Fortune Magazine Special Report: How Solana Labs and its Founders Build the Core Layer of Web3?

Original Authors: Anne Sraders, Declan Harty

Original Title: 《How Anatoly Yakovenko's crypto startup Solana Labs is building what investors think will be a core layer of Web3》

Translation by: Linqi, Chain Catcher

The warm Miami breeze sways the palm trees, and the entire block is drenched in purple light. It's just past 10:30 PM in Wynwood, an artsy neighborhood known for its murals. A small group of people passes under a large purple archway and goes through strict security checks. On a lamp post outside, a purple flag reads "Solana Miami" on one side and "vibe. mint. build." on the other.

Inside a huge white tent, the room is packed with disheveled men in their twenties, developers in shorts, and women in sandals. In one corner of the tent, a few people ironically vape next to a sign that reads "No Smoking, No Vaping," while the music from the DJ drowns out most of the conversation.

But this isn't a hot new club; it's Solana's Hacker House.

A prominent Ethereum challenger team from the active blockchain industry took over a block in Miami at the beginning of April, hosting a six-day gathering for developers, programmers, founders, and NFT creators to network, learn, and create projects on Solana. This is just one of the many lavish events the Solana Foundation (a branch of the startup Solana Labs) has held in various cities in recent months. It also serves as a physical manifestation of the company's reason for existence: to incentivize developers to experiment and collaborate on projects on the Solana blockchain, potentially building the next popular application that attracts a large number of users to the protocol.

The founders of Solana ambitiously hope it will become a "useful" blockchain, serving as an "execution layer" to support projects seeking scalable and affordable technology, enticing more people to integrate blockchain into their daily lives. To this end, Anatoly Yakovenko, co-founder and CEO of Solana Labs, stated in an interview with Fortune in Miami that, besides having a top-notch team developing projects on Solana, "it's very important to support those informal builders and developers because some of them will have that spark, that lightbulb moment."

From NFTs to DeFi, Solana has become one of the hottest commodities in the crypto world last year, attracting the attention of heavyweight crypto figures like SBF. SBF stated via email to Fortune, "In the native Web3 world, Solana is poised to become one of the core layers for most financial and information transfers."

Thanks to the low costs and fast speeds of the Solana network, this still-testing network has attracted developers of all sizes to build a wide variety of applications and projects on it. Its native token, SOL, despite a recent crash, has seen its value rise by 6500% since early 2021 (meaning that a $100 purchase in January 2021 would now be worth over $6500). According to the attendance at Solana's Hack House events and hackathons, David Nage, portfolio manager at crypto investment firm Arca, noted, "These events have attracted a large number of developers to the Solana ecosystem."

Arca's CIO Jeff Dorman told Fortune that, in terms of recognition and market hype, "for a long time, the digital assets people have heard about were Bitcoin and Ethereum. In the past 18 months, Solana has made it onto that list."

The network's growth has been accompanied by "growing pains." In recent months, Solana has struggled with multiple outages under high usage. Meanwhile, Ethereum, the undisputed leader in the blockchain and DeFi space, is about to undergo a transformation that may make it more scalable.

Some experts, including Dorman from Arca, believe that in the long run, blockchains will need to "carve out a niche market" (like NFTs or gaming) and specialize in competing. However, the founders of Solana Labs are reluctant to limit themselves to one market, believing they don't need to. Raj Gokal, co-founder of Solana Labs, thinks this "sells the vision of being 'the execution layer for everything' too short."

Instead, Yakovenko's vision for Solana is not to eliminate all other challengers, which may be a surprising ambition for a CEO of a company. At 41, he expresses a desire to create something akin to a blockchain operating system that allows "as many people as possible in the world to use cryptography to do whatever they want."

The Sun Rises on Solana

Conceived by systems engineer Yakovenko, Solana was founded in 2017, after he had worked at semiconductor giant Qualcomm.

