Interview with Solana Co-Founder: Execution is the Only Moat, Commercialization is the Key to Victory

Original Article Title: "The Next Chapter Of Solana Mobile | Emmett Hollyer"
Original Source: Lightspeed

Original Article Translation: DeepFlow Tech

Guest: Anatoly Yakovenko, Co-Founder of Solana

Host: Mert Mumtaz, Helius CEO

Background Information

This week, we welcomed Anatoly Yakovenko, co-founder of Solana Labs. We will delve into topics such as Solana's transaction fees, how to stay competitive in the crypto space, SOL's inflation issue, competition with Apple and Google, and whether Solana has a moat. We hope you enjoy!

Solana's Transaction Front-Running

Mert had an in-depth conversation with Anatoly Yakovenko, co-founder of Solana Labs, discussing Solana network's challenges in transaction processing, especially regarding front-running issues. Anatoly explained Solana's original intention and the current reality it faces.

Solana's Original Intention and Current Challenges

Anatoly mentioned that one of the reasons he founded Solana was due to frequent front-running in traditional markets. He hoped to achieve global information synchronization through Solana, maximize competition, and minimize arbitrage. However, in reality, front-running still widely exists, and in many cases, users are even paying higher priority fees than Solana's priority fees.

Solution and Future Outlook

Anatoly believes that users can set their own validators and submit transactions, something that is impossible in traditional markets. He pointed out that although this feature exists, the difficulty of setting up validators and the immaturity of the market make it challenging for users to fully leverage this advantage. He emphasized that the future solution lies in increasing bandwidth, reducing latency, and optimizing the network to eliminate unfair bottlenecks.

Market Dynamics and Competition

He further explained that the current market dynamics have led to users with more stake having an advantage in transaction priority, resulting in a "rich get richer" phenomenon. Anatoly believes that by improving performance and lowering the barrier to entry for honest participants, the market dynamics can be changed to promote fair competition, ultimately achieving the ideal market equilibrium.

Anatoly emphasized that the key difference between Solana and Ethereum is that addressing these issues is primarily an engineering challenge. He firmly believes that through continuous network optimization, increasing the number of leaders per second, and block size, Solana will be able to achieve its initial vision of a fair and efficient transaction environment.

Solana's Fee Market

Current State of the Fee Market

In this section, Mert raised questions about Solana's fee market, particularly why transaction fees (Jito tips) exceed the priority fee.

Anatoly explained that this is mainly due to the current implementation of transaction processing not being ideal, especially in high-load scenarios, where the fee market's performance falls far short of expectations.

Transaction Processing and Performance Bottleneck

Anatoly pointed out that during low-load periods, Solana's transaction processing is very smooth, with confirmation times even going below one second. However, as the transaction volume increases, queues become congested, making it difficult to effectively prioritize, thus disrupting the normal operation of the on-chain fee market. He emphasized that these are engineering challenges that require optimization of the processing pipeline.

Comparison with Other Solutions

Mert mentioned that some Layer 2 solutions do not seem to have faced the same issues.

Anatoly countered that even if Layer 2 adopts a centralized sequencer, similar priority issues would still arise. He pointed out that while these platforms may iterate faster, the fundamental issue remains. Even in a Layer 2 environment, competition among multiple applications can cause congestion in the fee market.

Future Solutions

Anatoly believes that addressing these issues relies not only on different architectures but also on continuous optimization and improvement of the existing system. He stated that while Layer 2 may perform well in certain scenarios, it still faces similar challenges when multiple markets coexist. Therefore, Solana needs to further invest in engineering to optimize its transaction processing capabilities.

Scale Composability

Mert raised a question about how Solana competes with specific-purpose chains like Atlas. Atlas is a DeFi-focused chain that can optimize its performance without worrying about the overhead of consensus and shared block space.

