3 Must-Know Facts About Solana, Before You Buy the Cryptocurrency | The Motley Fool (2024)

It's safe to say that the cryptocurrency market is back in the good graces of investors. After crypto asset prices tanked in 2022, they have been on a monster upswing in the past 15 months. There might be no better beneficiary of this positive momentum than Solana (SOL -1.07%).

This cryptocurrency has skyrocketed 800% just in the past 12 months. A $1,000 investment would be worth $9,000 today. Good luck finding a better-performing asset.

Before you rush to buy Solana, make sure you take the time to understand these three facts about it.

1. Transaction mechanism

Like Ethereum, Solana operates a proof-of-stake consensus mechanism. This means that token owners are the ones who help approve transactions and validate the blockchain. Solana also has functionality for smart contracts.

But this innovative cryptocurrency has a unique feature known as proof-of-history. This system changes how time is recorded on the blockchain, reducing the need to carry extra data and resulting in faster throughput. It helps explain why Solana can theoretically process 50,000 transactions per second (TPS). That's astronomically higher than Ethereum's 14 TPS or Bitcoin's 5 TPS.

2. Building out use cases

Solana's differentiated infrastructure, with its particular focus on speed and low costs, has helped introduce a valuable use case. Launched in Feb. 2022, Solana Pay could be this network's killer app. It allows consumers and merchants to connect directly via the blockchain, handling transactions in the native token, SOL, or a stablecoin. There's instant settlement and virtually no fees.

For retailers, payment processing is a huge expense item that can eat away at their already-slim margins. Solana Pay can help these merchants keep more of their revenue as profit.

Not only that but because a blockchain is used, new features can be introduced. Merchants can attach a non-fungible token (NFT) with each purchase that acts as a receipt. This NFT could also offer up future discounts or access to special events held by that merchant. The ability to engage with customers is what's exciting here.

Solana is also dabbling in the mobile space. It launched a web3-enabled smartphone, called the Saga, in the summer of 2022. The hope is that this product can onboard more users to crypto by making it seamless to interact with various decentralized applications. A cheaper second version of the smartphone has also been introduced.

I think it's encouraging to see a popular cryptocurrency like this try to bring greater utility, with the intention of transitioning Solana away from a tool that's used mainly for financial speculation to one people can turn to in their day-to-day lives. Time will tell if these initiatives actually catch on.

3. Investor enthusiasm is high

Investors who are considering owning cryptocurrencies need to be fully aware of the boom-and-bust nature of this industry. Narratives seem to drive price movements, especially in the short term. The result is that things will remain volatile for the foreseeable future.

At its current market cap of $77 billion, Solana carries a valuation in the neighborhood of businesses like Ferrari, MercadoLibre, and PayPal. I'm not sure if this is justified, but it probably bakes in a lot of optimism about Solana's future. If there's one sure thing, though, it's that there's still a ton of uncertainty over the long term.

You now have more information about this booming cryptocurrency. But before buying, you should ask yourself if you believe in Solana's prospects over the next decade and beyond. If you do, then it might make sense to start a tiny position in this digital asset right now.