In the past two weeks some news items have significantly impacted, in our view, the world of cryptocurrencies and digital assets in general. They are important because they concern two primary players in this universe: Coinbase and Solana; an exchange and a network.
For Coinbase a week of light and shadow. Just on the heels of its joining the S&P 500, news leaks of a cyber attack suffered last December. And here comes the first disturbing implication: how come this news comes out after four months? Perhaps in this alarming question we also have some good news. In fact, it does not seem that the attack has a purely IT matrix related to poorly written code (as in the case of Bybit – to mention the most recent and striking one), but that it stems from the corruption of some collaborators. This would explain why the news is only now coming out: the facility was not aware of the attack until a ransom was demanded. These kinds of attacks perpetuated through corrupt acts can happen in any facility, not just in players in the cryptocurrency market, which, in this instance, seems to homologate to the world of TradFi. In fact, the critical issues that become most interesting are precisely those related to cyber-security being the primary risk in the blockchain world. Neglecting the unmistakable aftertaste of the Wild West (Coinbase is a U.S. exchange) related to the bounties offered for criminal beacons, the damage seems very limited (maximum $400 million) and not even remotely comparable to that of Bybit.
Coming to the lights, the good news is definitely Coinbase’s acquisition of Deribit a crypto-exchange that started basically as a pioneer of options on crypto-currencies and has now definitely become the benchmark for derivatives. Initially – for basically AML reasons – Deribit accepted contributions only in crypto-currencies and offered inverse derivatives evolving to the current offering thanks also to stablecoins. With the purchase of Coinbase, Deribit thus hits its goal of entering the much-coveted U.S. market.
And then there is Solana. After Visa’s news that it intends to use Solana’s network to settle stablecoin transactions, it is these hours that some large financial institutions have announced that they will generate tokens on Solana that represent traditional securities starting with bonds and stocks. This interest in the Solana blockchain is driven by its high performance (in terms of transaction processing time), widespread use, and low cost. Be careful, however, not to overemphasize this news. We are in fact talking about R3, a British software house that counts several renowned financial institutions among its clients and that has closed a deal with Solana Foundation to allow its clients to use the network of the same name. R3 already has more than $10 billion in tokenized assets that nonetheless reside on a private blockchain named rope owned by R3 that is now being connected to the public Solana network granting R3’s clients the option to host their tokenized assets on a public network or stay on the private one. Now it is a matter of seeing how many will take advantage of the new option and join the project. Initial statements from the top management of institutions such as Euroclear and Clearstream (mainstays in securities custody and transfer) seem enthusiastic. But we await the proof of the facts.
However, we ask ourselves: Does Solana have what it takes to meet this challenge? This news gives us the cue to understand more about the technicalities of the network.
Solana is famous for inventing and adopting an innovative, as well as unique, consensus algorithm: the Proof-of-History (PoH) which basically consists of building a logical clock by exploiting standard hash functions. When a transaction is originated on the Solana network, the PoH assigns it a cryptographic timestamp that is objective and cannot be tampered with by ensuring the sequence of transaction creation. In other words, the network is able to internally generate an immutable and consensual sequence of events unlike other blockchains that must rely on a centralized time-measuring source (such as the atomic clock in Boulder, Colorado) to have an objective timestamp-a contradiction for a distributed system such as the blockchain must be. PoH prevents block validators from having to worry about checking the history of the transactions themselves by being able to focus on other aspects and thus gain time. This explains, in part, the network’s efficiency, i.e., the high number of TPS (Transaction Per Second) it can potentially process, which attracted VISA’s attention. The other efficiency elements relate to the validation of blocks through Proof-of-Stake (PoS) and the multi-threading architecture that allows for parallel computation and thus simultaneous validation of (non-overlapping) blocks conferring an increase in processing speed that is indeed remarkable. And this is possible, again, because of PoH which allows each individual node to independently verify the chronological sequence of transactions.
So far we have talked about transactions involving only the network’s native cryptocurrency, the SOL. But in fact this all applies to smart-contracts as well, and it is-we bet-the main feature that caught R3’s attention and convinced him to sign the agreement.
As the trilemma facing any architect or designer of a new blockchain well teaches, excelling in one of the desirable features of the new network (decentralization, security or speed) has a cost paid as a deficiency of the other two. The cost that Solana pays is represented by the tightness of the network and thus we might say that it pertains to the security of the network. Solana users well remember the outages that have occurred repeatedly since September 2021 as a result of cyber attacks that messed up the network’s logical clock through DDOS attacks or even the outages that occurred in May 2022 due to massive interactions following the launch of a new project.
The bet that awaits Solana is the network’s resilience in the wake of the new challenge posed by R3, which should – at least these are the expectations – increase the number of smart-contracts following tokenizations of traditional securities. Winning this challenge would mean winning the battle for positioning that sees it as the most formidable rival to the Ethereum network counting among other things on more than 1,000 validator nodes that give it a certain robustness (far from Ethereum’s nearly million nodes, however).
Disclaimer
This post expresses the personal opinion of the employees of Custody Wealth Management who wrote it. It is not investment advice or recommendations, personalized advice and should not be considered as an invitation to conduct transactions in financial instruments.