Simplified Optimization Challenge

Anatoly noted that chains like Atlas can be optimized more easily because of their fewer validators and relatively centralized load processing. However, he emphasized that the key is whether "synchronous composability" remains important at scale. While Atlas may only cover a specific region, information still needs to propagate globally.

Complexity of Global Information Propagation

Anatoly further explained that Solana's advantage lies in having multiple validators that can submit transactions globally simultaneously and being a permissionless open network. He pointed out that solving the challenge of rapid global information propagation and achieving consensus is the more challenging task. This means that although Atlas may perform well in localized optimization, in a broader application scenario, it still needs to address the same consensus and consistency issues as Solana.

Competition and User Experience

He compared such single-purpose chains to larger applications (like ByteDance), emphasizing the importance of user experience. Ultimately, users will choose the platform that offers a better experience. Therefore, Solana needs to become the best version of a decentralized exchange to stand out in the competition. Anatoly believes that only by adopting a decentralized multi-proposal architecture can this goal be achieved.

Competing with L2

Solana's Challenge versus L2's Advantage

Mert mentioned that Solana must address a series of issues, while L2 can address these issues faster in some aspects.

Anatoly responded that although single-purpose chains have advantages in localized optimization, it does not mean they can easily solve all engineering challenges. He emphasized that deploying a single chain does not automatically solve all problems, especially when facing complex engineering challenges.

Similarity of Engineering Challenges

Anatoly further pointed out that while L2s may be faster in some aspects, they still face the same engineering challenges as Solana, particularly in transaction submission pipeline. Even a single-chain like Jito may encounter bottlenecks when processing a high volume of transactions, thus potentially being limited in data transfer rate.

The Tragedy of the Commons in Shared Block Space

Mert raised the issue of shared block space, highlighting the possibility of Solana facing a "tragedy of the commons" challenge, especially when multiple applications share the same chain. Anatoly emphasized that such sharing is only effective in a permissioned environment. However, introducing unpermissioned validators can lead to competition among multiple apps causing interference and impacting overall performance.

The Significance of Isolation

Anatoly stressed the need to address isolation even in a permissioned environment to ensure that the performance of a single marketplace or application does not affect others. This isolation challenge is similar in engineering to the one addressed in Solana. He noted that failure to address these issues effectively may lead to more specialized payment chains or L2s for individual markets in the future.

Diversity of Use Cases

Mert inquired whether this marketplace analogy applies to other types of applications.

Anatoly responded, stating that some applications (such as peer-to-peer payments) may not face congestion issues, making scheduling relatively straightforward. However, if ensuring that a single market does not cause global congestion cannot be guaranteed, companies like Visa may introduce their own payment-specific L2s.

Anatoly believed that if isolation cannot be properly implemented, the concept of a vast composable state machine would become invalid. He believed that resolving these engineering challenges would provide significant advantages in composability within a single environment, reducing friction in moving funds between different states and liquidity. He concluded that Solana's survival in a bear market is partly due to its higher composability and capital efficiency.

Synchronous Composability

Mert referenced Vitalik's view that synchronous composability is overrated and mentioned the lack of empirical evidence supporting this claim. He expressed doubts about this view and asked for Anatoly's opinion.

Anatoly's Rebuttal

Anatoly countered Vitalik's viewpoint, pointing out that Jupiter is a prime example of synchronous composability. He emphasized that Jupiter holds a significant market share within the Solana ecosystem, demonstrating the importance of synchronous composability in practical applications. He believes that Jupiter's success could not have been achieved without synchronous composability.

Using Ethereum as an Example

Anatoly further mentioned that competitor 1inch has underperformed on Ethereum, partly due to high and slow transaction costs across L2s. He believes that this situation indicates that a lack of effective synchronous composability can limit the scalability of DeFi applications.

Comparison of Asynchronous and Synchronous

Anatoly acknowledges the existence of asynchronous finance, noting that most financial systems operate asynchronously, which does not mean that these systems will disappear. However, he firmly believes that if Solana continues to address current challenges and maintains continuous improvements, synchronous composability will emerge as the ultimate winner.

