Solana Project’s Escape from the UK

editorNovember 1, 2024

0 2 7 minutes read

Marinade Finance, a decentralized finance (DeFi) protocol on the Solana blockchain, has blocked access for UK users in response to regulations imposed by the Financial Conduct Authority (FCA).

Access for British users to Marinade Finance has been restricted

Marinade Finance, the largest DeFi protocol on Solana, recently restricted UK users’ access due to compliance concerns related to FCA regulations. This action, though unusual and surprising for decentralized protocols, reflects the platform’s proactive stance in response to legal and regulatory requirements.

Currently, UK users attempting to access Marinade Finance are met with a warning message indicating that the platform has stopped providing certain services to them, and no new registrations from UK citizens are being accepted. However, the platform still allows users directly connected with UK IPs to perform limited actions such as withdrawing liquidity or submitting withdrawal delay tickets.

The decentralized finance (DeFi) protocol Marinade Finance, built on the Solana network, holds a significant portion of the total value locked (TVL) on the network. Estimates show that Marinade Finance manages over $248 million of the $350 million total TVL on the Solana blockchain, invested across native products and liquidity pools. This is largely due to the platform’s annual yields of approximately 8.5% for native staking and 7.7% for liquid staking. Notably, the native staking feature of the platform was introduced earlier this year and quickly gained widespread popularity. While the Solana ecosystem is highly transparent and secure, presenting itself as a borderless and decentralized project, it raises the question of why UK regulatory actions have led to restricted access for UK users. In this article, we will explore this issue, but first, let’s review the Solana and Marinade Finance projects.

A Brief on Solana

Solana is an ambitious and innovative blockchain platform designed to revolutionize decentralized applications (dApps) and decentralized finance (DeFi) with unparalleled speed and scalability. Founded in 2017, Solana is an open-source project managed by the Solana Foundation in Geneva, with its blockchain network developed by Solana Labs, headquartered in San Francisco.

Key Features of Solana

Solana stands out due to its high transaction throughput and low fees, distinguishing it significantly from similar platforms. For instance, the Solana network can process thousands of transactions per second (TPS), whereas Ethereum handles only about 30 TPS. Solana’s native cryptocurrency, also named Solana, is listed on exchanges under the ticker SOL. SOL experienced a major leap in 2021, increasing by nearly 12,000% in value. Solana’s market cap at its peak surpassed $75 billion, though, like many digital assets, SOL saw a significant drop during the crypto market downturn of 2022, bringing its circulating market value to less than $4 billion. Despite this, Solana has shown resilience, recovering almost half of its lost market cap over the past year, with 426 million SOL tokens in circulation.

History of Solana

One of Solana’s founders, Anatoly Yakovenko, leveraged his experience in designing distributed systems from his time with prominent tech companies like Qualcomm. He recognized that synchronizing a network at an appropriate speed is crucial for increasing efficiency and simplifying network processes, leading to a much faster network whose only limit is bandwidth. Yakovenko’s innovation, known as Proof of History (PoH), aimed to enhance blockchain scalability. By utilizing PoH, each node in the network can rely on recorded timestamps to confirm the time lapse between events and achieve consensus. This approach enhances Solana’s throughput to the point where it could compete with centralized payment systems like Visa, which can handle 65,000 TPS.

The Concept of Proof of History

In November 2017, Yakovenko published a technical white paper on the concept of Proof of History, describing it as a method of achieving consensus by verifying the chronological order of events. The paper explains that these sequences of events and time progression are recorded in an encoded ledger, addressing the lack of a reliable time source in existing blockchain networks. Yakovenko emphasized that the absence of standard clocks in public blockchains leads to discrepancies in event timestamps, as each node relies on its local time, causing conflicting decisions among network participants. A blockchain utilizing this concept ensures that each node relies on a shared, synchronized, and trustworthy time source, enabling seamless and rapid consensus for each event in the network.

Technology Development Steps

Initially, Yakovenko and five others founded a project called Loom, which was rebranded as Solana in 2018 to avoid confusion with an Ethereum-based project of the same name. The name Solana was inspired by a small beach town near San Diego, California, where the founders once lived.

In June 2018, Solana moved to a cloud-based network and launched a test network capable of handling up to 250,000 TPS bursts, laying the groundwork for all subsequent major developments. Since then, Solana has continued to expand its network and enhance its capabilities, processing over 253 billion transactions by December 2023 with an average transaction fee of $0.00025.

Solana’s unique technology design removes performance bottlenecks typically encountered by other blockchain platforms. Its architecture supports impressive scalability, security, and decentralization. To illustrate Solana’s potential, the blockchain can handle up to 710,000 TPS on a standard network with gigabit bandwidth and up to 28.4 million TPS on a 40-gigabit network. Notably, PoH is not the only consensus algorithm used on Solana; the network also utilizes Proof of Stake (PoS), enabling validators to confirm transactions and achieve consensus based on the volume and quantity of tokens traded. In many ways, Solana is a masterpiece of technology and coordination.

