Cryptocurrencies are still early in their journey; Ethereum (ETH 0.66%) has been among the first cryptos to emerge as a "blue chip," mainly due to the broad adoption of its blockchain network, where there are more than 3,000 projects, called decentralized apps (DApps), operating. Ethereum is second only to Bitcoin in market cap.
But being a first-mover in a space doesn't mean you keep your crown, and alternatives have emerged to challenge Ethereum. One of 2021's biggest winners is Solana (SOL 0.64%), which has been received well by cryptocurrency investors, up more than 12,000% this year. Here is why it could be a better investment than Ethereum in 2022.
Ethereum gas prices are killer
Gas fees are one of the biggest complaints investors have about using Ethereum. It requires computing power to validate transactions on the Ethereum blockchain, so users pay a small amount of Ether (ETH) to the miners on the network for each executed transaction.
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But the problem isn't the concept of gas fees, rather the size of them. According to Etherscan, a website that estimates gas fees, users can expect to pay anywhere from $29 to $80 in gas for a transaction at the time of writing. Unless users are doing large transactions, this is very expensive.
A formula calculates gas fees; things such as how much traffic is going across the network at any given time can impact how much a transaction costs. You can think of this like taking an Uber, where your fare might be higher or lower if drivers are in high demand or not.
With heavy traffic on the Ethereum network, these bottlenecks and high gas fees could signify that Ethreum's popularity is working against it. This issue could open the door for other blockchain networks to emerge to challenge Ethereum.
Solana's advantages are attracting developers
Solana is one of these challengers; an alternative to Ethereum, it's been around since its development in 2017, though it didn't get very popular until this past year. Solana is now the fourth-most popular cryptocurrency on Coinbase and carries a $54 billion market cap, though it's still just a fraction of Ethereum's size.
Solana matches up well with Ethereum in two critical areas for development, speed and low transaction costs. Ethereum's structure limits transactions per second to 15-30 on its network, creating the bottleneck that results in these high gas fees. On the other hand, Solana can handle far more, as many as 50,000 per second, and its fees are just $0.00025.
The difference between Ethereum and Solana in this regard is similar to a single-lane road with bumper-to-bumper traffic versus an empty expressway that doesn't charge any fees to access. Therefore, it shouldn't be surprising that Solana is gaining traction with developers and now has more than 400 projects in its ecosystem. This is still just a fraction of what Ethereum is doing, but Solana's momentum is noteworthy and could continue drawing developers to the network.
A reason for caution
Ethereum has been a steady riser over time, but much of Solana's value has come from a surge over the past six months. I tend to be wary of assets that go "parabolic," rising significantly in a short amount of time, because these bubble-like price movements tend to burst, burning investors that jumped in late due to fear of missing out (FOMO).
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The long-term value of Solana will likely be influenced by how many decentralized apps developers bring to its network. Solana seems to have the high speed and efficiency to continue being useful in the future, which could ultimately make it a long-term winner.
Cryptocurrencies have proven to fluctuate, and any asset that appreciates 12,000% inside of a year could easily see significant volatility. Investors should manage risk by dollar-cost averaging into Solana or any cryptocurrency and maintaining a diversified portfolio.