Future Outlook

Anatoly is optimistic about Solana's future, believing that with the ongoing development of the ecosystem and problem-solving, synchronous composability will gain a more significant advantage in the crypto space. He thinks that in the long term, systems capable of achieving more efficient and rapid transactions will lead the market.

Validators

Mert's Question to Validators

Mert proposed that assuming other chains overcome engineering issues and achieve synchronous composability, how would the role and quantity of validators impact the network's success? He asked Anatoly, if engineering is not the moat, then what is?

Anatoly's View on Validator Quantity

Anatoly stated that Solana does not have a specific validator target. He hopes to have as many validators as possible to prepare for the network's future. He believes that having more validators can increase the chances of block production and allow more people to participate in various parts of the network permissionlessly.

Network Scalability

Anatoly emphasized that the cost of addressing these issues is relatively low, so Solana does not need to reduce the number of validators for performance reasons. He believes that if Solana can attract more users, more users will want to run their own nodes, thereby increasing the network's security and decentralization.

Validator Count Fluctuation

Mert mentioned that although the goal is to increase the number of validators, data shows that the number of validators has decreased over a period of time. He asked Anatoly if this is related to a lack of Product-Market Fit (PMF), causing users not to have enough incentive to run their own nodes.

Self-Sustaining Validators

Anatoly agreed with this point, stating his interest in the number of self-sustaining validators. He mentioned that while the overall number of validators may be large, the number of validators that can truly self-sustain may be smaller. He believes the network must be able to scale to support all users who wish to run nodes.

Delegation and Stress Testing

Anatoly explained the purpose of the delegation process, which is to involve as many people as possible in the network for stress testing. He believes that although the testnet cannot fully simulate the mainnet's characteristics, the growth in the number of self-sustaining validators is a positive trend.

Validator Theory and Practice

Mert pointed out that delegation can help stress test the network, but Anatoly emphasized that the most important thing is self-sustaining validators. Even though in theory, a single validator may still be helpful in a catastrophic failure, fundamentally, the key is whether the network is growing and succeeding.

Solana Inflation

Mert's Question on Inflation

Mert raised concerns about Solana's inflation schedule, suggesting that this inflation may subsidize validators by offering more rewards, potentially to the detriment of pure investors. He asked Anatoly about his views on excessive inflation.

Anatoly's Response

Anatoly suggested referencing John Carbono's article, stating that the discussion on inflation is somewhat meaningless. He expressed that moving digits does not truly create or destroy value but only impacts accounting numbers. The existence of inflation is because it was copied from Cosmos, with most of the original validators coming from Cosmos.

Impact of Inflation

Anatoly further explained that the impact of inflation on individuals depends on their specific tax regime. However, from the perspective of the entire network, inflation is a cost for non-stakers and a corresponding reward for stakers, with both summing up to zero. Therefore, from an accounting standpoint, inflation is not crucial to the overall performance of the network.

View on Reducing Inflation

Mert mentioned that some argue if inflation is arbitrary, why not lower it. Anatoly responded that anyone can attempt to change the inflation rate, but ultimately, they need to persuade validators to adopt this change. He pointed out that the primary constraint in selecting these numbers is to ensure they do not lead to catastrophic outcomes, and Cosmos's model is effective in this regard.

How Does Solana Compete?

Mert's Question on Competition

Mert noted that in an environment where everyone can run a system quickly, cheaply, and permissionlessly, why should people choose Solana?

Anatoly's View on Competition

Anatoly believes that the future winner is either Solana because its ecosystem performs well in execution, staying ahead of other concerns, or other projects that are very similar to Solana but have faster execution speeds. He noted that the only reason they wouldn't be Solana is if they are faster in execution, overcoming the network effect Solana may not yet possess.