Yakovenko came to the U.S. from Ukraine as a child in the early 1990s. As a teenager, he became fascinated with programming and learned his first programming language, C. Sitting at a long table in the Solana Hack House in Miami, Yakovenko told Fortune that the internet boom was in full swing at the time, "There was this magical possibility of writing a piece of code to solve some huge problems for the world," and then becoming the next Steve Jobs or Bill Gates.

When the internet bubble burst, Yakovenko was still in college. "Some advisors did tell me, 'Maybe computer science isn't a good career choice,'" he said. But Yakovenko persevered, and after a failed startup, he found a job at Qualcomm, where he worked for nearly 13 years on distributed systems, according to his LinkedIn, before leaving in 2016.

In 2017, Yakovenko had an idea. He had been working on an amateur project with friends to build deep learning hardware. To offset the costs of building all the GPUs, the two started mining with cryptocurrency. At that time, Yakovenko was already well-versed in the crypto market. But one night, after reportedly drinking two cups of coffee and a beer, he stayed up until 4 AM and had a lightbulb moment. He realized that the passage of time itself could be used as a data structure to help order transactions and events on the blockchain.

This seemingly far-fetched conclusion would become part of what is now known as "Proof of History," and a key reason why Solana can operate at lightning speed compared to Bitcoin and Ethereum. (Solana uses a PoS consensus mechanism combined with Proof of History to validate transactions on the blockchain.) Yakovenko also brought in several other co-founders, including Qualcomm colleagues Greg Fitzgerald and Stephen Akridge.

Solana co-founders Raj Gokal and Anatoly Yakovenko photographed in Miami on April 7 this year

The project was initially named Loom, but a project called Loom Network, based on Ethereum, prompted a renaming. At the time, Yakovenko and several of his co-founders were surfing at Solana Beach in California, and Yakovenko thought that since many companies were named after California locations, they could do the same. He said, "We were arguing on Slack, and I finally suggested the name 'Solana,' and that ended the conversation."

Solana Labs currently has 71 full-time employees and claims that Solana can process over 50,000 transactions per second (though the project's limitations may be in the hundreds of thousands). However, if you look at Solana's website, the transaction volume at any given time is only about 1,000 to 2,000, which Yakovenko explains is due to demand not reaching that level. Meanwhile, its costs are just a fraction of what other blockchains like Ethereum require. According to crypto research firm Messari, the average transaction cost on Ethereum is about $12, while on Solana, it's about $0.00025.

While the Solana protocol was developed and launched by Solana Labs, it exists as an independent blockchain. To help support its development and fund research on the protocol, Solana Labs transferred some of its SOL and all intellectual property to the Switzerland-based nonprofit Solana Foundation (Solana Labs declined to disclose how much SOL the company currently holds).

A "Thoroughly" Systems Engineer

At the Hacker House in Wynwood, Yakovenko casually leans against a table, chatting with a small group of people gathered around him. To his right is a large room filled with dozens of developers, and through another archway, there’s a gaming center with classic games like Space Invaders. Nearby, there’s a designated area with a whiteboard labeled "nerd cage," filled with many computers.

Dressed in a gray sweatshirt, shorts, sneakers, and a black baseball cap, Yakovenko looks just like any other developer, not like the CEO of the star company hosting this event.

Anatoly Yakovenko photographed in Miami on April 7, 2022, by Alfonso Duran

According to a16z general partner and Solana investor Ali Yahya, Yakovenko is a "thoroughly" systems engineer. Yakovenko speaks in a very analytical and technical manner, mixed with a bit of calm contradiction, sometimes even nervousness.

But since caffeine makes him "too jittery," his preference is tea or decaf Americano. Yakovenko says he has gotten into the habit of writing code in the mornings and believes that surfing or biking helps him think through problems. "If I can ride my bike for two hours, I come back feeling more energized and have made or internalized many decisions," he says. Like some other Solana founders, Yakovenko is also a triathlete and underwater hockey player. He claims he can swim three laps in a pool with fins without needing to breathe at his peak.

