Solana’s funding feud raises familiar complaints

If you were an early backer of Solana, a leading “Ethereum killer” blockchain targeting decentralized finance (DeFi) and other decentralized application (DApp) developers, you are probably rich.

One of the many blockchains that sought to create a better smart contract platform than the overloaded, overvalued and undersized Ethereum, Solana’s SOL token started 2020 at under $2.50. As of March 15, it was $84 and hitting $260 during the bull markets of 2021, making its way into the list of top 10 cryptocurrencies by market capitalization.

See also: PYMNTS Blockchain Series: What is Solana?

Solana investors, like others trying to build a community of developers and projects before Ethereum handled the long-delayed passage of a slow and power-hungry Bitcoin-style proof-of-work, were looking for token prices to rise. as the blockchain became operational and then began to attract developers.

The seed and venture capital firms that participated in the half-dozen funding rounds through March 2021, as well as the baker’s dozen companies like Andreessen Horowitz and Polychain Capital that backed it to the tune of $314 million in the June 2021 Initial Coin Offering (ICO) also caught on as investors flocked in thereafter and the price of SOL soared.

That’s pretty much what happens whenever venture capitalists back a successful company before it goes public.

And it’s also why Solana and other similar Ethereum killers have received the kind of criticism from Ethereum proponents and other members of the crypto community that mainstream businesses, from neobanks to ridesharing apps like Uber, receive all the time: they use seed funding to support operations. while building and expanding a customer base, giving them an unfair advantage over competitors like taxis.

Inflationary rewards

In the case of cryptocurrencies, investors get tokens instead of shares – and note that because the price of these tokens is set by an investment market, the Securities and Exchange Commission says they are also titles and must follow its regulations.

These tokens are sold at very low prices to early investors, who bet they will rise in value as the blockchain attracts developers who create DApps that attract customers.

At this point, you should understand how blockchains are governed and managed. There is, however, something unique to crypto and blockchain: inflationary rewards.

Blockchains are secured and transactions added by people who compete to validate transactions and write them to the blockchain in two ways: block rewards of new tokens minted with each block and transaction fees.

Read more: PYMNTS Crypto Basics Series: What is a consensus mechanism and why is it destroying the planet?

As block rewards are distributed, increasing the total supply of tokens, supply increases and presumably demand and prices fall – hence “inflationary” rewards.

Fight the power?

Last May, Ryan Watkins, an analyst at crypto industry firm Messari, published a chart of the percentage of tokens held by inside investors in 15 major blockchain projects, including Ethereum and Solana.

Solana was made up of 48% insider investors and 13% Solana Foundation, with most of the rest going to funding the ecosystem or attracting users. The much older Ethereum had 20% for early investors and the foundation, with virtually everything else sold to the public.

“The distribution of tokens is critical in determining the distribution of power in blockchains,” Watkins wrote. “Concentrated insider ownership can permanently impair the ability of projects to become credible and neutral public infrastructure. The oligarchy is the system we are supposed to disrupt.

Watkins’ post prompted responses for two of Solana’s founders.

“If there was a way to get a [blockchain] built from the ground up with less venture capital funding, less insider allocation and more public allocation, we would have done it”, Raj Gokal tweeted. “The market was very different back then, and we barely made it.”

Its co-founder Anatoly Yakovenko was less amused.

“The Foundation distributes tokens to those who strive to maximize censorship resistance over a long period of time and demonstrate the operational skills necessary to run an honest replica that can aid in recovery from catastrophic failures,” he said. he declares.

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