Importance of Execution

Anatoly emphasized that execution is the only moat. If there is no advantage in execution, other projects are likely to surpass Solana. He mentioned that a shift in user behavior (i.e., product-market fit, PMF) is critical. For instance, if transaction fees are ten times cheaper, will users switch? If users are already paying a very low fee (such as half a cent), then even if another platform has lower fees, they may not switch.

User Behavior Change

Anatoly illustrated that a key difference between Solana and Ethereum is that users on Ethereum might see fees as high as $30 when making transactions, a price discrepancy significant enough to drive changes in user behavior. Additionally, confirmation times play a crucial role, with Ethereum potentially taking two minutes for confirmation while Solana's confirmation time is around 2 seconds, sometimes even reaching 8 seconds.

Performance Optimization Potential

He noted that whether an improvement from 8 seconds to 400 milliseconds is enough to prompt users to switch products remains to be seen. However, Solana's engineering design does not hinder the network from optimizations to enhance latency and throughput.

Competitive Challenge

Anatoly concluded that while Solana's growth rate might surpass Ethereum's, the marginal differences with other competitors make it challenging to achieve significant changes in user behavior. This stands as a primary challenge for Solana.

Execution is the Moat

Mert on the Challenge of Execution and Organization

Mert mentioned that if execution is the most critical moat, it somewhat transforms into a challenge of organization and coordination. Taking Solana and modularity (although not entirely accurate terminology) as an example, he pointed out that when developing applications on Solana (e.g., Drip), developers need to wait for Layer 1 (L1) to make some changes, such as addressing congestion or fixing bugs. On an application chain (L2), developers can make these changes themselves, potentially achieving faster execution on other chains.

Anatoly's View on Execution Speed

Anatoly believes that over time, the gap in execution speed will diminish. He cited Ethereum as an example, stating that if developing an application on Ethereum leads to fees rising to $50, developers might need to inquire when Vitalik will address the issue, to which he might respond with a six-year roadmap to solve the problem, indicating a time-consuming resolution process. Conversely, on Solana, the team would promptly respond and strive to address the issue in the next version.

Cultural and Responsiveness Disparities

Anatoly emphasized that in the Solana ecosystem, the entire infrastructure for submitting transactions understands that when there is a slowdown or global congestion, it is a priority-zero urgent issue that must be addressed immediately. He stated that as the network grows in usage, significant design changes (such as changes to the fee market) become increasingly unlikely.

Likelihood of Design Changes

He pointed out that there are currently no significant design changes on the horizon, meaning the network will not face situations requiring major design fixes lasting six months to a year. While there may be some unexpected deployment errors that require the team to work overtime to resolve, this is considered normal.

Advantages and Costs of Application-Specific L2

Anatoly further mentioned that if developers have their own application-specific L2 instead of shared infrastructure, they may move faster, but the cost of doing so is also high. Therefore, for most use cases, using shared, composable infrastructure may be cheaper, faster, and as software layers improve and bugs are fixed, this gap will gradually narrow.

Firedancer

Mert's View on Firedancer

Mert mentioned the recent buzz around Firedancer, citing Jerry's view that the project may be overvalued and mentioning that it does indeed slow progress in the early stages as ANSA engineers and other engineers need to align on certain matters and develop from there. He asked Anatoly for his opinion on whether once the specifications and interfaces are clear, faster iterations can be achieved.

Anatoly on the Design and Implementation Process

Anatoly explained the three steps: design, implementation, and test validation. He believes the design phase may take longer, but implementation can proceed concurrently, while testing and auditing phases should be faster as the probability of two independent teams making the same errors is lower. He noted that Ethereum tends to release all target features with each major version release, whereas Solana sets a release date and features that are not ready by then are dropped, hence Solana has a faster release cycle.

Accelerating the Iteration Cycle

Anatoly believes that theoretically, the iteration cycle of two teams can be expedited as long as core engineers are willing to release quickly. He emphasizes that cultural context is also crucial, with both teams working in high-pressure environments, able to respond and execute rapidly.

