Solana Fee Markets: Fact vs Fiction

The world of blockchain technology is constantly evolving, with different networks experimenting with various approaches to scalability, security, and decentralization. One of the most hotly debated topics in this space is the structure of fee markets - the mechanisms by which users pay for transaction processing and network resources. In a recent discussion, industry experts Jon Charbonneau and Zen Llama delved deep into the intricacies of Solana's fee market, comparing it to Ethereum's approach and exploring potential future developments.

The Historical Context of Blockchain Fee Markets

To understand the current state of fee markets in blockchain networks, it's crucial to look at the historical context. The discussion began by drawing parallels to the "big block vs small block" debates that occurred in the Bitcoin community around 2017. This debate centered around the fundamental question of how to scale the Bitcoin network:

• The "small block" camp argued for keeping blocks small to maintain scarcity and support a store of value narrative.
• The "big block" camp, which led to the creation of Bitcoin Cash, advocated for larger blocks to enable more transactions and support a medium of exchange use case.

This historical context is relevant because it highlights the ongoing tension in blockchain design between optimizing for monetary policy and maximizing transaction throughput. As Zen Llama pointed out:

"Bitcoin, being like the only [cryptocurrency] that wasn't programmable, right? It was just like a form of money. And like how that money is like economic bandwidth was kind of like limited by the block space, right?"

Ethereum's Approach to Fee Markets

Ethereum's fee market structure has been heavily influenced by Bitcoin's monetary policy, especially after the implementation of EIP-1559. This upgrade introduced a mechanism where a portion of transaction fees is burned, potentially making Ethereum deflationary under certain network conditions.

John Charbonneau emphasized that the original motivation for EIP-1559 was not primarily about monetary policy:

"The initial motivation for 1559 was not just to burn all the ETH and be this like deflationary, you know, like it's good for ETH as money like that, like that wasn't the intention of it. It really was just the fact that it is a just better feedback mechanism than what like Ethereum had in place."

The key innovations of EIP-1559 include:

1. A base fee that adjusts dynamically based on network demand.
2. The burning of the base fee to prevent manipulation by block producers.
3. An optional priority fee (tip) that users can add to incentivize faster inclusion.

This mechanism aims to improve user experience by making fee estimation more predictable and reducing the occurrence of stuck transactions.

Solana's Unique Approach to Fee Markets

Solana takes a fundamentally different approach to fee markets compared to Ethereum. The Solana team views the network's native token, SOL, primarily as a spam prevention mechanism rather than focusing on monetary policy.

Key aspects of Solana's fee structure include:

1. A fixed base fee for transactions, currently set at 5000 lamports (the smallest unit of SOL).
2. Priority fees that users can add to potentially get faster transaction processing.
3. A 50/50 split of fees between validators and burning.

One unique aspect of Solana's architecture is that validator votes are treated as on-chain transactions, which has implications for network economics. As John Charbonneau explained:

"The cost to run a validator it's really expensive to vote on every single block of that is a transaction every single block and like like most people always hang on to the fact that like oh you know most of the transactions or votes well like that's true but like they're like the problem is that they're economic implications of that is like it is expensive to run a validator for that."

The Validator Economics of Solana vs Ethereum

The economic models for validators on Solana and Ethereum differ significantly. On Ethereum, the focus has been on making it possible for individuals to run nodes at home, which influences the design of the fee burning mechanism. The goal is to make validator operations profitable without requiring extremely high hardware costs.

On Solana, the costs associated with running a validator are higher due to the frequent voting transactions. This has led to discussions about potentially changing how vote transactions are treated in terms of fees. Currently, validators pay the same base fee for their vote transactions as regular users do for other transactions.

Zen Llama highlighted an interesting perspective on validator economics in Solana:

"There's a world where validators aren't even necessarily profitable they could be even loss leaders in some ways and where like the value driver to the token is not as emphasized perhaps as networks like Ethereum."

This approach assumes that the value of running a validator comes from other benefits, such as having low-latency access to network data, which could be advantageous for applications like decentralized exchanges or high-frequency trading.

