Cryptocurrency markets have been in the throes of a brutal sell-off since the middle of last year. Investors are trimming their exposure to risk assets in the face of rising economic and political uncertainty, which recently hit a crescendo with the ongoing geopolitical tensions in the Middle East. The combined value of all cryptocurrencies in circulation is down 45% from last year’s peak of $4.4 trillion, and no major coins or tokens have avoided the carnage.
Ethereum (ETH +1.35%) is the world’s largest platform for building decentralized software applications, which are popular in industries like gaming and financial services. However, a growing number of developers are turning to the Solana (SOL +2.27%) ecosystem instead, which is a cheaper, faster, and more efficient alternative to Ethereum.
There is a native cryptocurrency in the Solana network, which is also called Solana. It’s currently down 68% from its all-time high, but could this be the ultimate long-term buying opportunity for investors?
Image source: Getty Images.
A legitimate threat to Ethereum
Decentralized apps are governed by slivers of computer code called smart contracts, which lay out the rules for each app’s functionality. They live on the Ethereum or Solana blockchains, and they typically can’t be changed, which prevents any person or company from hijacking control of the given app. Smart contracts ensure every user receives equal treatment, no matter who they are.
The Ethereum and Solana networks themselves are also fully decentralized. Rather than hosting them inside centralized data centers, they are hosted across thousands of individual nodes (computers) spread all over the world. Each node stores an updated copy of the blockchain, so even if a few of them go down, the broader Ethereum and Solana networks remain unaffected. In Ethereum’s case, this has resulted in over a decade of perfect, 100% uptime.
Solana was built with a series of improvements that address Ethereum’s limitations. Ethereum uses a proof-of-stake (PoS) validation mechanism, which requires network participants to offer coins as collateral in exchange for the right to verify transactions on the blockchain. The validators earn interest on those coins, but they also risk losing them if they engage in malicious behavior.
Solana also uses PoS, but in conjunction with a proof-of-history (PoH) validation mechanism that encodes every transaction with a timestamp. This step speeds up the verification process so thousands of transactions can be validated per second. Ethereum, on the other hand, typically can’t process more than 15 transactions per second before congestion triggers a massive increase in fees (often called “gas”).
Therefore, not only is Solana faster, but it’s also much cheaper to use, which is why the network is so attractive for developers.
Is Solana a buy after its 68% crash?
Every time someone uses a Solana-based decentralized app, they activate smart contracts that trigger fees payable in Solana coins. Therefore, demand for the cryptocurrency should grow in line with an increase in network activity, thus increasing its value.
Today’s Change
(2.27%) $1.88
Current Price
$84.79
Key Data Points
Market Cap
$49B
Day’s Range
$81.53 – $85.26
52wk Range
$70.61 – $252.78
Volume
3.5B
The number of daily active wallet addresses in the Solana network peaked at around 9.1 million in January last year, which roughly aligns with the all-time high in the Solana cryptocurrency. As I write this, daily active addresses have declined to 4.8 million, which might explain the 68% crash in Solana’s value over the same period.
However, although the number of users in the Solana network appears to have declined over the past year, it’s still up more than tenfold from three years ago, which suggests the network is becoming more popular over the long run.
Some of the most successful decentralized apps built on Solana include the Magic Eden marketplace for non-fungible tokens (NFTs) and the Jupiter cryptocurrency exchange. However, neither of them has achieved mainstream popularity yet — in fact, most people outside the crypto space have probably never heard of them.
That means predicting the trajectory of the Solana cryptocurrency will be tricky from here. Speculative investors will have a strong influence over its performance unless activity in the Solana network continues trending higher, but that is the big unknown.
Moreover, Solana can’t match Ethereum’s perfect uptime claims. The network reported seven service outages and three performance setbacks from 2020 to 2024.
Solana might be an attractive buy for investors who believe in the potential of decentralized apps, especially at the current price. It’s still a good idea for them to keep their position size small to minimize risk, because if the last few years are any indication, this cryptocurrency is likely to remain highly volatile.
Leave a comment