Decentralized finance, or DeFi, and non-fungible tokens, or NFTs, have seen massive growth in 2021. Both technologies need efficient blockchains to operate at a high speed and low cost to the user. The Ethereum (CRYPTO:ETH) network has struggled as rising demand makes it more expensive for users, spurring greater adoption of alternative networks such as Solana (CRYPTO:SOL) and Cardano (CRYPTO:ADA). Here's why keeping an eye on this trend might pay off for investors in the long run.

Ethereum struggling under the load

The Ethereum network is the industry standard for DeFi and NFTs – two of the largest growth markets in the blockchain industry this year. But being the largest and most popular network comes with a major drawback: Everyone wants to use it.

The cost to use the Ethereum network is determined by how many transactions pass through it, and how fast its miners can process them into new blocks on its chain. When user demand puts a strain on the network -- such as when a DeFi project launches a yield farming incentive, or when a new NFT collection is released -- these transaction costs can skyrocket.

A woman with a tablet and a paper ledger keeps track of transactions made in Ethereum.

Image source: Getty Images.

Ethereum's average transaction cost surged to an all-time high of $70 in mid-May, and prices have been increasing again recently, hitting an average of $60 per transaction on Sept. 7. This makes smaller micro-transactions economically unviable for the majority of Ethereum users.

Adoption soaring for rival networks

The high cost of using Ethereum has resulted in the launch of a number of rival networks that promise much faster and cheaper transactions. Two of Ethereum's major rivals, Cardano and Solana, have seen token prices soar to fresh highs recently as investment and network adoption grows. Both offer high-speed and low-cost alternatives to Ethereum by using different consensus mechanisms -- the way they use cryptographic math problems to confirm transactions on the blockchain.

Cardano launched a long-awaited upgrade this week that introduces smart contract functionality to the network. Smart contracts are programs that run on the blockchain executing commands when predetermined conditions are met. Developers use them to build decentralized applications (dApps) and decentralized finance (DeFi) protocols -- new ways to send, receive, and earn cryptocurrency or conduct financial business online. 

The price of Cardano's native token, ADA, has surged in recent weeks, hitting an all-time high earlier this month. Cardano's momentum may well continue if dApp and DeFi developers start to build on it.

Solana is another Ethereum rival that offers an enterprise-grade, high-throughput blockchain. It has also seen adoption soar in recent weeks as the fully regulated FTX (CRYPTO:FTT) crypto exchange that runs on it has gotten publicity and endorsements from several big names in the sports industry.

Solana and FTX's founder, Sam Bankman-Fried, also announced the launch of an NFT platform that will run on it and Ethereum while being integrated into the FTX exchange for U.S. customers -- giving its users another way to buy, sell, or trade unique art and other creative works on the blockchain.

Solana's native token, SOL, surged to a new peak on Sept. 9, having gained more than 400% in the previous months. At more than $48 billion, it's now the seventh-largest crypto asset by market cap as of this writing, up more than 10,000% since the beginning of this year. Just keep in mind that these experimental blockchains aren't infallible. Overwhelming demand knocked Solana offline -- its first major outage -- on Sept. 14. 

Cardano and Solana aren't alone in the race to outdo Ethereum. Other networks such as Polkadot, Avalanche, and Binance Smart Chain offer high-throughput transactions for a fraction of the cost that Ethereum does. These networks have grown in terms of users and projects, but Ethereum is still the go-to network for DeFi, dApps, NFTs, and smart contracts. 

It is going to take a lot to knock Ethereum off that perch, especially after Ethereum's major scaling upgrade early next year. Right now, Ethereum can process around 15 transactions per second (compared to roughly 250 for Cardano, and Solana's claims of more than 2,000). But the upgrade will increase that capacity by an order of magnitude; though it'll initially enable 2,000 to 3,000 transactions per second, that figure could eventually rise to 100,000, according to its co-founder Vitalik Buterin. 

The need for speed  

Tokens based on faster and more efficient networks have already performed very well this year. There's every reason to believe this will continue given the sustained demand for blockchain space.

Ethereum alone has seen its daily transaction count nearly triple since the beginning of 2020. The same is likely to occur for many of these alternative networks as users seek out faster and more cost-effective ways to transfer tokens and engage in DeFi activities.

There are also scaling platforms and decentralized exchanges to look out for. These work by adding side-chains to Ethereum to process transaction data off the main chain to make it faster and cheaper. Some notable ones that have grown in adoption this year include Loopring, Polygon, ZkSync, Arbitrum, and Optimism. Not all of them have their own tokens, but the ones that do have done very well. 

Keeping an eye on the native tokens of alternative blockchains such as Cardano, Solana, Avalanche, and Polkadot, and adding a few to diversify your portfolio, may not be a bad idea given their recent performance. To increase your chances of a successful investment, look for tokens with major partnerships with large corporations, a vibrant and expanding developer community, and an increasing number of projects employing that particular blockchain. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.