What is Solana?
Solana is an open-source, decentralized and highly scalable blockchain protocol that provides a platform for developers to create decentralized applications (dApps). As of October 2021, there are currently over 400 projects being built on Solana. The protocol uses a new timestamp system called Proof-of-History (PoH), which creates a historical record that proves that an event has occurred in a specific point in time, but that also leverages Proof-of-Stake (PoS) consensus mechanisms to help secure the network. Solana can process over 50,000 transactions per second, which is in significant contrast to Bitcoin’s seven transactions per second.
Anatoly Yakovenko began working on the project and published a whitepaper describing Proof-of-History in November 2017. Solana’s continued development is supported by Solana Labs, which is developing the blockchain, and the Solana Foundation, which is a non-profit organization dedicated to the decentralization, growth, and security of the Solana network. Solana’s mainnet beta was officially launched in March 2020 by the Solana Foundation, and in April 2020, Solana Labs transferred the protocol’s intellectual property and 167 million SOL tokens to the Solana Foundation.
What is SOL?
SOL is Solana’s native token serving two primary functions within the network: the token is used to pay for transaction fees and to execute smart contracts. Users can also stake SOLs as part of the proof-of-stake consensus mechanism to validate transactions. SOL is inflationary and there is no maximum supply.
There is currently no timeline for adding on-chain governance so the token is not currently used for voting on development proposals and protocol governance. Solana Labs and the Solana Foundation remain core contributors to the protocol, leading network upgrades and the development of new features. Since March 2018, Solana has raised over 25 million USD through five rounds of token sales, four of them being private sales.
How does SOL staking work?
On Solana, certain nodes called validators process transactions and run the network. Validators on Solana are responsible for the same thing as miners in proof-of-work systems such as Bitcoin: ordering transactions and creating new blocks so that all nodes can agree on the state of the network. Holders of SOL can participate in staking by delegating their SOL to validators. The Solana network pays staking rewards to participants that delegate their SOL.
Wealthsimple Crypto allows you to stake SOL with a minimum balance of 0.02 units. SOL staking rewards are automatically staked by the Solana protocol. For a more detailed general explanation of staking and the associated risks of staking, please refer to the Wealthsimple Crypto Product Risk Disclosure. Additional information regarding staking of SOL on Wealthsimple Crypto is set out below.
Solana validators receive a fee (referred to as a “commission”) based on a percentage of rewards earned by SOL delegated to them. This fee is deducted automatically by the Solana protocol and paid to validators when staking rewards are distributed.
Wealthsimple Crypto arranges to stake SOL with validator nodes operated by the following infrastructure providers:
|Infrastructure Provider||Description||Validator Commission|
|Staked||Based in New York, Staked operates a non-custodial staking platform. Staked was acquired by the Kraken crypto trading platform in December 2021.||10%|
The Solana protocol uses a “leader schedule” to determine which validator is responsible for appending transactions to the Solana ledger at any given time. An epoch is the period of time during which a leader schedule is valid. Each epoch lasts roughly two days.
Warm-Up & Cool-down Periods
In Solana, it usually takes one full epoch before staked SOL starts to earn rewards, which is referred to as the “warm-up” period, and a full epoch after being unstaked before the SOL can be transferred, which is referred to as the “cool-down” period.
Solana imposes a limit on the total amount of SOL that can be staked or unstaked simultaneously. If there is a large increase in staking or unstaking activity, “warm-up” and “cool-down” periods may be longer than one epoch.
Under the Solana protocol, staked assets cannot be transferred until they are un-staked and the cool-down period has elapsed. Despite this restriction, Wealthsimple Crypto allows you to sell or transfer SOL immediately after un-staking it.
The Solana network pays staking rewards from network inflation, that is, the increase in SOL supply over time. The initial inflation rate for Solana is 8% per year. The dis-inflation rate - the rate by which the inflation rate decreases year over year - is -15%. This means that the inflation rate will decrease by 15% each year until the inflation rate eventually reaches the long-term inflation rate of 1.5%.
Solana computes and issues staking rewards once per epoch. Rewards accrued in a given epoch are issued in the first block of the following epoch.
When rewards are received, Wealthsimple Crypto will calculate and distribute your share of SOL staking rewards to your Crypto Account. For each epoch, your share of SOL staking rewards is proportionate to the amount of SOL that you had staked and was warmed up when the epoch began. If you un-stake SOL during an epoch, you will not receive any rewards for that epoch.
