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    Bankless

    Austin Federa: Is SOL Money?

    Thu Aug 10 2023
    SolanaEthereumDesign PhilosophyUtilityMEV OpportunitiesLiquid StakingLayer 2 SolutionsStake-Weighted ApproachGovernanceSecurity

    Description

    Bankless explores the nature of Solana and its native asset, comparing it to Ethereum. The episode covers the design philosophy of Solana, its utility, collateralization, MEV opportunities, DeFi and layer 2 solutions, stake-weighted approach and governance, as well as a comparison between Ethereum and Solana. It also examines the strengths, vulnerabilities, security, and governance of both networks.

    Insights

    Solana's Design Philosophy

    Solana aims to build one global state machine as fast as traditional markets by keeping everything in one global state. This improves developer and user experience but requires more hardware resources compared to Ethereum.

    Utility of Sol Token

    The Sol token has utility as a civil resistance mechanism and payment for transaction fees on the Solana network. Transaction fees consist of a base layer fee and a subdivision called LAMPORTS (LAMP).

    MEV Opportunities on Solana

    MEV opportunities on Solana are harder due to faster blocks and slimmer margins compared to Ethereum. They depend more on market movement and other on-chain activity.

    Liquid Staking on Solana

    Solana has a robust liquid staking ecosystem with various providers like LIDO, marinade, and Gito Soul. Stake accounts can have any size unlike Ethereum's requirement of 32 ETH.

    Ethereum's Layering and Future

    Ethereum's layering up to L57s is a rebuild of the traditional financial ecosystem. The future could see an integrated and fair Ethereum stack, but also a compromise of its values by extreme multinational corporate capitalism.

    Security and Governance in Ethereum and Solana

    Impacting Ethereum governance at layer one is extremely difficult due to social consensus and cryptography. Solana's single network makes it vulnerable to corruption if one point of insertion is compromised.

    Chapters

    1. Exploring Solana and its Native Asset
    2. Understanding Solana's Design Philosophy
    3. Exploring Solana's Ecosystem and Utility
    4. Understanding Collateral and MEV in Solana
    5. Exploring MEV and Liquidity in Solana
    6. Exploring DeFi and Layer 2 Solutions
    7. Understanding Stake-Weighted Approach and Governance
    8. Comparing Ethereum and Solana
    9. Evaluating Ethereum and Solana's Strengths and Vulnerabilities
    10. Examining Security and Governance in Ethereum and Solana
    Summary
    Transcript

    Exploring Solana and its Native Asset

    00:00 - 06:36

    • Bankless explores the nature of Solana and the economics of its ecosystem
    • Bankless has produced limited Solana content in the past
    • The investment thesis behind Sol has not been clear to Bankless
    • Bankless believes there is a strong connection between the design architecture of a Layer 1 network and the properties of its native asset
    • The Solana community often disagrees with Bankless' perspective
    • Austin Federer, head of strategy at the Solana Foundation, joins the podcast to discuss the design philosophy of Solana and its native asset
    • Austin's conversations feel similar to those with CK, Ryan's old Bitcoin co-host on POV Crypto
    • The episode focuses on comparing ETH and SOL as native assets in their respective ecosystems

    Understanding Solana's Design Philosophy

    06:08 - 13:06

    • Soul is the native asset of the Solana ecosystem
    • The architecture of a network can be compared to the zoning of a city, with different rules and frameworks
    • Solana's core thesis is to build one global state machine as fast as traditional markets
    • Keeping things in one global state improves developer and user experience
    • Solana requires more hardware resources to run validators compared to Ethereum
    • The design decision on Solana flattens the VM and consensus layer into one stack
    • In Solana, a crash in the VM can cause a crash in the consensus protocol
    • Ethereum implements economic policies to create deflation and reduce supply over time

    Exploring Solana's Ecosystem and Utility

    12:38 - 19:12

    • Ethereum implemented economic policies to create deflation and reduce supply over time
    • Networks like Bitcoin and Ethereum took several years to reach their current state, but there is pressure on all networks to accelerate
    • Solana's cheap transactions and massive throughput could be similar to software as a service (SaaS) for blockchain
    • Solana introduced stake-weighted QoS, which guarantees quality of service based on stake percentage
    • QUIC networking standard, local fee markets, and stake-weighted QoS address reliability issues on the Solana network
    • The utility of the Sol token includes civil resistance mechanism and payment for transaction fees
    • Transaction fees on Solana consist of a base layer fee and a subdivision called LAMPORTS (LAMP)

    Understanding Collateral and MEV in Solana

    18:50 - 25:17

    • The soul token is a subdivision of a soul and is used to pay gas fees on the network and help secure the network from civil resistance
    • The base structure of Solana is similar to Ethereum, where the inflation rate decreases by 1.5% every year until it reaches a steady state of 1.5%
    • If no one is using the Solana blockchain, it inflates at a rate of 1.5% assuming it's building blocks
    • The burn on top of the inflation rate is currently around 6% but drops by 1.5% per year
    • Solana aims to keep transaction fees low for widespread usage of blockchains
    • Developers chose to build on Solana because it offered speed and performance that was technically impossible on other blockchains
    • Applications built on Solana are different from those on Ethereum, with Uniswap being more expensive for smaller trades compared to centralized exchanges
    • Fracturing liquidity across multiple layer twos and bridges introduces complexity and trust assumptions, whereas Solana offers an all-in-one L1 solution
    • Solana enables applications like Helium and central limit order books that are not feasible or too expensive on Ethereum

