Is Solana too dependent on Serum? A Deep Dive with SolanaFM
In just 2 years, Solana has garnered a reputation as one of the most effective blockchains for Decentralized Finance (DeFi), attributed to its fast transaction speeds and extremely low fees.
As of Q1 2022, Solana holds a Total Value Locked (TVL) of over $7.8B across over 60 protocols, making it the 4th largest DeFi blockchain (by TVL). A key component that has arguably been a cornerstone of Solana’s successes thus far would be Serum — a protocol that allows builders in Solana to build composable DeFi applications.
However, Serum then also becomes a double-edged sword to Solana. Will the network’s dependence on Serum ultimately prove to be its undoing? This is what SolanaFM aims to find out in this report by diving deep into Solana’s network data.
Lessons from Terra’s Downfall
When viewed in the light of recent unfortunate events, this report becomes even more pertinent. The recent collapse of LUNA and UST came as a huge shock to all of us (Read Bybit’s coverage of the Terra situation here).
Beyond the emotions, however, there is now — more than ever — a strong need for all within this space to be honest with ourselves with regard to the extant state of our industry. We are never invincible, and there is no room for complacency. Now is the time for brutally honest introspections. That is what SolanaFM aims to do.
First, a very quick AAR of LUNA’s collapse. How could the crash occur at such an extent? Apart from the bearish market sentiment in general, a heavy dependency on certain protocols may have accelerated the downfall. You may have heard of Anchor Protocol — the biggest lending and borrowing DeFi protocol in the Terra ecosystem. The protocol was responsible for 74% of demand for UST, likely due to the 20% APY offered on its staked assets.
Such a heavy dependency on a single protocol translates into a harder knock when large sums of money are withdrawn from the treasury. This brings us back to Serum and Solana. Is Solana overly-reliant on Serum? Is Serum a single-point of failure that is a problem for Solana?
Before we dive into that, however, first a quick primer on Serum’s key features and the current state of its ecosystem.
What is Serum?
Serum Protocol is an on-chain liquidity infrastructure protocol that enables trading at high speeds and at low transaction costs — essential focal points to enable the mass adoption of DeFi. Serum offers a central limit order book for optimal order matching and a shared liquidity pool that other protocols in Solana can tap into.
As of 31st March 2022, Serum is the largest DeFi protocol holding a TVL of $860.78M, with over 30,835,668 unique accounts and over 1 billion transactions involving Serum’s programs (across all protocols). Our team indexed Serum’s data and found that 294,228,616 orders were made on the Serum order book across Q1 2022.
Serum’s ecosystem consists of 24 protocols across various categories like DeFi, NFTs and Gaming. DeFi protocols like Raydium typically provide on-chain liquidity to Serum’s order book and are able to access the order flow and liquidity of all the other protocols within the ecosystem. Play-to-Earn gaming applications like Aurory tap on Serum’s infrastructure to power its marketplace. NFT applications like FRAKT are also built on top of Serum to power its DEX, Fraktion.
This ecosystem is bound to grow with the fast-expanding Solana developer community. 2% of all Serum transaction fees go to the ecoSerum developer community, which provides grants to all projects built on Serum (subject to application). In addition, the Serum ecosystem offers a wealth of guidance, including various Medium articles and Github repositories that provide inspiration and ideas on how to get involved with Serum. Check out Serum’s documentation for a list of GUI Improvements that can be developed.
Program Breakdown: Serum dominance in Solana
Onto the main question — How dominant is Serum in Solana?
In Q1 2022, we found that more than a billion instances of ‘Serum Dex Program V3’ had been executed, making up almost 39% of all program executions in Solana, excluding non-native programs. This is much more than the program executions of the second and third largest programs combined. Mango and Raydium, both built on top of Serum, make up 16% and 11% of program executions respectively.
How reliant are other protocols on Serum? We will reference Mango Markets, Raydium AMM and Cykura CLMM to see how heavily various Dapps depend on Serum.
Mango Markets routes spot-related trading transactions to Serum while perpetual-related trading transactions are executed using their own programs.
