What Is Solana (SOL) And How Does It Work?

How Does Solana (SOL) Crypto Work?

Last Updated November 16th 2022

8 Min Read

Solana is a web-scale blockchain that provides secure, scalable, fast, and decentralized applications/marketplaces.

In this article, Trading Education presents detailed information about what Solana is and how the entire ecosystem works.

This will help you learn more about the possibilities of the Protocol that will guide you to know if it is a good idea to invest in Solana (SOL).

Solana returned 17,122.5% when it reached a new all-time high in November 2021.

This brought extensive interest on the part of decentralized finance (DeFi) fans and blockchain technology enthusiasts as to the type of financial products that can be found on the Solana Network.

Aside from DeFi users, millions of people have thrown their support behind the novel token that settles all transactions on the ecosystem, SOL.

As talks of the cryptocurrency and its protocol have gone global, several industry analysts and experts have made suggestions that the crypto project could replace Ethereum as the go-to smart contracts blockchain.

With all the hype, you may have been wondering - what is Solana and how does it all work.

What Is Solana (SOL)?

Solana is a highly functional open-source project that banks on blockchain technology’s permissionless nature to provide decentralized finance (DeFi) solutions.

Although the idea behind the crypto project began in 2017 the official launch was in March 2020.

To put it simply, Solana has an aim of improving scalability by introducing a Proof-of-History (PoH) consensus combined with the underlying Proof-of-Stake (PoS) consensus of the blockchain.

SOL is the cryptocurrency that oversees all transactions on the Network.

It can also be termed as a digital currency or virtual currency. Depending on the more than 500 decentralized applications (DAPPS) you would like to use on the Solana ecosystem, you can use SOL to settle all smart contracts.

SOL can also be swapped for other mainstream tokens such as Ether (ETH), Litecoin (LTC), Binance Coin (BNB), Dogecoin (DOGE), and Dash (DASH) to buy goods and services online.

Due to the popularity of cryptocurrencies as mediums of exchange, several companies will benefit massively from having SOL as a payment method.

This is because the digital currency has one of the cheapest average transaction costs in the space today.

Currently, Solana has an average transaction cost of $0.00025 and processes a minimum of 2,000 transactions and a maximum of 50,000 transactions per second (TPS).

As a trader, you should know that the digital representations of Solana Coins online do not have any real value without the private codes embedded in them.

Don't Miss: Should You Buy Solana (SOL)? 4 Pros, 4 Cons

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

How Does Solana (SOL) Work?

Many people ask the question, how does Solana blockchain work?

Each SOL token is a computer file stored in a wallet on a cryptocurrency exchange and digital wallet.

Digital Wallet Holders can send and receive Solana themselves through the internet without the backing of third-party organizations such as clearinghouses, banks, or insurance companies.

This ledger is called a blockchain. Blockchain Technology helps with the creation, storage, distribution, and trading of Solana coins. Every single transaction is recorded in a public ledger.

This creates an environment where transactions can be carried out privately but can be traced through individual addresses.

Due to the complexity of blockchain, it is difficult for hackers to breach protocols. This also makes it difficult for hackers to spend digital tokens twice (double spending).

How Do People Get Solana (SOL) Coins?

There are several ways of getting Solana coins. Some of the ways are:

Solana Trading (You can buy, hold, and sell SOL tokens on centralized and decentralized exchanges).
You can sell products digitally and request payments in the form of Solana coins.
You can get Solana tokens from promotions.
You can get Solana from Staking. Once you get annual percentage yields (APYs) from staking SOL, you can reinvest the money into getting more Solana coins.

How Are New Solana Coins Created?

When Bitcoin was first launched, the only way new Bitcoin was created was through a process called mining.

Litecoin, Dogecoin, and Ethereum followed suit with the proof-of-work (POW) algorithm that meant that coins had to be mined before they could be added to the ones already in circulation.

Instead of POW, founders Anatoly Yakovenko and Greg Fitzgerald settled on the proof-of-stake model.

This is the primary reason why Solana scales relatively faster than the aforementioned projects.

The proof-of-stake (POS) system helps Solana verify transactions, manage its coin supply, and create new SOL tokens.

For you to be a participant, you need to own a substantial number of SOL tokens. This way, you help stake your coins and earn rewards in the form of new SOL coins for helping operate the system.

By staking SOL with a validator, you are putting trust in a specific validator to authorize transactions.

As a novice in such a complicated space, you must know that new coins are created through mining on proof-of-work-backed blockchains and new coins are created through staking on proof-of-stake-backed blockchains.

Why Are Solana Coins Valuable?

Solana is valuable because it possesses all the essential attributes of a successful currency.

There are six characteristics of successful currencies and they are transportability/transferability, durability, utility, divisibility, counterfeitability, and scarcity.

More importantly, they possess the two most important attributes and they are durability (store of value) and utility (medium of exchange).

The worth of Solana comes from the confidence users have in the token as a digital currency that can be used to settle transactions on the network.

Therefore as more liquidity is being poured into SOL on the network, its daily transactional count increases. This in turn improves the utility of the Solana Network.

Thriving on such data, numerous investors (individual and institutional) buy more SOL on cryptocurrency exchanges.

Why Do People Want Solana Coins?

Millions of people want Solana coins because of what the Solana ecosystem represents.

Several people continue to live on the edge daily. Most of them do not hold an account with any financial institution (unbanked). Those who hold an account with banks do not have the minimum required for fixed deposits in the form of bills and bonds (underbanked).

Once Solana provides decentralized finance applications in the form of lending where owners of SOL can become liquidity providers and make passive income, millions have taken to the platform. The resultant effect is a positive reflection in the price of the cryptocurrency, SOL.

Many people have said that owning Solana coins draws them into the decentralized finance and non-fungible token (NFT) space. This is a new space that continues to make headlines daily.

The only way to get to know more about the potential of a coin is to invest in it. Once you own SOL, you get to know the various categories and products available in the ecosystem.

Lastly, holding SOL coins means you can swap the token for others so that you will be able to pay for goods.

As earlier pointed out, you can buy more by paying less. SOL gives people value for money and that is the reason why they demand more of the coins.

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Is Solana Secure?

The complexities of blockchain technologies make them difficult to attack.

The security of the Solana Protocol cannot be called to question. This is because the ecosystem has existed for the last 2 years and performed massively without incident.

This does not mean your SOL coins cannot be lost.

This is because security lies in the hands of representatives of platforms that hold your SOL as well as the responsibility on your part to protect your private keys.

Suppose your preferred exchange is hacked, there is a huge probability that you could lose your entire cryptocurrency holdings including SOL.

That is the primary reason why Trading Education advocates that you find a well-regulated exchange that has great customer service, processes thousands of transactions per second, and supports your country of residence.

From more than 30 exchanges, we would like to recommend eToro because it has all the aforementioned features.

If you lose your passcodes to your Solana Wallets such as TrustWallet, Exodus, or Zelcore, there is little chance of you regaining access to your account.

This is the primary reason Trading Education advocates you write your passcodes in at least four (4) different places.

In case you cannot find one of the places, the others can make up for it.

Due to the volatile nature of the cryptocurrency market, many experts believe traders will be better off with less-volatile assets. Although SOL experiences multiple percentage swings, having the right investment strategy in place on a well-regulated exchange can help you trade peacefully.