The Role of Full Nodes in Solana's Ecosystem

An important aspect of Solana's design philosophy is the emphasis on the utility of running a full node. Unlike some other networks where light clients are common, Solana encourages participants to run full nodes for several reasons:

1. Faster access to network data
2. Improved user experience for applications
3. Potential economic advantages in certain situations

As Zen Llama explained:

"Having a full node gives you the data the fastest you'll be able to have like the fastest UX the fastest like seeing what's going in on chain versus like someone who's just like listening off on RPC."

This design choice influences the fee market structure, as it assumes that many network participants will be willing to bear the costs of running a full node for the associated benefits.

The Challenge of Spam Prevention

One of the key challenges in designing a fee market is preventing spam while maintaining accessibility for legitimate users. Solana's approach to this problem differs from Ethereum's in several ways:

1. The fixed base fee acts as a basic spam deterrent.
2. Priority fees allow users to express urgency for their transactions.
3. The network's high throughput helps absorb potential spam attempts.

However, the current implementation has some limitations. As John Charbonneau pointed out:

"You still get the result of you know when the network is super congested you can have this like hey i attached a priority fee but then my transaction just got like dropped like two seconds later like what the hell i try again and the same thing happens."

This highlights the ongoing challenge of balancing spam prevention with user experience, especially during periods of high network congestion.

The Concept of Local Fee Markets

An interesting concept discussed in the podcast is the idea of "local fee markets." This refers to allowing individual programs or applications on the Solana network to have more control over the fees associated with interacting with their state.

The proposed mechanism for this is called PRAF (Priority Rebatable Account Fees). As Zen Llama explained:

"Pros are kind of trying to express a way for an app to say like maybe i want conditions on my state okay maybe i have like a piece of data that should never be called into from anything other than like my program right."

This approach could allow applications to:

1. Implement their own spam prevention mechanisms
2. Capture more value from their usage of the network
3. Provide better guarantees to their users about transaction ordering and inclusion

However, this concept is still under discussion and debate within the Solana community, as it adds complexity to the overall fee market structure.

The Trade-offs of Different Consensus Mechanisms

The discussion also touched on how different consensus mechanisms impact fee markets and overall network design. Solana's unique approach to consensus, with its sub-second block times and on-chain voting, creates both opportunities and challenges.

One key difference is in how transactions are propagated through the network. As Zen Llama explained:

"On Ethereum like it's just a peer-to-peer network essentially so everyone's listening to the mempool there's not like this concept of like a leader gets the transaction first like on Solana and then it forwards it to other leaders on the network it's actually like a shared mempool you send it to anyone any note on the network."

This difference in architecture has implications for how fee markets can be structured and how effectively they can prevent spam and ensure fair transaction ordering.

The Role of Out-of-Protocol Mechanisms

An important aspect of fee markets that was discussed is the role of out-of-protocol mechanisms. These are ways in which network participants can influence transaction ordering or inclusion without relying solely on the on-chain fee mechanisms.

On Ethereum, this is seen in the form of MEV (Miner Extractable Value) and block builders. As John Charbonneau explained:

"A builder on ethereum someone out of protocol can do is just like hey you sent me all the bids i'm just going to include the one that like actually one and put that in when i built the block."

Solana is also seeing the development of similar mechanisms, such as the Jito MEV infrastructure. These out-of-protocol systems can potentially provide more efficient transaction ordering and fee discovery, but they also raise questions about centralization and fairness.

The Governance Challenge

As blockchain networks mature, governance becomes an increasingly important consideration in fee market design. The discussion highlighted how Solana's governance model is evolving as the network grows and becomes more decentralized.

Zen Llama noted:

"Today right like the governance has been very much like because there's like one dominant client it's like your vote is do i upgrade or not in the same way that like bitcoin governance is like do you run that client or not and if you don't it's a hard fork right you just get forked off the network like that is your vote."