The Challenge of Coordination and Execution

Mert then raised a third point on coordination and execution, assuming that there is no execution capability in the development work, is this correct.

Anatoly stated that one of the significant changes he was involved in was moving the account database index out of RAM. While he could design and propose a solution, to successfully implement it, a full-time engineer focusing on this task was needed.

Individual Role and Influence

Anatoly believes that as an Individual Contributor (IC), he hoped to focus on Firedancer's development, but in reality, his time is spread across many different projects. He found that his most significant impact came from defining the status of issues, such as the multiple concurrency leader problem or MEV auction problem, proposing solutions, discussing with the team, and reaching consensus.

Design Cohesion and Implementation

Anatoly emphasized that once a design is approved, as discussions deepen, the design gradually coalesces and solidifies. When he senses the increasing urgency he foresaw, the team already has a design foundation, and the next steps are implementation and testing. His role is akin to a Chief Engineer in a large company, primarily responsible for coordinating various teams, assisting them in problem-solving, and reaching consensus.

Solana Phone

Mert asked Anatoly whether this meant he believed successful individuals like Jack Dorsey and Elon Musk could coordinate and execute while simultaneously launching a phone.

Anatoly's Trust in the Team

Anatoly stated that he does not bear all the responsibility alone but has an outstanding engineer and an excellent general manager who together are responsible for the execution of the phone project. He emphasizes that his role is to set the vision, believing that building a trustworthy phone platform is possible. He mentioned that the Android and iOS firmware are cryptographically signed, providing a trust foundation for the entire platform.

The Importance of Cryptographic Signature

Anatoly further explains that during firmware updates, the signature is verified, and this process is key to the overall security. He envisions that if companies like Apple could control cryptographic signature certificates through a DAO (Decentralized Autonomous Organization), it would disrupt the concept of existing software platforms.

Setting Vision and Team Execution

Anatoly notes that his role is to set the vision and motivate the team to sell more phones to give meaning to the project and ultimately achieve the goal of the entire ecosystem controlling its firmware. He is not involved in day-to-day execution work. He mentions that Elon Musk's way of working is to set a big goal and then find an engineer who can see it through from start to finish. He believes that by giving this engineer enough funding and time, they can complete the entire project.

Mert's Discussion on Business and Ideals

Mert further explores if the success of this phone project and disruption of the existing market dynamics would lead Apple to lower its fees. Anatoly believes that this change is to prevent small to medium software companies from feeling like they are paying a ransom to Apple in the form of a 30% fee, which can promote more productivity and software development.

Integration of Ideals and Business

Anatoly emphasizes that only when this project is successful in business terms can it achieve its ideal goal. He points out that Apple must see competitive pressure from a growing and commercially viable ecosystem to change its fee structure. Therefore, this project must find a product-market fit and remain self-sustainable. He believes that this does not hinder its potential to change the world because by lowering fees, the market economy will transform, benefiting consumers.

Competition with Apple and Google

Mert asks Anatoly if he believes they have the capability to compete with the world's largest companies—Apple and Google, and what gives him such confidence.

Anatoly's View on the Current Market

Anatoly states that a 30% commission is clearly excessive, and this issue has already attracted a lot of attention, including Tim Sweeney's lawsuit against Apple and Google. He points out that this "rent-seeking" behavior from Apple and Google has been troublesome for businesses that rely on these platforms for distribution. Consumers are not aware of these hidden fees, as 30% is deducted by Apple from the amount they pay to the applications.

Challenge of the Solution

Anatoly emphasized that the key to solving this problem lies in how to break the existing fee model, which is essentially a network creation issue. He believes that blockchain technology excels in the financialization of digital assets and scarcity, unlike the traditional Web2 model. He acknowledged that while this idea is promising, it could also fail.

Reasons for Failure

Anatoly pointed out that the reason for failure is not because application developers don't want lower fees, but because an effective way to leverage the incentives provided by cryptographic technology to scale the network has not yet been found. He stressed that this is not a product or business model issue but rather a challenge of truly driving user behavior change to make them willing to switch networks.