Solana’s unique technology design removes performance bottlenecks typically encountered by other blockchain platforms.

A Brief on Marinade Finance

Marinade Finance is a protocol built on the Solana blockchain, enabling users to stake SOL tokens and earn rewards. It emerged from the Solana & Serum Hackathon project in March 2021 and officially launched on the mainnet on August 2, 2021. Since then, it has seen significant growth and adoption within the Solana ecosystem.

Marinade Finance introduced its governance token, MNDE, as the primary token for participating in protocol governance. Additionally, the project created a separate version of Solana’s token, called Marinade SOL (mSOL). When users stake their tokens in Marinade’s pool, they receive mSOL as a reward. Notably, Marinade Finance is funded through grants from Solana and Serum.

Mission

Marinade Finance aims to create a liquid staking protocol accessible to users and projects within the Solana ecosystem. To attract a broader range of investors, the project recently launched native staking, allowing users to delegate SOL across multiple network validators.

Governance in Marinade Protocol

This project is a fully decentralized protocol, meaning it’s not governed by any individual or group; rather, it operates as a decentralized autonomous organization (DAO). To participate in Marinade’s governance, users need a unique token called veMNDE, derived from the MNDE token and obtained by locking MNDE tokens in Realms. Holders of veMNDE tokens have voting power, enabling them to actively participate in managing the Marinade protocol and vote on proposals. Essentially, every veMNDE token holder becomes a member of the Marinade DAO and can contribute to the protocol’s governance.

Marinade Finance’s Issue with UK Regulations

The UK’s Parliament and Treasury have been working on crypto asset regulations since 2017. The UK government’s approach appears logical and legally sound, as it adapts existing financial and commercial laws gradually instead of introducing sudden, fragmented regulations. However, in practice, the UK government’s approach has been strict, limiting economic freedoms in this field. The latest report from the UK Treasury Select Committee is notably negative and filled with concerns about blockchain technology and financial activities, suggesting that this area be regulated similarly to gambling. Although the report does acknowledge some benefits of digital assets, the overall tone is cautious.

The new report from the UK Parliament’s Treasury Select Committee is drafted with a negative outlook, filled with concerns regarding the overall technology and blockchain financial activities.

Within the current UK government, a regulatory perspective dominates economic sectors. The UK seems focused on greater economic self-reliance, preserving the national currency’s value, and protecting users’ rights. But, in practice, these policies may drive capital away from this progressive field and reduce economic dynamism.

The UK government has, in effect, drawn a hard line by treating all crypto activities as if they have similar risks to other activities, placing them under stringent regulations. For instance, one of the strangest moves is the announcement of a list of “unauthorized and invalid” exchanges. According to the FCA, any investment or trading advertisement must be clear and free of ambiguity, with risks and potential pitfalls well highlighted for users and customers. Thus, the regulator and economic authorities must first determine whether such advertisements are authorized, which category of laws they fall under, and whether they’re ambiguous. This is despite the fact that no specific amendment has been proposed to understand and account for the distinct conditions of blockchain and decentralized markets. Additionally, the UK government has not suggested any supportive guidelines or legal provisions to aid entrepreneurs or users, especially for risks caused by governmental actions themselves.

According to the FCA’s recent decisions, all digital asset-related activities must adhere to its advertising regulations. In other words, marketing cryptocurrency products or services is restricted by this agency’s standards in the UK. Furthermore, the government may impose securities laws on blockchain projects and offerings. If the FCA bases its actions on the Treasury Committee’s suggestions, then all cryptocurrency activities will, in practice, be equated with the risks of gambling. Any institution, company, or project that does not accept these frameworks and continues to operate may face legal challenges and criminalization of its activities by the UK government. (For more details, refer to the article “The UK’s Cryptocurrency Regulatory Framework and Its Consequences.”)

Marinade Finance has taken proactive measures to comply with regulations in order to avoid exposing itself and its users to legal issues and complications.

Marinade Finance has taken precautionary steps to comply with regulations to avoid legal troubles for itself and its users. This move aligns with other crypto businesses like PayPal and Bybit, which have recently withdrawn from the UK market. Binance, too, has temporarily halted new registrations from the UK.

Final Thoughts

Marinade Finance’s decision underscores the increasing importance of regulatory compliance in the DeFi ecosystem. This protocol aims to pave a path for evolving regulations by imposing these restrictions and responses, helping to reduce potential legal challenges and conflicts. As the crypto industry continues to evolve, balancing compliance with innovation remains an unresolved challenge. It seems essential to remind the UK and all governments that actions taken by activists, traders, platforms, and institutions in various markets shape the laws, not the other way around. This is true for the response from Marinade Finance and other platforms as well. The real future of decentralized financial activities will be defined by these actions, with people and communities—not just industry participants—closely watching how these decisions unfold.