Lightspeed Newsletter: Solana caught the layer-2 bug

15.05.2024

Hiya!

Markets may be down slightly, but that’s not the main thing bumming me out today. Last night, I took a train all the way up to Queens just to see the Mets blow a 9th-inning lead. What even is a “Phillie?”

Anyways, let’s talk Solana.

Pandora’s Box of L2s

Solana’s lack of layer-2s has long been a point of pride for some Solana supporters.

Rather than relying on a fragmented and expanding network of blockchains to scale à la Ethereum, why not just move to a blockchain fast and cheap enough to keep everyone in the same building?

But since fast things can always be faster, and cheap things cheaper, the layer-2 bug appears to be coming for Solana.

Zeta Markets announced a $5 million raise Tuesday, partially to build a DeFi layer-2 on Solana. Electric Capital led the round, which added to the $8.5 million Zeta Markets raised in a 2021 seed round led by Jump Capital.

Zeta Markets currently runs a regular derivatives DEX — the fifth-largest on Solana, according to DefiLlama. By adding a layer-2 to the mix, it wants to make its DEX as fast as a CEX.

Zeta Markets founder Tristan Frizza told me that he’s always been a “monolithic chain maxi,” but when you’re letting traders take big leverage on derivatives, market makers want to see some really low latency.

“Solana does what, 400 millisecond block times? But these guys are used to like 10 milliseconds on Binance,” Frizza said.

Off-chain centralized exchanges can basically figure out the price of assets faster than decentralized exchanges, which are slowed down by the underlying blockchain’s throughput. In some cases, savvy arbitrageurs can exploit the momentary differences in price — to the detriment of DEX liquidity providers.

So, there are justifiable reasons beyond snake oil sales for why Solana would want to build layer-2s. Still, it bears notice that Solana co-founder Anatoly Yakovenko — who invested in this Zeta Markets round — appeared on Lightspeed in August asserting that having too many layer-2s can create massive composability and user experience problems. Other notable Solana ecosystem angel investors also took part in Zeta’s round.

Perhaps this signals that Solana’s thought leaders are softening toward rollups.

Zeta’s layer-2 is set to launch in the first quarter 2025, The Block reported. By then, I wouldn’t be surprised to see other Solana projects following suit.

— Jack Kubinec

Zero In

Solana’s fee generation looks to be rapidly closing the gap with Uniswap. Over the past year, Uniswap’s fees stand at $751.193 million, while Solana’s reach $185.173 million; that’s about $14.446 million and $3.562 million per week, respectively.

However, Solana’s fees have risen sharply over the past week to $10.078 million, nearly matching Uniswap’s $12.260 million. Interest in the Solana network continues to increase, thanks at least in part to Solana’s high network uptime, low transaction fees, and ever-increasing user adoption in the DeFi and NFT segments.

If this trend continues, Solana could soon surpass Uniswap in fee generation. This rise suggests growing network usage and transaction volume, which — while positive for Solana’s ecosystem — could also mean higher costs for users.

— Jeffrey Albus

The Pulse

If you’ve ever spent time exploring Solanaland, you’ve probably come across the term OPOS — Only Possible on Solana. And while this may sound exaggerated to the uninitiated, it is true that certain innovations are indeed only achievable within the Solana ecosystem. Well, for the most part… kind of… at least for now.

The idea isn’t so much that other blockchains can’t do what Solana is capable of, full stop. It’s more that there are a lot of things that other chains just can’t do quite so well.

For instance, Solana’s state compression technology drastically reduces the cost of storing data on-chain. That makes large-scale transactions far more feasible, and is why projects like Drip Haus are able to affordably distribute millions of NFTs to users across the ecosystem. Other blockchains, which famously struggle with scalability and high fees, would have a tough time developing similar projects.

Projects like Hivemapper and Helium also benefit from Solana’s high throughput and low costs in support of their decentralized mapping and community-powered 5G services. This is yet another area where transaction speeds and costs hinder the practical implementation of such large-scale decentralized applications for most other chains.

But while Solana holds the advantage in these areas for now, there is little reason to believe it will stay that way forever. Competing networks are assuredly taking notes on what is and isn’t working across Web3, and may soon develop similar or even superior capabilities. So the question is: Will Solana be able to keep up with these challenges over the long term? Anything is possible.

— Jeffrey Albus