Is Solana The One True “Ethereum Killer”?

Is Solana The One True “Ethereum Killer”?
Stéphane Renevier, CFA

over 2 years ago4 mins

  • Solana is hot for a reason: it’s faster and cheaper than competitors like ethereum, and the rate at which it’s growing market share is impressive.

  • But it’s also incredibly risky: its technology remains largely unproved, it’s not truly decentralized, and it faces tough competition.

  • Short-term momentum traders with a clear exit strategy could make money by buying at these levels, but longer-term investors should be careful as opportunities to buy at better levels may happen sooner rather than later.

Solana is hot for a reason: it’s faster and cheaper than competitors like ethereum, and the rate at which it’s growing market share is impressive.

But it’s also incredibly risky: its technology remains largely unproved, it’s not truly decentralized, and it faces tough competition.

Short-term momentum traders with a clear exit strategy could make money by buying at these levels, but longer-term investors should be careful as opportunities to buy at better levels may happen sooner rather than later.

You don’t need to go far in the world of crypto to find 100% gains over a matter of months. But SOL – Solana’s token – is up 5,430% in the last year, bringing the newbie crypto into the top ten of biggest market caps. So is that a sign that it’s set to become the “ethereum killer” the market’s been waiting for, or will it die its own death like so many before it?

Why is Solana so hot right now?

Solana is a programmable blockchain, and programmable blockchains are receiving a lot of love from investors right now.

Unlike non-programmable blockchains like bitcoin, programmable blockchains go beyond just transferring value. They open up a whole new world of use cases by facilitating the execution of “smart contracts”, from typical decentralized finance (DeFi) applications – like borrowing or lending without the intermediary – to more innovative ones, like the ability to buy or sell non-fungible tokens (NFTs).

But there’s more to Solana’s popularity than that: it’s also perceived by many as the most efficient programmable blockchain in town, thanks to the use of an innovative transaction validation method known as “Proof of History” (PoH). That, as its name suggests, means it creates a record of when events happen, enabling validators to go ahead without waiting for confirmation across the network like other methods.

That PoH method means Solana offers some of the lowest transaction fees on the market, and makes it a great alternative to ethereum, which has recently become prohibitively expensive to use. It’s also impressively fast: it handles 65,000 transactions per second, putting ethereum’s 30 to shame.

What’s more, Solana is poised to be one of the biggest beneficiaries of NFT mania. It’s been growing its NFT ecosystem significantly recently, and achieved a huge win last week after successfully selling “degenerate ape academy” NFTs for millions of dollars through its platform. Given its cost advantage over ethereum, it’s not impossible to see Solana gain a significant market share in the space over the next few months.

And so far, these advantages have translated into impressive growth numbers: crypto platform Revix says that the number of projects on the blockchain has more than doubled over the past few months, while the “total value locked” in smart contracts has rocketed to more than $3.5bn – making it the third-largest blockchain in the smart contract arena.

What’s the downside?

Solana is hot for good reasons, but it remains an extremely risky bet.

First, its technology is new and remains largely unproven. So it might have to first overcome significant challenges – and most likely significant price corrections – before reaching the tried-and-tested robustness of older blockchains like Ethereum.

Second, Solana isn’t without its critics – the main pushback being that there is a strong level of concentration in the top validators. In other words, it’s not fully decentralized. That not only reduces the stability of the network, it potentially makes it more vulnerable to attacks.

Third, competition is stiff. Ethereum remains in the number two spot by a significant margin, and should continue to benefit from its advantage as one of the first blockchains on the scene. Its transition to ethereum 2.0 should help too: it’ll go a long way towards fixing its main weaknesses, like its slow speed and the high cost of its transactions. Throw in some other competitive rivals like Cardano or Polkadot, and taking number two is no walk in the park.

What’s the opportunity here?

Let’s face it, the technology behind Solana does look promising. But in the same way that great companies don’t always make great investments, it’s important to consider the price you pay for something that at the end of the day remains mostly a promise. And after seeing its value rise more than 40x in a year, it’s hard to argue Solana is undervalued.

That doesn’t necessarily mean you should avoid it, mind you. The extremely positive sentiment around Solana could push its token much higher in the short term, and momentum traders who have an exit strategy in place could turn a serious profit.

But if you’re a long-term buy-and-hold investor who just wants to gain some exposure to Solana’s promising technology, you might want to think about a more careful approach. That could involve using dollar cost averaging to build your position, allowing you to maximize your long-term returns by buying more when prices are low and less when they’re high. Or it could involve sizing your overall position like there’s a high chance you lose it all. Those strategies seem smart to me: the young cryptocurrency might’ve been dubbed the ethereum killer, but it’s still a long-way from overtaking its more established rival. That makes it a speculative play, and it should be implemented as such.

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