Bitcoin has dramatically altered the financial world over the past decade and a half. However, the blockchain that underpins the most dominant cryptocurrency in the world can process only five to seven transactions per second. In contrast, an impending update to Solana will allow the blockchain to process roughly one million transactions per second.
In the report Understanding Solana for Financial Services, Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research, examined the upgrades in the works for Solana, its potential to make a significant impact on financial services, and the emerging use cases for this powerful technology.
A Robust Architecture
The Solana blockchain not only will be much faster than bitcoin but it will also be 10 to 15 times faster than credit card rails like Visa and Mastercard. This substantial increase in Solana’s throughput will come to fruition through the Firedancer upgrade.
“This isn’t just theoretical,” Hugentobler said. “Jump Trading—the brains behind this upgrade—they’re notorious for high-frequency trading. Coming in and providing this extra validator not only diversifies the code base, which adds additional security, but obviously adds that crazy throughput with 400-millisecond finality. It’s not just theory—they’ve had multiple demos where they are executing these volumes of transactions live.”
Scaling to this speed would not be possible if Solana didn’t already have robust architecture in place. One of the key benefits of the network is it reduces counterparty risk—the chance that an unknown third party doesn’t hold up its end of the transaction.
In addition to speed and security gains, Solana is less expensive than the leading blockchain, Ethereum. Solana’s fees are less than a penny compared with Ethereum transaction fees, which can range from $1 to $50.
The speed, security, and cost benefits of Solana make the blockchain a strong fit for financial services applications. Once the Firedancer upgrade is live, Solana can do even more to eliminate many of the issues financial services firms have faced.
“Their architecture, with this upgrade, supports real-time settlement in traditional payment rails,” Hugentobler said. “But what’s really cool about all this is it eliminates batch processing, which is a significant pain point in legacy systems.”
Compliance in a Box
A significant barrier that has kept many institutions from fully investing in digital assets is concerns about the security of financial data. Although blockchain is inherently a secure and transparent network, financial institutions have specific compliance and risk management demands.
To meet this need, Solana has introduced technologies like token extensions, which can protect private data on the blockchain. Token extensions enable developers to create tokens with unique features designed for specific use cases.
For example, token extensions can give institutions the capability for confidential transfers, which allow merchants to maintain confidentiality of transaction amounts while financial institutions have visibility into other transaction details for compliance purposes.
Token extensions can also enable memo fields, which allow additional information to be included with payments.
The blockchain’s token extensions were a key factor behind PayPal’s decision to bring its stablecoin, PYUSD, from Ethereum to Solana. The payments giant credited the speed and efficiency of the blockchain as the driving forces behind the success of PYUSD and said the added customization provided by token extensions meant that Solana essentially provided “compliance in a box.”
A Compelling Hybrid
As powerful as token extensions are, they are also due for an upgrade. Helius Labs and Solana Labs recently announced an extension of the confidential transfers token extension called confidential balances.
Confidential balances are built to enable private token transfers within institutional compliance. In addition to tools that protect data, confidential balances also allow for partial confidentiality, which means organizations can determine whether to fully conceal specific token amounts or just to mask certain aspects.
Some of the use cases for this added functionality are in payroll, B2B payments, and other scenarios where particular regulatory requirements come into play. Solana has also developed auditor keys, which give institutions more insight into transactions without overreaching on compliance.
All these innovations mean Solana is poised to deliver on more of an institution’s needs.
“Solana with this upgrade has enabled token extensions which allow KYC, AML, compliance, transaction freezing, things like metadata tagging, confidential transfers, and real privacy transfers—all on a public blockchain,” Hugentobler said. “These extension capabilities enable financial institutions to operate like a private type blockchain, but it’s all on a public blockchain, which is a compelling hybrid model in my eyes.”
Moving Past Speculation
These characteristics have made Solana a top choice for tokenizing real-world assets—which can be an intensive process. For example, Franklin Templeton recently moved the third-largest tokenized money market fund, valued at $594 million, onto the blockchain.
However, the use cases for Solana can go much further.
“Solana is being used by big names like Visa, PayPal, and Franklin Templeton,” Hugentobler said. “They’re using it for stablecoins, cross-border payments, tokenized funds, treasury settlement, that sort of thing. It’s moved past the speculative phase; it’s being used for real use cases.”
The Firedancer upgrade should make Solana an even more compelling choice for financial services companies, once it is live.
“Frankendancer is the hybrid upgrade between Firedancer and what’s existing, a smooth process that’s fully live,” Hugentobler said. “It has consensus live voting and all that sort of thing on the back end. Firedancer is live, but it doesn’t have the consensus model fully live, so the voting and things like that are not 100% quite yet, but they are saying it should go fully live this quarter.”
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