This spirit of dedication applies not only to his athletic activities. Gokal describes himself as "strictly the COO," and he recalls that the first time he met Yakovenko was at the home of his friend, Solana co-founder Eric Williams. He remembers that Yakovenko, then working at Qualcomm, was "slumped on a brown leather couch, staring into space, probably thinking about some tricky problem."

Unlike many co-founders from Qualcomm, Gokal came from a healthcare startup, joining as a co-founder at the end of 2017, according to his LinkedIn. He says Yakovenko often becomes so engrossed in his work, "it's like he enters another dimension." Gokal recalls one time when he was feeding Myro, a dog that frequently visited the office, at his desk. "Toly," as many call him, "came over to chat with us, and then… he didn't even look, just reached into his bag and started wolfing down whatever was in there," Gokal recalls. "He didn't notice. He saw all of us laughing, and he was like, 'What?' We said, 'You're eating dog food,' and he just kept eating," Gokal laughs.

As for Yakovenko, he speaks with self-deprecation, ironically stating that he was "very popular" in high school, messing around with Linux in programming class, trying to "break the internet"; and joking that he is the "life of the party" (a16z partner Yahya jokes that after a few drinks, his systems engineer-like way of speaking "becomes more pronounced as his self-control diminishes").

Yakovenko is more of a visionary programmer than a typical CEO: when asked what he thinks the crypto space will look like in ten years, he pragmatically responds, the most optimistic scenario is, "I think a billion people will have self-custody capabilities, forming a DAO and shutting down every coal power plant."

According to Gokal, it is this focus and vision that enable Yakovenko to attract supporters, including venture capital firms.

"He is a dream chaser. He really just wants to create something cool, and maybe, at the same time, hopes to change the world a little bit," Jump Crypto president Kanav Kariya says of Yakovenko. "Their whole team is moving forward with that vision."

Venture Capital Betting on Solana

A year after Yakovenko's lightbulb moment, in the spring of 2018, he met the person who would ultimately help him realize his vision. Venture capitalist Yahya joined the renowned a16z as a partner focused on emerging cryptocurrencies. On April 2, when Yakovenko pitched Solana to him, he was guest lecturing in a course on "Blockchain, Cryptoeconomics, and the Future of Technology, Business and Law" taught by Berkeley professor Dawn Song.

"It was a time at the end of a class when students come up to ask questions," Yahya recalls, "Anatoly came over and said, 'I'm developing a high-performance blockchain called Solana.'"

Yahya said he had doubts about how blockchains actually work, and for the next few years, the two kept in touch, occasionally grabbing a drink, discussing the crypto industry, and catching up on Solana's progress. When the company finally felt the blockchain was robust enough to invest in, they came in with big chips: a16z, along with Polychain Capital, led a funding round in June 2021, investing $314 million through a token private sale, providing Solana Labs with ample new funds to develop the protocol.

Other companies participating in the private sale included Alameda, CMS Holdings, and even German music producer Boys Noize.

This wasn't Solana Labs' first time seeking funding to achieve its ambitions. According to The Information, by the end of 2018, the company's co-founders sold nearly 80 million tokens to companies including Multicoin Capital and 500 Global (formerly 500 Startups). Christine Tsai, CEO of venture capital firm 500 Global, told Fortune via email that Yakovenko "has an extremely sharp and pragmatic ability in the crypto industry, including opportunities and limitations." 500 Global invested $250,000 in tokens in Solana's seed round (the company declined to disclose how many tokens it holds).

SBF, NFTs, and DeFi: Solana's Expanding Ecosystem

For crypto billionaire SBF, behind FTX and Alameda Research, Solana has a real chance to become one of the last winners in the crypto revolution.