However, as alternative client implementations like Firedancer emerge, the governance process is becoming more complex. This mirrors the experience of Ethereum, where multiple client teams and stakeholders need to reach consensus on protocol changes.

The Future of Solana Fee Markets

The discussion concluded with some speculation about the future direction of Solana's fee market. While there's no clear consensus on the exact path forward, several potential changes were discussed:

1. Adjusting the base fee to account for compute unit usage rather than just signatures
2. Implementing a dynamic base fee similar to Ethereum's EIP-1559
3. Allowing validators to vote on fee adjustments periodically
4. Implementing local fee markets through mechanisms like PRAF

John Charbonneau emphasized the experimental nature of these proposals:

"I don't think that there's a perfect solution to all of these um and that is actually like part of also why i'm like excited to see more like svmforks in the future and like people like eclipse because i think that they should be much more incentivized to be just be like and we're gonna change something see if it works."

The Role of Layer 2 Solutions and Data Availability Layers

The conversation also touched on how layer 2 solutions and dedicated data availability layers like Celestia could impact fee markets. These technologies offer the potential to significantly reduce transaction costs by offloading some of the data and computation from the main chain.

However, as Zen Llama pointed out, these solutions also introduce new challenges:

"Even though you got rid of the votes like you might have 10 different roll-ups bidding for the same da space on celestia and as much as celestia can scale and it is like a sub-linear scaling model like it does have physical limits like you can't get around physics right."

This highlights that while layer 2 solutions and data availability layers can offer significant improvements, they don't completely solve the underlying economic challenges of blockchain scalability.

The Importance of Experimentation

A key theme throughout the discussion was the importance of experimentation in blockchain design. Both experts emphasized that there are no perfect solutions, and that different approaches may work better for different use cases or network conditions.

John Charbonneau summed up this perspective:

"Nobody knows what the perfect solution that the shit is right now people got to try everything to completely agree and i think that's always been one of the key benefits are yeah benefits of Solana's approach building a new blockchain for first principles and just shipping fast and seeing how to fix it in real time."

This willingness to experiment and iterate quickly has been a hallmark of Solana's development approach, and it's likely to continue shaping the evolution of its fee market and other protocol features.

The Interplay Between Network Design and Application Requirements

An interesting point raised in the discussion was how network design influences the types of applications that can be built and deployed effectively. Solana's high-throughput, low-latency design enables certain types of applications that might not be feasible on other networks.

For example, the ability to run full nodes with low-latency access to network data can be crucial for decentralized exchanges or other high-frequency trading applications. This highlights how fee market design isn't just about transaction costs, but also about enabling certain types of economic activity on the network.

The Challenge of Cross-Chain Interoperability

As the blockchain ecosystem continues to evolve, the challenge of cross-chain interoperability becomes increasingly important. The discussion touched on how different fee market structures and consensus mechanisms can make it challenging to create seamless interactions between different blockchain networks.

This is particularly relevant when considering layer 2 solutions or sidechains that aim to leverage the security of a main chain while offering different performance characteristics or fee structures. Designing systems that can effectively bridge these different environments remains an active area of research and development in the blockchain space.

The Role of MEV in Shaping Fee Markets

Maximal Extractable Value (MEV) was discussed as an important factor in shaping fee markets and transaction ordering. While MEV is often associated with Ethereum due to its more developed ecosystem of MEV extraction tools, it's becoming an increasingly important consideration for Solana as well.

The development of tools like Jito for MEV extraction on Solana highlights how these out-of-protocol mechanisms can influence the effective fee market. As blockchain networks mature, finding ways to balance the incentives created by MEV with the needs of regular users and the overall health of the network becomes a crucial challenge.

The Potential for Application-Specific Fee Models

One intriguing idea discussed was the potential for more application-specific fee models within the Solana ecosystem. The concept of PRAF (Priority Rebatable Account Fees) opens up the possibility for individual applications to have more control over how fees are structured for interactions with their specific state.