SOL staking rewards are automatically staked by the Solana protocol and do not need to be manually staked to compound staking rewards.
Commission rates charged by supported validators are set out above under “Supported Validators”. The validator commission is automatically deducted from staking rewards before they are received by Wealthsimple Crypto. Under commercial agreements between Wealthsimple Crypto and supported validators, validators pay a portion of the validator commission to Wealthsimple Crypto.
Wealthsimple Crypto also charges you a fee equal to a percentage of staking rewards received by you. The amount of the fee for SOL is set out in our Fee Schedule. This fee is deducted when rewards are distributed to you and is in addition to the validator commission.
Custody of Staked SOL
In Solana, a stake account is used to delegate tokens to validators. Stake accounts are different than a traditional Solana wallet address, known as a system account. A system account is only able to send and receive SOL from other accounts on the network, whereas a stake account supports more complex operations needed to manage a delegation of tokens.
SOL staked using the Staking Functionality is delegated from dedicated stake accounts held with one or more of Wealthsimple Crypto’s custodians. Wealthsimple Crypto’s custodians will continue to hold the private keys required to control SOL held in these stake accounts.
On Solana, slashing is a penalty for a validator’s intentional malicious behavior, such as creating invalid transactions. When a validator is slashed, all token holders who have delegated SOL to that validator lose a portion of their delegated SOL.
Currently, slashing is not automatic in Solana. After a safety violation, the Solana network will halt. Other validators can propose that the stake delegated to the validator responsible for the safety validation be slashed after the network restarts.
In the event that a supported Solana validator is slashed, Wealthsimple Crypto will replace any lost SOL in accordance with the terms of the Wealthsimple Crypto client agreement.
How does SOL compare to Bitcoin?
SOL differs from Bitcoin in a few key ways.
First, SOL powers the underlying proof-of-stake process for Solana, a blockchain entirely separate from the Bitcoin blockchain. Since Solana uses proof-of-stake (in addition to proof-of-history) instead of the proof-of-work method of Bitcoin, SOL tokens are staked as part of the validation mechanism, in contrast to BTC which are mined as a result of the proof-of-work algorithm.
The second major difference between SOL and Bitcoin is their age. Solana’s mainnet beta was launched in 2020, compared to Bitcoin’s 12 or so years. Despite this difference in age, however, Solana has rapidly reached a competitive market capitalization and level of token distribution.
However, it should be noted that although SOL is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that SOL will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) It is not clear, but unlikely, that a significant drop in SOL’s value would have a material impact on Bitcoin.
Before trading or staking any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Solana, including an opinion that SOL is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of SOL prior to making it available on Wealthsimple Crypto and has concluded that SOL is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated SOL based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of SOL, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Solana;
- The supply, demand, maturity, utility and liquidity of SOL;
- Material technical risks associated with SOL, including any code defects, security breaches and other threats concerning SOL and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with SOL, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of SOL.
As part of its assessment, Wealthsimple reviewed and considered:
- the design and operation of staking SOL, including:
- bonding/unbonding or warm-up/cool-down periods;
- any limits on the number of active validators;
- the mechanism for selecting validators;
- slashing or similar penalties; and
- token inflation;
- any publicly available security assessments; and
- where feasible, the number and identity of validators participating in staking.
Like all other crypto assets, there are some general risks to investing in SOL. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Please review the Product Risk Disclosure for additional information regarding these risks, as well as other general risks associated with using the Wealthsimple Crypto platform.
Solana presents an elevated short history risk, and in contrast to networks like Bitcoin and Ethereum, where multiple parties participate in development, Solana Labs and the Solana Foundation are the primary participants in ongoing development of the software underlying the Solana network.
Further, Solana Labs, the Solana Foundation, and the Solana community are not under any legal or regulatory obligation to disclose material information to the public regarding their activities. Holders of SOL have no recourse to Solana Labs, the Solana Foundation or Wealthsimple if SOL declines in value for any reason.
WDA has prepared this Crypto Asset Statement based on publicly available information. Although WDA has taken steps to obtain information from apparently reliable sources, information contained in this Crypto Asset Statement may be inaccurate, incomplete or out-of-date. WDA emphasizes that this Crypto Asset Statement is not exhaustive of all risks associated with trading or staking SOL. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that statutory rights in section 130.1 of the Securities Act (Ontario) and similar statutory rights under securities legislation of other Canadian jurisdictions do not apply in respect of this Crypto Asset Statement.
Last updated: Sept 29, 2022