The 30-year-old first learned about Solana in early 2020 and was impressed. He told Fortune via email, "They are by far the most serious Layer 1 we’ve talked about that continues to expand its blockchain and broaden its opportunities." Eventually, FTX and Alameda Research revealed plans to create a DEX that would run on Solana, called Serum. According to DeFi data aggregator DeFiLlama, the DEX is now one of the largest DeFi protocols on the network.

Even so, Solana remains relatively small in the DeFi space. According to DeFiLlama's data, activity on the Solana blockchain accounts for only about 3% of the total value locked across all chains. In contrast, Ethereum holds about 56% of the share. However, according to observers and Solana founders, after comparing speed with companies like Nasdaq and Visa, the Solana protocol has made a significant impact in the trading world.

Take a look at Pyth Network, a Solana-based project that collects and disseminates trading data: so far, it has amassed a contributor directory of heavyweight Wall Street players, including high-frequency trading platform Hudson River Trading, market maker Virtu Financial, and exchange operator MEMX. David Easthope, a senior analyst at financial services research firm Coalition Greenwich, stated, "People see Solana as a natural testing ground and a place to have a seat in the future of DeFi."

Jump's Kariya, a founding code contributor to Pyth and involved in the 2021 token sale, believes Solana has a lot of potential beyond DeFi—depending on the direction the community wants to take. "It's hard to predict how the wave will utilize the capabilities it has," Kariya says. He adds that Solana may retain its position as a DeFi hub, but it is also rapidly expanding into other areas like NFTs and gaming, "it has a lot to do."

Or, as co-founder Gokal puts it, "Solana could be the DeFi chain… There is a clear path to win in that category," he suggests. But once the blockchain can build the performance requirements needed for such projects, "why not use that performance and security to solve the simplest things for users," Gokal asks.

In Yakovenko's estimation, it's more about the product than the protocol: if you have "compelling applications, that's where users will go."

At Solana Miami Hacker House on April 7, 2022.

In fact, other types of projects are taking off. NFT marketplaces built on Solana, such as Solanart, Fractal, and Magic Eden, have gained increasing attention—including from venture capitalists. At the end of 2021, Reddit co-founder Alexis Ohanian's venture capital firm Seven Seven Six and Solana Ventures pledged $100 million to develop social media projects on Solana. Meanwhile, developers seem to appreciate Solana's new payment framework, Solana Pay, as well as the blockchain's NFT capabilities—considering the number of NFT creators and users participating in the Miami Hacker House, this is not surprising. According to NFT data aggregator CryptoSlam, Solana is the second most popular blockchain for NFT sales.

Connor O'Hara, a software engineer at the oracle project Switchboard, uses the Solana blockchain to provide off-chain data feeds (like USD prices), and while working at the Miami Hacker House, he told Fortune that some people prefer Solana's "programming model" over the Ethereum Virtual Machine. "Once you get the hang of it, it's hard to make serious mistakes," he believes.

Many Growing Pains

However, despite the growth of the Solana blockchain proving its promise, it has also proven to be a complex issue.

Since last fall, the frequency of outages on the Solana network has been increasing. A 17-hour outage in September marked the most extreme case, but that was just the beginning. According to Bloomberg, there were six different outages just in January.

"Solana is currently building what may be the most complex distributed system in the world. It's a very difficult thing to do, and they can send messages very quickly and stop them when errors occur," Jump's Kariya told Fortune. "Naturally, we will see problems along the way; it's a growing pain. But we remain optimistic about the design of the system and all the community built so far."

For some developers, the interruptions come at inconvenient times, like Irvin Cardenas, co-founder of OpenDive, which is building a game and NFT wallet project called Kiyomi on Solana. Cardenas told Fortune during breaks at the Hacker House event that during a live demo he conducted for existing partners and potential investors last September, there were issues with Solana's blockchain that prevented the transfer or upload of NFTs—the key components of the project.