In this transaction, a user cancels their spot orders and places new spot orders.We can see that the transaction gets routed to Serum Dex Program v3.
In this transaction, a user cancels their perpetual orders and places new perpetual orders. We can see that the transaction is fulfilled using only Mango Program v3.
In Q1 2022, Mango Markets routed a total of 31,894,280 transactions over to Serum. Across the same period, the total number of transactions that involved Mango’s main program was 239,395,745. Thus, Mango Markets is roughly 13% dependent on Serum.
In Q1 2022, Raydium routed 122,703,762 transactions over to Serum, while the total number of transactions involving the Raydium program amounted to 124,059,841. We can see that almost 99% of all Raydium’s transactions are routed to Serum.
Take a look at the Raydium AMM Program here, and you’ll find that a large majority of the transactions under the Raydium program will also involve the Serum program. We’ll explore how Raydium works with Serum in greater detail in future articles to come.
Cykura, previously known as Cyclos, is an example of a protocol that began with swaps that routed via Serum’s orderbook and utilized Serum’s liquidity. The protocol recently went through a rebuilding process, and now route transactions via their own liquidity pools.
Take a look at the transactions under Cykura’s program here, and you’ll find that a large majority of transactions do not involve the Serum program.
What if Serum Fails?
Through the program breakdown, we can see that some DeFi protocols are heavily dependent on Serum. What would happen if Serum’s order book or liquidity pools get exploited? We extrapolated 2 possible outcomes.
Solana Dapps will lose core functionalities
For starters, DeFi Protocols will lose core areas of their functionality. Many of these protocols are built on the technical infrastructure of Serum, routing their transactions via Serum’s order book. Protocols like Mango Markets will not be able to fulfil their spot transactions.
The following graph shows the number of new markets created across all DeFi protocols within Solana. Without Serum’s core infrastructure, we can expect the number of new markets created across Raydium and other Dapps on Solana to decrease drastically.
Solana Dapps will lose access to the shared liquidity pool
Referencing values from Q1 2022, in the worst of cases, Dapps in Solana such as Atrix Protocol would be unable to tap into over $860M of liquidity. This could result in various liquidity problems within the protocol — Users may potentially face issues selling their assets and risk having their assets locked up.
The Bottom Line
So far, our investigation shows that the level of dependencies vary between Dapps. Although Serum does play an influential role as the core DeFi infrastructure, there are several protocols independent of Serum, simply leveraging on them to enhance order book functionalities.
If the unthinkable ever happens to Serum, we will definitely see damage inflicted to other Solana protocols. However, the existing diversification we see across these projects with the likes of Cykura CLMM, Mango Markets and Saber AMM could possibly contain the damage to a certain extent.
Ultimately, Solana has always emphasized the importance of composability — using existing applications to be building blocks for new applications. The projects building on Serum today could become the next ‘gold standard’ for DeFi in Solana, and we may possibly see another DeFi powerhouse in the near future.
Bybit coverage of Terra situation: https://blog.bybit.com/en-US/post/terra-ust-loses-peg-luna-goes-to-zero-community-takes-over--blt27a99811516c51dd/
Project Serum Documentation: https://docs.projectserum.com/serum-ecosystem/build-on-serum
Mango Markets Spot Transaction: https://solana.fm/tx/4eZiWMELpvrrYivezosQeFQpKSbaoMMj7pJQz6nvGhwhTUTi9E6gEQibCZpKiooAY6bL6wLh2TaVZyydCm7qkZ3P
Mango Markets Perpetual Transaction: https://solana.fm/tx/5bex95whx3WmcPDJKgXjXf51BhnyVERXKG2f4bvxwdJCwgLCD5rBwgRDbXCZxBzpm6MdfXJV8gCXVxXpQ24Xvpf8
Raydium AMM Program: https://solana.fm/address/675kPX9MHTjS2zt1qfr1NYHuzeLXfQM9H24wFSUt1Mp8
Cykura CLMM Program: https://solana.fm/address/cysPXAjehMpVKUapzbMCCnpFxUFFryEWEaLgnb9NrR8