Bitcoin made its debut in 2009, and first achieved a value of $1.00 in 2011. Since then, its price has skyrocketed 4,900,000%, meaning $21 invested in Bitcoin a decade ago would be worth $1 million today. And while Bitcoin remains a worthwhile investment, other cryptocurrencies probably offer more long-term upside, especially those that contribute to decentralized finance (DeFi).
Blockchain technology makes it possible to spend money electronically without involving financial institutions, and DeFi products extend that value proposition to other financial services, like lending, borrowing, and earning interest. And because banks are eliminated from the equation, DeFi products could make those services more accessible and less costly.
Building on that idea, Solana (SOL 3.32%) and Avalanche (AVAX 1.16%) play key roles in the DeFi ecosystem, and both cryptocurrencies could be big winners down the road. Here's what you should know.
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1. Solana
Solana is a programmable blockchain designed for smart contracts, the building blocks of decentralized applications (dApps) like DeFi products. Of course, it's far from the only DeFi-friendly blockchain, but it is currently the fastest in terms of throughput.
Why does that matter? Scalability is a significant problem for many blockchains. In its current form, Ethereum supports just 30 transactions per second (TPS), limiting its utility. Imagine what would happen if Visa could only process 30 TPS -- traffic on the network would bottleneck, and you might end up waiting hours for a payment to be accepted. Fortunately, Visa can handle more than 24,000 TPS.
That's why Solana is so impressive. It can handle an estimated 50,000 TPS, making it two times faster than Visa, and orders of magnitude faster than other blockchains. Of course, Ethereum is still the largest DeFi ecosystem by a long shot, with $163.1 billion invested in DeFi. But Solana has clawed its way to fourth place, and it now boasts $11 billion locked in DeFi products on its blockchain. And it's well positioned to continue rising through the ranks.
Case in point: DeFi services are quickly becoming more popular. Since last December, the collective value locked in DeFi products across all blockchains jumped from $17 billion to $246 billion -- that's a fourteenfold increase in a single year. Assuming that trend continues, Solana's speed makes it a great alternative to Ethereum.
So what? DeFi products aren't free. Miners and validators have to be compensated for their time, so users pay transaction fees using the native cryptocurrency. In other words, as DeFi products on the Solana blockchain become more popular, users will have to buy more SOL tokens, sending its price higher. That's why Solana looks like a smart long-term investment.
Image source: Getty Images.
2. Avalanche
Solana is far from the only blockchain project trying to dethrone Ethereum. Avalanche has similar ambitions, and despite being launched in 2020, the platform has already garnered a significant amount of interest. In fact, Avalanche is the fifth-most-popular DeFi ecosystem, boasting $11.25 billion locked in DeFi products.
More importantly, the platform has already been benchmarked at 4,500 TPS, but it can theoretically support 20,000 TPS. Of course, that means Avalanche offers less than half the throughput of Solana, but there is another variable to consider: time to finality.
Whereas TPS measures throughput, time to finality measures how quickly the network can incorporate transaction data into blocks on the blockchain. At that point, transactions are irreversible. From that perspective, Avalanche is actually faster than Solana. In fact, Avalanche is the fastest blockchain-powered smart contract platform as measured by time to finality.
From there, the investment thesis mirrors that of Solana. As dApps and DeFi products on the Avalanche blockchain see greater adoption, more people will be required to purchase the underlying cryptocurrency, driving its price higher. That's why risk-tolerant investors should consider adding Avalanche to their portfolios.
