One of client favorite questions, which has organizations saved many hours of unnecessary effort and given back precious time, is the question:
“Where are we wrong?” or “Where are we at risk of going wrong?”
I was recently having an engaging conversation with a Web3 early-stage company on the DeFi payment infrastructure risks as we grow and scale through my boutique Advisory Firm, Emergent Core, on this topic
What should early-stage startups in primarily focussed in DeFi and Web3, focus on?
1. Sticking too closely to decentralization at all costs:
Insisting on complete decentralization, even when centralized solutions are more practical, can slow development and hinder adoption.
Case Study: Solana’s Network Outages (2021-2023)
Solana’s key selling points included a Proof-of-History (PoH) consensus mechanism designed to support thousands of transactions per second, making it an attractive platform for decentralized finance (DeFi), non-fungible tokens (NFTs), and other high-demand decentralized applications. Solana’s goal was to maintain the benefits of decentralization while offering scalability that could handle large-scale applications. Its approach attracted significant attention, and by mid-2021, Solana had become one of the most popular blockchain ecosystems, with a growing number of dApps and users.
Problem:
Despite Solana’s technical promises, it has suffered from multiple network outages and performance issues that have severely impacted its reliability. Notably:
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Network Outages: Between 2021 and 2023, Solana experienced several major outages, some lasting hours and others even longer. These outages caused the network to slow down or even stop processing transactions.
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Validator Centralization: Solana had a relatively small number of validators, leading to concerns that the network’s decentralization is more superficial than it appears, with a concentration of control in the hands of a few validators.
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Complex Consensus and Forking Issues: Solana’s PoH and Proof-of-Stake (PoS) hybrid model has proven complex to maintain in high-demand environments. While innovative, a core component of Solanna’s network had created vulnerabilities, thereby declining trust in its infrastructure.
Reliance on FULL DECENTRALIZATION WAS THE PRIMARY Risk to Scalability and User Adoption:
Solana’s outages and performance issues have made it less reliable for developers building dApps that require constant uptime, such as in DeFi or high-frequency trading.
While Solana’s focus on decentralization (relative to more centralized networks) and high throughput was meant to create a robust ecosystem, the technical limitations of its decentralized infrastructure have led to poor user experiences, transaction delays, and questions about whether it can support large-scale, mission-critical applications.
For example, DeFi applications that rely on Solana have faced liquidity issues during outages, while NFT marketplaces built on Solana have seen significant drops in activity when the network became unusable for hours at a time.
Strategic Adjustment and Evolution:
To address these issues, the Solana team has begun exploring more centralized solutions to augment its infrastructure while maintaining its decentralized ethos at a core level. Recent efforts include:
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Validator Improvements: Solana is working on improving validator performance by implementing more efficient algorithms and network optimizations to prevent the network from becoming overwhelmed during high traffic periods.
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Offloading Transaction Loads: While still in early stages, the Solana team is exploring layered approaches where certain types of non-critical transactions are offloaded to secondary layers or less decentralized components to reduce strain on the main network.
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Adoption of More Centralized Governance Measures: The Solana Foundation has also been exploring governance frameworks that allow for faster decision-making in the event of network emergencies, improving its agility without entirely abandoning decentralized governance principles.
Outcome and Lesson:
The scalability issues faced by Solana highlight the limitations of adhering too closely to a decentralized model when performance and reliability are crucial to user adoption. By focusing heavily on decentralization and throughput, Solana failed to adequately account for the network stability issues that would arise under real-world usage scenarios. Its frequent outages have slowed adoption of dApps, particularly in the DeFi space, where uptime is critical.
However, Solana’s recent moves toward optimizing its infrastructure—by introducing layered scaling approaches and centralized interventions during critical moments—represent a shift toward a more hybrid model, where decentralization is balanced with the need for operational efficiency.
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Over-indexing tech and under-indexing use cases: Focusing too much on blockchain’s potential without creating practical, usable applications can lead to wasted effort.
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Neglecting security: Rushing to release decentralized apps without thorough security protocols can damage credibility and lead to significant losses.
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Sticking too closely to decentralization at all costs: Insisting on full decentralization even when centralized solutions are more practical can slow development and hinder adoption.
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Ignoring regulatory environments: Developing products without considering the legal and regulatory landscape can result in shutdowns or legal trouble.
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Not aligning with business objectives: Prioritizing decentralized principles over aligning with business goals can cause a disconnect between innovation and practicality.