Setting Up for Solana DeFi

Introduction 

As TVL continues to climb and DEX volumes continue to reach new all-time highs, many people have found themselves looking to get onboarded to Solana. Brand-new crypto users and natives alike are drawn to the performance and low-costs on Solana, and with numerous bluechip DeFi and NFT protocols, an abundant memecoin market, numerous DePIN projects using Solana, there are many reasons you may want to get started using Solana today.

Step 1: Set Up Your Wallet 

The first step towards trading on any blockchain is to set up a non-custodial wallet. Think of this as your key to the on-chain world. Unlike trading on a traditional exchange, e.g CEXs, which custody crypto assets on your behalf, using blockchain-native applications allows you to maintain that custody yourself. 

Solana supports several different wallets today, but we’ll focus on the top providers: Phantom, Solflare, and Backpack. While self-custody provides strong security guarantees, the caveat is that no one can retrieve it for you if you lose access to your wallet. Therefore, it is crucial that you write down and store your seed phrase and private key in a secure place when setting up a new wallet.

Phantom 👻

Phantom has been around since early 2021. With over 4 million monthly active users today, Phantom’s adoption represents a significant milestone achievement for crypto wallets and Solana’s network adoption. The wallet offers a simple and intuitive UI, allowing users to swap, stake, and store NFTs with ease. Phantom is available as a chrome extension and on mobile app stores. 

Start by visiting Phantom.app/download and downloading the extension to your browser (you can also do this on your phone).

Select “Create a new wallet”.

Create a passcode and click “Continue”. 

Store your recovery phrase in a secure location. 

Log in with your passcode and enjoy your new Phantom wallet! 

Solflare ☀️

Solflare was one of the earliest wallet providers on Solana, providing users with swap, stake, and NFT functionality in a simple, secure UI. It is also available as a chrome extension and on mobile app stores.

Visit Solflare.com and click on “Access Wallet” in the top right corner. 

Since you are setting up your first wallet on Solana, click on “I need a new wallet”. 

Write down and store your recovery phrase in a secure location, and click “I saved my recovery phrase” to continue.

Confirm your recovery phrase and click “Continue.” 

Congrats! You have just created your first Solana wallet with Solflare. 

Backpack 🎒

Backpack is a non-custodial wallet built by the Blue Coral Inc. team, the same team behind the MadLads NFT collection, which launched in 2022. Though Backpack offers many of the same native features as Solflare and Phantom, it introduces support for xNFTS - a new token standard on Solana which allows for adding executable code within an NFT, further bolstering utility. 

Start by visiting Backpack.app and downloading the extension for your browser - you can also download the app on your phone.

Select “Create a new wallet”. As you do for Solflare or Phantom, make sure to write down your seed phrase in a secure location.

Congrats! You have created your new Backpack wallet. 

Step 2: Acquiring SOL Tokens 

Once your wallet is set up, you’ll need to fund it before you can start trading. This is because unlike a CEX, which allows you to purchase crypto directly with fiat, trading directly on-chain requires a crypto <> crypto transaction. Blockchain networks use transaction fees, called gas fees, to subsidize validators for securing the network and processing transactions. Therefore, in order to trade on Solana, we will first need to send SOL to our wallet. 

As a top 5 cryptocurrency by market cap, SOL can be purchased across a wide range of top CEXs including Coinbase, Kraken, Binance, and more. Additionally, users can use a crypto on-ramp like MoonPay to purchase SOL with fiat.

Solana Markets via Coingecko

Step 3: Understanding Solana Transaction Fees 

As you get set to start exploring the robust Solana ecosystem, it is critical to understand how transaction fees work, given you will be charged for every on-chain interaction you make. Solana is known for its low transaction fees, but there are certain important variables to consider. 

Today, Solana uses a base fee set at 0.000005 SOL, applied to every single transaction. Users who are willing to pay a little extra to get their transaction through faster can set a priority fee in their transaction. Priority fees on Solana emerged as a response to the issue of network spam enabled by the network’s low fees, and have grown significantly in use as activity has picked up on Solana.

Visual courtesy of Solana Compass

By default, for all fees - base and priority fees alike - 50% are distributed to the validator-producing blocks, and 50% are burned. However, it is important to note that priority fees do not guarantee earlier inclusion for a transaction. This is because Solana does not have a native mempool like Ethereum, and there isn’t a native mechanism (yet) for a dynamic base fee to price blockspace accurately. Therefore, remember that while using priority fees is likely to get your transaction through faster, it is not guaranteed. 

Step 4: Staking on Solana

With your new freshly funded wallet, you may find yourself wondering how to get the most of your idle SOL tokens. Consider staking your SOL as a way to earn yield on idle capital, while benefiting the economic security and performance of the broader Solana network. 

In a proof-of-stake network like Solana, entities running validators must lock up the native SOL token in a smart contract in order to be eligible to validate transactions and produce new blocks. They may set up stake pools like the JitoSOL stake pool to accrue more stake, incentivizing user deposits by offering an Annual Percentage Yield (APY) for stakers.  

By default, staked capital is illiquid and cannot be further utilized once it is locked up. Liquid staking is a breakthrough mechanism which allows stakers to receive a synthetic token representing their deposit amount. The key breakthrough is that this synthetic token can be deployed to earn additional yield, maximizing capital efficiency for stakers by compounding their returns, while the broader crypto ecosystem benefits from a significant unlock in liquidity. 

Conclusion

Solana is home to a continuously growing robust ecosystem with numerous applications in DeFi, NFTs, DePIN, and more. In this guide, we explained how to get set up for using Solana, namely setting up your wallet, acquiring SOL to fund your on-chain operations, and understanding how Solana transaction fees and staking work.  Stay tuned for our next article, in which we further unpack the differences between native vs liquid staking, the opportunities created from this unlock in capital efficiency, and how to take advantage of liquid staking on Solana.