This could lead to a more diverse and dynamic fee ecosystem within Solana, where different applications can experiment with fee models that best suit their specific use cases and user bases. However, it also introduces additional complexity and potential user experience challenges that would need to be carefully managed.

The Impact of Hardware Requirements on Decentralization

An important consideration in fee market design is how it interacts with the hardware requirements for running nodes or validators. Solana's high-performance design necessitates more powerful hardware compared to some other blockchain networks, which has implications for decentralization and validator economics.

The discussion touched on how these hardware requirements influence the overall cost structure for validators and how this, in turn, affects the design of the fee market. Finding the right balance between performance, decentralization, and economic sustainability remains an ongoing challenge in blockchain design.

The Role of Foundation Subsidies in Network Growth

An interesting point raised in the discussion was the role of foundation subsidies in supporting network growth and decentralization. The Solana Foundation's delegation program was mentioned as an example of how targeted subsidies can help support a more diverse validator set during the early stages of network growth.

While such programs can be effective in bootstrapping a network, they also raise questions about long-term sustainability and the transition to a fully market-driven validator ecosystem. This highlights the complex interplay between protocol design, economic incentives, and governance in shaping the development of blockchain networks.

The Potential for Hybrid Approaches

As the discussion progressed, it became clear that there's potential for hybrid approaches that combine elements from different fee market designs. For example, the idea of implementing a dynamic base fee similar to Ethereum's EIP-1559 while also allowing for application-specific fee models through mechanisms like PRAF.

These hybrid approaches could potentially offer the best of both worlds, providing the predictability and spam resistance of a dynamic base fee while also allowing for the flexibility and innovation of more localized fee markets. However, implementing such hybrid systems would likely require careful design and extensive testing to ensure they work as intended in practice.

The Importance of User Experience in Fee Market Design

Throughout the discussion, the importance of user experience in fee market design was repeatedly emphasized. While much of the conversation focused on the technical and economic aspects of fee markets, both experts stressed that ultimately, these systems need to work well for end-users.

This includes considerations like:

1. Making fee estimation accurate and predictable
2. Ensuring transactions don't get stuck or dropped unexpectedly
3. Providing clear and intuitive interfaces for users to interact with the fee market

As blockchain networks aim for mainstream adoption, designing fee markets that are not only economically sound but also user-friendly becomes increasingly crucial.

The Role of Data Availability Layers in Scaling Blockchain Networks

The conversation touched on the emerging role of dedicated data availability layers like Celestia in scaling blockchain networks. These systems aim to provide a more efficient way of handling the data storage and availability aspects of blockchain operations, potentially allowing for significant cost reductions and scalability improvements.

However, as the experts pointed out, these solutions also introduce new economic considerations and potential bottlenecks. As Zen Llama noted:

"Even though you got rid of the votes like you might have 10 different roll-ups bidding for the same da space on celestia and as much as celestia can scale and it is like a sub-linear scaling model like it does have physical limits like you can't get around physics right."

This highlights that while data availability layers offer promising solutions to some scaling challenges, they also introduce new economic dynamics that need to be carefully considered in the overall design of blockchain ecosystems.

The Future of Blockchain Scalability

As the discussion concluded, both experts emphasized that the quest for optimal blockchain scalability and fee market design is an ongoing process. There's no single perfect solution, and different approaches may work better for different use cases and network conditions.

John Charbonneau summed up this perspective:

"Nobody knows what the perfect solution that the shit is right now people got to try everything to completely agree and i think that's always been one of the key benefits are yeah benefits of Solana's approach building a new blockchain for first principles and just shipping fast and seeing how to fix it in real time."

This willingness to experiment, iterate quickly, and learn from real-world usage has been a hallmark of Solana's development approach. As the blockchain ecosystem continues to evolve, this spirit of innovation and experimentation is likely to drive further advancements in scalability, fee market design, and overall network performance.

In conclusion, the discussion between Jon Charbonneau and Zen Llama provided a deep and nuanced exploration of the challenges and opportunities in blockchain fee market design. From the historical context of the Bitcoin scaling debates to the cutting-edge proposals for application-specific fee models on Solana, the conversation highlighted the complex interplay between technical design, economic incentives, and user experience in shaping the future of blockchain technology.

