What to Know Before Investing in Ethereum Competitor Solana (SOL)

What to Know Before Investing in Ethereum Competitor Solana (SOL)

As a request for Ethereum, the most used blockchain network, surged this year, other projects have sprung up to try to compete. Among them is Solana, a blockchain with a native cryptocurrency called SOL.

“Solana is Ethereum’s biggest competitor,” Matt Hougan, chief investment officer at Bitwise Asset Management, told CNBC Make It. “I wouldn’t put all my chips on it, but I’m a big fan.”

Hougan isn’t alone ⁠—the global market has also shown support for Solana. This year, SOL is in place nearly 12,000%, according to CoinGecko. Now the the fourth largest cryptocurrency by market value, SOL hit an all-time high of nearly $259.96 on Saturday, and currently, it has a market capitalization of over $74 billion.

There are several reasons why Ethereum and Solana are often compared. For one thing, both have smart contract capabilities. Smart contracts, or collections of code that execute a set of instructions on the blockchain, are crucial for managing decentralized finance, or DeFi, applications and non-fungible tokens, or NFTs.

“A lot of the fastest growing crypto technology applications were built on Ethereum and rely on the Ethereum blockchain to run,” Hougan said. “If you invest in Solana, you bet its technical sophistication will help it leapfrog Ethereum.”

Although Solana has been particularly busy lately, it is important to research and understand the risks before investing. After all, financial experts generally view all cryptocurrencies as risky, volatile, and speculative investments.

What is Solana?

Solana was officially launched in March 2020. Its founder, Anatoly Yakovenko, designed Solana to support smart contracts and the creation of decentralized applications, or dapps.

The blockchain operates on both a proof-of-history (PoH) and proof-of-stake (PoS) model. PoS allows validators to verify transactions based on the number of coins they hold, while PoH allows those transactions to be timestamped and verified faster, Yakovenko wrote in the Solana White Paper.

In combination, “Solana can complete more trades per unit time and has significantly lower fees,” compared to Ethereum, says Sam Trabucco, co-CEO of cryptocurrency quantitative trading firm Alameda Research.

Currently, Ethereum operates on a proof-of-work (PoW) model, where miners must compete to solve complex puzzles in order to validate transactions.

How does it compare to Ethereum?

Although Ethereum is older and bigger, “Solana is a viable competitor,” says Brett Harrison, president of cryptocurrency exchange FTX US.

One reason is that Ethereum “is fundamentally limited in its capacity for applications on a global scale due to the small number of transactions per second it can support,” Harrison explains. Solana can support tens of thousands of transactions per second, while Ethereum can support approximately 13 transactions per second.

Solana also has “significantly lower fees,” Trabucco said. One of the biggest complaints about Ethereum is its often high transaction fees.

Ethereum also has its own advantages. “Ethereum has more users, more applications that already exist, and more stability,” says Trabucco.

It also has a “massive adjacent ‘first mover’ advantage,” he adds, referring to the theory that the first to enter a market automatically has an advantage over the competition.

Ethereum proponents say the blockchain will become more scalable, secure, and sustainable after its Eth2 upgrade, scheduled for 2022, during which the network will also transition to a PoS model. They also argue that Solana still has a long way to go before it reaches the same level of quality and prominence that Ethereum commands.

Still, “I certainly think both probably have their place,” says Trabucco.

What are the risks ?

As a general rule, financial experts warn to only invest what you can afford to lose in cryptocurrencies due to their significant risks.

Solana, in particular, has its own risks. First, it appreciated considerably in a short time. Just like with other cryptocurrencies, the potential for large price fluctuations should be considered and understood before investing. As soon as it hits a new high, it might come back down.

Critics too worrying about Solana’s decentralization after suffering a 17-hour outage in September, during which the network was unable to process transactions. Solana developers later blamed so-called “resource exhaustion”, Bloomberg reported.

All in all, “the risks are that [Solana] competes with other technologically sophisticated blockchains and blockchains with very large communities and established user bases,” Hougan says. “It’s like betting on a nifty new software company.”

This story has been updated to reflect Solana’s price.

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