    Exploring MEV and Liquidity in Solana

    24:51 - 31:22

    • Collateral is one of the pillars in the triple point asset thesis
    • There are no differences between Ether and Solana on their respective networks regarding collateral
    • The liquid-staking market on Solana has less of a single player compared to Ethereum
    • On Ethereum, there is a requirement for 32 ETH to be able to stake, while on Solana, stake accounts can have any size
    • Solana has a robust liquid staking ecosystem with various providers like LIDO, marinade, and Gito Soul
    • Unstake It is working on a common liquidity layer for all liquid stake tokens on Solana
    • Staked soul will be collateralized in Solana's DeFi applications similar to staked ether in Ethereum
    • Solana has Jito as the group that built the Mev client, which works similarly to Flashbots on Ethereum
    • MEV opportunities on Solana are harder due to faster blocks and slimmer margins compared to Ethereum
    • MEV opportunities on Solana depend more on market movement and other on-chain activity

    Exploring DeFi and Layer 2 Solutions

    30:56 - 37:36

    • Opportunities for earning in the market tend to be inconsistent and dependent on market movement or on-chain activity
    • MetaMask portfolio allows users to view and engage in various DeFi activities such as buying, swapping, bridging, and staking crypto assets
    • Mantle (formerly known as BitDow) is a DOW-led Web3 ecosystem built on top of Mantle Network, a high-performance Ethereum layer 2 solution that reduces gas fees by 80%
    • Mantle offers a grants program for promising projects that help expand, secure, and decentralize the ecosystem
    • Arbitrum provides secure Ethereum scaling solutions with faster transaction speeds and lower gas fees
    • Arbitrum Orbit allows users to build their own Layer 3 applications using Arbitrum's secure scaling technology
    • The Ethereum philosophy aims to democratize MEV by pushing it towards Ether the asset rather than letting one central party capture it
    • Solana's approach to democratizing MEV is stake-weighted QOS, which ensures important transactions are always included in blocks

    Understanding Stake-Weighted Approach and Governance

    37:18 - 43:59

    • Stake-weighted approach in Solana allows DeFi applications running validators to ensure important transactions and users are included
    • About 27% of the Solana network is running on the Gito client
    • Gito Soul is a stake pool token that gives MEV revenue in addition to staking rewards
    • Enforcing MEV burn at the protocol level is challenging due to it being an application-level issue
    • Implied oracle mechanism for MEV burns raises skepticism about its effectiveness
    • Potential social punishment for not burning MEV may violate Ethereum's social contract
    • Ethereum has a history of shipping updates, although they may differ from initial promises
    • The original vision for Ethereum's ETH2 was shards with execution layers, but it evolved into roll-ups as execution environments
    • Decentralization compromise occurred with the shift towards roll-ups and layer-2 solutions

    Comparing Ethereum and Solana

    43:36 - 50:11

    • Ethereum has never failed to execute on its roadmap
    • ETH 2 could have prevented the existence of L2 tokens without economic value
    • Fractional transactions in Ethereum could eliminate the need for different tokens on different roll-ups or networks
    • Starkware is the only layer two that requires a gas token
    • Solana is working towards decentralization but it will take time
    • Solana has shown a high pace of innovation and change
    • Solana has faced hardships similar to Ethereum, but in different ways
    • The Solana Foundation supports multiple validator clients through grants
    • Solana is not a threat to Ethereum, just like Bitcoin or Filecoin

    Evaluating Ethereum and Solana's Strengths and Vulnerabilities

    49:49 - 56:49

    • Ethereum competes with nation states, not other layer ones
    • The primary opposition to Ethereum is not Bitcoin or Solana
    • Layer ones are supposed to be money and market cap is important for scaling values to the world
    • Criticism: High transaction fees hinder Ethereum's goal of being egalitarian and accessible
    • The layering of Ethereum up to L57s is a rebuild of the traditional financial ecosystem
    • The topology of the Ethereum network aligns with the traditional financial system but with better tools and minimized taxation
    • Introducing security hops and bridges in crypto increases risk
    • There is potential for an integrated and fair future for the Ethereum stack, but also a potential future where its values are compromised by extreme multinational corporate capitalism
    • Reducing points of potential capture and interference in system architectures is important over a long-term horizon
    • Solana takes a different approach from Ethereum, aiming to keep everything in one global state as the socially safest option

    Examining Security and Governance in Ethereum and Solana

    56:24 - 1:01:16

    • The Ethereum layer one is deeper than any corrupting corporation can reach
    • The Protocol Sync Thesis states that the most socially scalable and legitimate protocol sync is at the bottom of the stack
    • Corrupting influences like JP Morgan's chain quorum won't spread to other chains due to cryptography
    • Impacting Ethereum governance at layer one is extremely difficult as it requires fighting social consensus as well as cryptography
    • Solana's single network makes it vulnerable to corruption if one point of insertion is compromised
    • Market cap capture, like Elon Musk buying up stock in secret, is possible on any L1 network
    • Proof of stake is more resilient than proof of work to capture, but not immune from it
    • Even if a layer two solution like Polygon gets taken over, the base layer can still be captured
    • Solana validators are hard to run and not hosted on AWS, making them less susceptible to capture compared to Ethereum validators on AWS
    • The future is uncertain, so defense mechanisms must be developed to prevent undesirable scenarios from occurring in both Solana and Ethereum ecosystems
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