconomies.
• Vertical Integration: Solana Labs builds ecosystem primitives (Serum, Metaplex) to control key infrastructure, unlike Ethereum’s decentralized approach.
• Horizontal Expansion: Targets adjacent markets (NFTs, gaming, social tokens) to diversify use cases.
• M&A: None noted; growth is organic via developer tools and community funding.

Unique Dynamics of Solana’s Business Model

Solana’s business model is unique due to:

• Parallelism: By leveraging GPU cores (e.g., 4,000-8,000 per NVIDIA card), Solana achieves >50,000 TPS, enabling applications infeasible on Ethereum (e.g., Audius’ 5M users, Star Atlas). This aligns with silicon trends favoring parallel compute over clock speed.
• Proof of History: A novel mechanism encoding time within blocks, allowing sub-second slot times (~400ms) without global clock synchronization. This enhances throughput and resilience, skipping unresponsive validators seamlessly.
• Turbine Protocol: Inspired by BitTorrent, Turbine replaces inefficient gossip protocols with hierarchical data propagation, minimizing bandwidth waste and boosting network efficiency.
• Anti-Network Effects: Unlike traditional software’s zero marginal cost, Solana’s fixed resources (compute, storage, bandwidth) create anti-network effects, where fees rise exponentially near capacity. However, its high TPS delays this threshold, keeping fees low.
• Ecosystem Primitives: Solana Labs’ proactive development of Serum and Metaplex contrasts with Ethereum’s hands-off approach, accelerating developer adoption by providing ready-to-use infrastructure.
• Token Economics: A 7% initial inflation rate (declining to 1.5%) and fee burning create a potentially deflationary asset, aligning validator and holder incentives. The Solana Foundation’s ~20% token reserve funds growth, with potential for burns to enhance scarcity.

Standout points from the interviewee (Kyle Samani):

• DeFi as the Killer App: Samani reframes blockchains as DeFi-native systems, not just non-sovereign money, emphasizing low latency and high throughput for derivatives and risk management.
• Credible Neutrality: Solana’s focus on neutrality ensures developers (e.g., Bank of America or individuals) trust the platform’s stability, critical for long-term adoption.
• Productive Asset Thesis: Samani compares SOL to equities (vs. Bitcoin’s gold), arguing that productive assets powering dApps will dominate over non-productive stores of value.
• Leaning into Differences: Solana’s rejection of EVM compatibility and focus on performance created a Schelling point for developers dissatisfied with Ethereum’s limitations.

Critical Analysis

While Solana’s speed and cost advantages are compelling, risks include:

• Neutrality Concerns: Solana is less neutral than Ethereum, with Solana Labs’ influence on primitives raising centralization fears. This may deter developers prioritizing censorship resistance.
• Competition: Zero-knowledge roll-ups could disrupt layer-1 blockchains, though Solana’s compatibility with roll-ups mitigates this. Ethereum’s ecosystem size remains a formidable barrier.
• Regulatory Uncertainty: Social tokens and DeFi applications risk being classified as securities, potentially stifling U.S.-based innovation.
• Adoption Hurdles: Achieving Samani’s vision of 1B daily users requires overcoming technical (e.g., validator scaling) and cultural (e.g., mainstream trust) barriers.

Conclusion

Solana’s business model redefines layer-1 blockchains by prioritizing performance (50,000+ TPS, ~$0.0001/tx) and developer enablement (Serum, Metaplex). Its parallelism, proof of history, and Turbine protocol create a scalable, low-cost platform for DeFi, NFTs, gaming, and social tokens. While lacking traditional financials, its token economics (500M SOL, 7% inflation, fee burning) and ecosystem growth (5M Audius users, 2,000 Metaplex uses) suggest strong potential. Hamilton’s 7 Powers highlight economies of scale, network effects, and process power as key strengths, though neutrality and competition pose risks. Solana’s proactive ecosystem strategy and alignment with silicon trends position it as a contender for global financial infrastructure, provided it navigates regulatory and adoption challenges.