L1 Business Model

Mert began discussing ZK (Zero-Knowledge Proof) technology and asked Anatoly Solana about his vision in this area. He mentioned that future blockchains might rely entirely on ZK technology, requiring only proof validation without the need to perform all operations on a full node. He inquired if Solana has any relevant plans.

Anatoly's Explanation of Asynchronous Execution

Anatoly responded that understanding his views on validators would be apparent if one were to read his previous article on asynchronous execution. He mentioned that multiple validators could share a common prover to verify the state. This means that different trust models (such as Te or ZK1) could be used, and once the application bundles the entire asynchronous execution and computes the snapshot hash, this goal can be achieved.

ZK Compatibility with Solana

Anatoly emphasized that fully verifiable ZK bundling is not something Solana lacks. He stated that asynchronous execution allows for computing the snapshot hash regardless of the trust model used. He pointed out that running one's own full node as a user has no impact on it, no matter the environment.

Solana's Business Model

Anatoly further elaborated on Solana's survival strategy, which involves having a viable business model. He believes that the only L1 business model is priority fees, which align with Maximum Extractable Value (MEV). This means that it is necessary to build Rollups that generate their own math and have external sorting on L1, with these Rollups being a form of parasitic relationship on L1.

The Importance of Competitive Environment

Anatoly believes that these competitive environments are beneficial, enabling each other to become better. He mentioned that, like LeBron, great athletes want to compete against the best opponents rather than participate in high school leagues. He noted that while other technologies (such as SVMs) are also advancing, this is different from the core philosophy of the Solana ecosystem.

Differences Between ZK Technology and Solana

Anatoly concluded by saying that there is a fundamental difference between ZK technology and other technologies in the application on Solana and Ethereum. He mentioned that Solana's lightweight protocol is excellent because its ordering is done on the Solana mainnet by Solana validators. This mechanism gives Solana a unique advantage in handling transactions and executing smart contracts.

Bandwidth

Mert's Theoretical Exploration of Bandwidth

Mert presented a theoretical example where bandwidth is maximized, latency is reduced as much as possible, Moore's Law is fully utilized, and only a bit of additional hardware is needed when the channel is saturated. If it is assumed that cryptocurrency adoption does indeed increase, what would happen?

Anatoly's View on Network Saturation

Anatoly expressed that even with increased bandwidth, it would still not be possible to boot up another network because Solana's full nodes have already saturated every Internet Service Provider's (ISP) bandwidth, leaving no room for others. He emphasized that Solana has already "eaten up" all available bandwidth.

Relationship Between Bandwidth and TPS

Anatoly further explained that nearly every mobile phone globally can reach 1 Gbps bandwidth, which means that with the current lower efficiency, Solana's Turbine mechanism can process 250,000 transactions per second (TPS). He considered this to be an astronomical number and stated that bandwidth saturation must first be achieved before discussing other issues. He pointed out that Solana is currently lagging by 250 times in terms of load and needs to achieve a 250x improvement to even start considering other issues.

Current Technological Level

Anatoly emphasized that the 1 Gbps technical standard has been around for 25 years, but Solana has not yet reached this saturation point. He mentioned that although the Fire Dancer team demonstrated this capability in a lab environment, there are still many other issues in a real-world commercial setting that need to be addressed to effectively leverage these technologies.

Mert's Question on the Competitive Environment

Lastly, Mert inquired how Solana plans to compete in terms of transaction volume when Ethereum already has higher-quality assets due to its existing security moat, especially if the quality of assets or stablecoins is not high enough. What should change?

Anatoly's View on Assets

In response, Anatoly suggested that Ethereum's assets could now be referred to as "traditional assets" and believed that a large number of new assets need to be introduced. He stated that this narrative must change, highlighting Ethereum as a platform for "traditional assets" to attract new attention and usage.

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