Solana (SOL 4.69%) was a red-hot growth story that increased by 100-fold between November 2020 and November 2021. Then it fell more than 85% from its all-time high in a matter of months. Solana suffered a pair of network outages in May and June, which added more downward pressure in conjunction with tumbling crypto and equity markets.
SOL -- the native token of the Solana blockchain -- is now less than $40. Here's why it may be time to buy Solana and why Solana could even be a better buy than Ethereum (ETH 0.97%) for certain investors.
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Differences between Solana and Ethereum
It can be challenging to differentiate among the thousands of cryptos, let alone the different types of crypto investments. But when it comes to building decentralized applications (dApps), Solana, Ethereum, and Cardano (ADA 2.99%) are in a league of their own. They are known as layer-1 blockchains that provide the platform upon which layer-2 protocols and smart contracts -- agreements that self-executive when certain terms are met -- can be built.
Ethereum is more decentralized than Solana. It was envisioned by then 19-year-old Vitalik Buterin, who authored the Ethereum whitepaper in 2013 before launching Ethereum in 2015. The Ethereum Foundation is a non-profit organization that supports Ethereum. But there isn't a for-profit company that calls the shots.
By comparison, Solana was launched in 2017 by Solana Labs, a California-based, for-profit company that has a lot of control over the blockchain. Because Solana is more centralized, it can do things faster than Ethereum. Upgrades take less time. And there's more accountability for outages. Transaction fees are dirt cheap, and transaction times are lightning fast. However, because Solana is more centralized than Ethereum, it's also less secure.
Solana's advantages
Most large projects are built on Ethereum. But Solana has carved out a unique niche for itself. Since it is faster and cheaper, it has been used as a growing marketplace for non-fungible tokens (NFTs). Lower minting costs and fast speeds also make Solana a great place for smaller developers to build their projects. Solana may be riskier than Ethereum, but its ecosystem should become more sophisticated with time.
Even though more NFTs have historically been bought and sold on Ethereum, there have been periods when Solana's daily NFT sales volume has exceeded Ethereum's.
For investors who are optimistic about the growth of NFTs, Solana -- with a market cap roughly a 10th the size of Ethereum's -- could be a better investment.
Risks worth considering
The Ethereum merge, which will transition Ethereum from a proof-of-work consensus mechanism to a proof-of-stake mechanism (like Solana), should drastically increase Ethereum's speed and scalability while lowering its transaction fees. If all goes according to plan, the upgrade could take away a lot of Solana's advantages.
Aside from the threat of the merge, there are other layer-1 protocols that are competing with Solana. While Solana has taken a "throw it at the wall and see if it sticks" approach, Cardano has been slow and steady. Despite heavy criticism in the crypto community, former Ethereum co-founder Charles Hoskinson, a founder of Cardana, has resisted the temptation to implement Cardano upgrades until they are ready.
A high-risk, high-reward buy
Given the extent of the Solana sell-off, now could be a great time for highly risk-tolerant investors who believe in Solana's ability to work out its kinks, reduce outages, and continue to be a major player in the NFT marketplace. However, Bitcoin (BTC 2.92%) and Ethereum remain safer alternatives for investor with lower risk tolerance.
Daniel Foelber has positions in Bitcoin, Cardano, and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
As a seasoned cryptocurrency enthusiast and blockchain technology expert, I've closely followed the trends and developments within the crypto space, including Solana (SOL), Ethereum (ETH), and other major cryptocurrencies like Bitcoin (BTC) and Cardano (ADA). My insights are drawn from continuous research, active participation in crypto communities, and hands-on experience in trading and understanding the underlying technologies.
Regarding the article's content on Solana's rise, fall, and potential investment aspects, let's delve into the fundamental concepts mentioned and provide comprehensive insights:
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Solana's Price Movement: The article highlights Solana's meteoric rise followed by a significant decline. This sharp volatility is a common trait in the cryptocurrency market, often influenced by factors like network outages, market sentiments, and broader market movements.
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Solana's Network Outages: The article mentions Solana's struggles with network outages in May and June. These incidents affected the network's reliability and investor confidence. Such issues underline the importance of network stability and resilience in blockchain systems.
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Comparison with Ethereum: Solana and Ethereum belong to the league of layer-1 blockchains supporting decentralized applications (dApps) and smart contracts. Ethereum, known for its decentralization and pioneering role in smart contracts, differs significantly from Solana in terms of governance. Ethereum is more decentralized, driven by a non-profit foundation, while Solana, launched by a for-profit entity, is more centralized, allowing faster upgrades but posing potential security concerns.
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Advantages of Solana: Solana's speed, low transaction fees, and scalability make it an attractive platform for developers, particularly in the NFT space. Its competitive advantage in faster transaction times has positioned it as a potential rival to Ethereum in the NFT marketplace.
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Risks for Solana: Despite its advantages, Solana faces risks, notably from Ethereum's impending transition to a proof-of-stake mechanism, potentially diminishing Solana's comparative advantages. Additionally, competition from other layer-1 protocols like Cardano poses a threat, with different approaches to development and scalability.
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Investment Considerations: The article suggests that for investors with a high-risk tolerance and belief in Solana's ability to improve its infrastructure and maintain a strong position in the NFT market, now might be an opportune time to invest. However, it also emphasizes the safer investment choices of Bitcoin and Ethereum for risk-averse investors.
In summary, Solana presents unique advantages and challenges in the rapidly evolving crypto landscape. Its positioning in the NFT market, alongside Ethereum's impending upgrades and competition from other protocols, will likely shape its future trajectory as an investment option.
The disclosure by Daniel Foelber and The Motley Fool's positions and recommendations on Bitcoin, Ethereum, and Solana indicate a certain level of confidence and interest in these cryptocurrencies within the investment community.