Nevertheless, Cardenas continues to use Solana, calling it "the most developer-friendly or perhaps the most practical blockchain." Regarding the outages, "If you're building something new, things are bound to go wrong," he says.

Yakovenko is well aware of the consequences of outages, calling solving the issues the "top priority" today, "it has definitely disappointed a group of people."

The head of Solana Labs stated that while the "root causes" of the outages vary, "whenever you scale by 10 times, you encounter new engineering challenges regarding spam and traffic on the network." "When it goes from a million to ten million, there will be another challenge. That's part of life."

The Solana community is also not immune to the broader attention of the crypto market. For example, in the eyes of some market observers, including Messari research analyst Chase Devens, centralization has become a concern for the Solana network. He told Fortune, given the demands for speed and throughput on the blockchain, Solana has set higher barriers to becoming a validator. However, Devens said that if all goes according to plan, these costs should decrease over time.

"They are really building for growth," Messari manager Aidan Mott added, "They want to bring in the next million users. So they are willing to take shortcuts that other projects historically haven't taken."

Solana Labs told Fortune via email, "Solana is decentralized, but decentralization is a journey," adding that the Solana blockchain has over 1,600 validators and 1,400 RPC nodes, which are growing at about 100 per month across six continents, all independent of Solana Labs and the Solana Foundation.

But most importantly, the Solana project Wormhole's "cross-chain bridge" was hacked in February, with approximately $320 million worth of cryptocurrency stolen, marking one of the most severe hacks in the still-early DeFi world. Cross-chain bridges connect different blockchains by allowing people to transfer tokens from one network to another, typically through a process called wrapping. For months, concerns have been raised about cross-chain bridges operating across the entire market, including Ethereum founder Vitalik Buterin. The Wormhole hack stemmed from a vulnerability in the Wormhole contract code. "Everyone is still digesting this," Easthope from Coalition Greenwich said.

Yakovenko said that when he received the call notifying him of the hack, he felt like "when you're driving and you feel like you're about to have an accident, that feeling in your gut." He credited all the praise to Jump, which acquired Wormhole developer Certus One last August, discovering and fixing the vulnerability that led to the hack and covering the resulting losses.

Solana is still experiencing its own bumps. On April 8, Yakovenko tweeted, "The network's performance has been very poor over the past two days, even without excessive load." (Solana Labs confirmed that a bug caused part of the network to "overestimate" the "computational cost of certain transactions," adding that a fix has been rolled out and "performance has significantly improved.")

In some ways, users have recently become more wary of the protocol: in recent months, the total value locked in Solana has dropped from about $15 billion in December to $6.6 billion this week, according to DeFiLlama's data. Meanwhile, according to CoinMarketCap, the SOL token has fallen over 60% from its peak in November 2021 and is currently hovering around $100. Arca's CIO Dorman said, "Solana had a significant lead in hype and momentum, and it has now lost that momentum." However, Dorman acknowledges, "this could also turn around."

According to charts from Solana data provider ChainCrunch, as the Solana Labs team likes to point out, the unique programs used on the blockchain are steadily increasing.

Regarding the outages, both Yakovenko and Gokal are not overly concerned about long-term issues. "In general, people's memories are short, and in the crypto space, memories are even shorter," Gokal argues. He says Solana is currently in a "longer phase than anyone would like," and users experiencing similar transaction failures "are more than we would like," noting that NFT marketplace OpenSea just started integrating Solana-based NFTs into its platform last week, and the influx of users often makes "these issues very apparent."

A Pew Research Center survey in 2021 showed that blockchain technology— not just Solana—has a long way to go to achieve mainstream adoption, especially considering that only an estimated 16% of Americans are involved in the market.

But back in Miami, the Hacker House is filled with programmers, founders, and crypto enthusiasts at work. Perhaps one of the engineers typing away on a laptop is preparing for their own moment of brilliance for the next big application—one that will ultimately lead everyone and their grandmothers to use blockchain-driven products.

Or at least, that's the hope.