Ethereum was a the first programmable blockchain, a platform where developers can build self-executing programs known as smart contracts. Since its launch, that technology has evolved into decentralized applications (dApps) and decentralized finance (DeFi) platforms, software that exists on a peer-to-peer network rather than centralized corporate servers.
dApps prevent censorship and protect user privacy, and DeFi products make financial services more efficient and more accessible. Given that value proposition, it should come as no surprise that both industries are gaining popularity. In fact, there are now over 3,800 dApps in existence, and $230 billion invested in DeFi products. And in both cases, Ethereum is the leader by a wide margin.
However, scalability problems have hindered adoption of Ethereum-powered products, pushing transaction fees 250% higher over the past year. And while the Ethereum 2.0 upgrade will address that issue, other programmable blockchains like Solana (SOL -5.76%) and Terra (LUNC -3.96%) are gaining ground. Not only that, but Solana and Terra have market values of $43 billion and $23 billion, respectively, a fraction of Ethereum's $369 billion.
Here's why both look like smart long-term investments.
While Ethereum is certainly the most mature dApp ecosystem, it currently handles just 30 transactions per second (TPS), while global payments networks like Mastercard regularly process over 2,800 TPS. In short, Ethereum lacks the throughput needed to enable mainstream adoption. Solana aims to solve that problem.
The network employs a unique hybrid consensus mechanism, blending proof of stake (PoS) with proof of history (PoH) to secure the blockchain. Generally speaking, PoS protocols require each node (computer) to confirm each transaction with every other node in order to achieve consensus. But Solana's addition of PoH makes it possible to timestamp transactions as they occur, creating a verifiable order of events. That means each node can verify transactions independently, without waiting for consensus from every other node.
That makes Solana fast -- very fast. The platform can theoretically handle 50,000 TPS, and those transactions are finalized in less than a minute. By comparison, Ethereum transactions require six minutes to reach finality (i.e. the point at which data is irreversibly added to the blockchain), and fees are significantly higher than fees on the Solana blockchain.
Not surprisingly, Solana has become popular with dApp developers and DeFi investors. There are currently over 1,100 projects in the works on the platform and $9.8 billion invested on the blockchain, making Solana the fifth-largest DeFi ecosystem. And going forward, assuming dApps and DeFi continue to gain traction -- a likely scenario, given the value proposition -- Solana should see an uptick in usage in the years ahead, a trend that would increase demand for the SOL token, pushing its price higher.
Terra aims to make e-commerce payments and financial services more efficient. To do that, the Terra blockchain features various stablecoins -- cryptocurrencies tied to the price of fiat currency -- each of which is powered by the LUNA token. For instance, the TerraUSD token is designed to track the U.S. dollar, and the TerraEUR token is designed to track the Euro. That being said, the forces of supply and demand determine the price of a stablecoin at any given moment.
Here's how it works: When rising demand pushes the price of TerraUSD above $1, the network incentivizes token holders to convert LUNA to TerraUSD. That mechanism causes the supply of TerraUSD to rise and its price to fall. The system works the same way in reverse. When falling demand drives the price below $1, the network incentivizes token holders to convert TerraUSD to LUNA. That mechanism causes the supply of TerraUSD to fall and its price to rise.
Terra is built on the Cosmos Hub, a blockchain technology powered by the tendermint consensus protocol, which itself is designed for speed and interoperability. Terra can theoretically scale to 10,000 TPS, and transactions are finalized in just six seconds. That makes Terra much more scalable than Ethereum in its current form.
Moreover, because Terra is built on blockchain technology, it doesn't rely on banks or other financial institutions. That means payment platforms powered by the network (e.g. Chai mobile app) benefit from faster settlement times and fewer fees, while making cross-border transactions less complicated. But those benefits extend to other financial products as well. Of particular note, the Anchor DeFi protocol allows investors to earn interest in exchange for providing stablecoin liquidity, and the current payout for lending TerraUSD is 19.5% APY -- a phenomenal figure compared to the 0.06% you might expect from a savings account.
Here's the big picture: As the Chai payments app, the Anchor protocol, and other dApps and DeFi products on Terra become more popular, demand for Terra stablecoins will rise. Consequently, because the LUNA token is designed to absorb stablecoin price volatility, demand for LUNA will rise, driving its price higher. And investors have good reason to believe that will happen. Chai has already made a name for itself in South Korea, where over 2.5 million people use the dApp. And more broadly, Terra is the second-largest DeFi ecosystem behind Ethereum, with $15.5 billion invested on the platform. That's why this cryptocurrency looks like a smart long-term investment.