As Solana continues to evolve and experiment with new approaches to fee markets and scalability, it remains at the forefront of innovation in the blockchain space. While challenges remain, the willingness to tackle these issues head-on and explore novel solutions positions Solana well for continued growth and adoption in the dynamic world of decentralized technologies.

Facts + Figures

• Solana's base fee is currently fixed at 5000 lamports per transaction signature
• Approximately 50% of transaction fees on Solana are burned, with the other 50% going to validators
• The estimated break-even point for running a Solana validator is around 40,000-50,000 SOL in stake
• Validator votes on Solana are treated as on-chain transactions, contributing significantly to network load
• Solana aims for 400 millisecond block times, resulting in a high volume of validator votes
• The Solana Foundation's delegation program helps support smaller validators to improve network decentralization
• Ethereum's EIP-1559 introduced a dynamic base fee that adjusts based on network demand
• Celestia, a dedicated data availability layer, aims to provide more efficient data storage for blockchain networks
• The concept of PRAF (Priority Rebatable Account Fees) is being discussed as a potential feature for Solana to allow application-specific fee models
• Jito, an MEV extraction tool for Solana, is used by approximately 43-44% of Solana clients
• Solana's approach to transaction propagation differs from Ethereum's shared mempool model
• The hardware requirements for running a Solana validator are generally higher than those for Ethereum
• Eclipse, an upcoming blockchain using the Solana Virtual Machine, plans to use Celestia for data availability
• The Solana community is actively discussing potential changes to the network's fee structure, including adjusting the base fee to account for compute unit usage

Questions Answered

What is the main difference between Solana and Ethereum's approach to fee markets?

Solana and Ethereum have fundamentally different approaches to fee markets. Ethereum uses a dynamic base fee that adjusts based on network demand, with all of the base fee being burned. Solana, on the other hand, has a fixed base fee and allows users to add priority fees, with 50% of fees being burned and 50% going to validators. Solana's approach focuses more on spam prevention and efficient resource allocation, while Ethereum's approach is more closely tied to monetary policy and predictable fee estimation.

How does Solana's validator economics differ from Ethereum's?

Solana's validator economics differ significantly from Ethereum's. On Solana, validators incur higher costs due to frequent voting transactions, which are treated as on-chain transactions. This makes running a validator more expensive on Solana, with some suggesting that validators could even operate as loss leaders. In contrast, Ethereum's design aims to make it possible for individuals to run nodes at home, with validator profitability more closely tied to the network's fee burning mechanism and overall token economics.

What is PRAF and how could it change Solana's fee market?

PRAF stands for Priority Rebatable Account Fees, a proposed feature for Solana that would allow for more application-specific control over fee structures. PRAF would enable individual programs or applications on Solana to set conditions on their state and implement their own fee models for interactions with that state. This could potentially allow for more diverse and flexible fee structures within the Solana ecosystem, enabling applications to better manage spam and capture value from their usage of the network.

How does Solana's approach to transaction propagation differ from Ethereum's?

Solana's approach to transaction propagation is fundamentally different from Ethereum's. In Solana, transactions are sent directly to the next leader in the validator schedule, and there is no global mempool. This allows for faster transaction processing but can potentially lead to centralization concerns. Ethereum, on the other hand, uses a shared mempool where transactions are broadcast to the entire network, allowing for more decentralized transaction propagation but potentially increasing latency.

What role do data availability layers like Celestia play in blockchain scalability?

Data availability layers like Celestia aim to provide more efficient data storage and availability for blockchain networks. By separating the data availability concerns from execution, these layers can potentially allow for significant cost reductions and scalability improvements. However, they also introduce new economic dynamics, as multiple rollups or chains may compete for the same data availability resources. While promising, these solutions don't completely solve the underlying economic challenges of blockchain scalability and introduce their own set of trade-offs and considerations.