Solana (SOL -7.85%) wowed investors last year with its performance and potential as a future leader in the cryptocurrency market. This exciting crypto player soared 11,000% in 2021. Today, it's the world's seventh-largest cryptocurrency, with a market value of more than $28 billion.
But there's one big challenge Solana faces right now if it hopes to secure its spot in the cryptocurrency world -- and increase in value. And this particular issue is one that contributed to Solana's 32% drop over the past 10 days. Let's take a closer look.
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Known for speed
Solana is a blockchain network created in 2017. The platform is known for the speed of its transactions, thanks to its proof-of-history validation method.
Solana marks blocks of data with a timestamp. And this streamlines the validation process. Right now, Solana is processing more than 2,000 transactions per second, but it has the ability to handle more than 250,000 transactions per second. And its architecture allows for the eventual processing of more than 700,000 per second.
Transaction speed is key to success in this increasingly competitive space. It's particularly important as more and more people begin to rely on blockchains for important business such as banking or investment. They can't afford to have deals held up or thrown into jeopardy. And this brings us to the biggest challenge facing Solana.
The blockchain has struggled with outages in recent months. Back in September, the network went offline for 17 hours. Transactions flooded the system and many validators crashed -- bringing everything to a standstill. And just a few days ago, the network experienced "high levels of network congestion," according to Solana's official report. Duplicate transactions caused the problem.
This sort of incident can lead to major losses for network users. For instance, those borrowing money through decentralized applications (dApps) on the blockchain must provide a certain level of collateral or face liquidation. When the market declines, they often have to add to collateral. But network congestion may make that or any other move impossible.
More improvements to come
Solana engineers resolved the recent incident by releasing an update -- and Solana pledged to make additional improvements in the coming eight to 12 weeks.
Solving this sort of problem for good is a goal Solana must work toward if it aims to establish a position as a reliable player. As it stands, users who couldn't complete transactions during the recent outage and lost money may not want to give the blockchain a second chance. But if Solana does indeed show that it can maintain stability along with ensuring transaction speed over the long term, it may win these players back -- and continue to grow its number of users.
What does this mean for investors? It's important to remember Solana is a work in progress right now. The network still technically is in beta. That means now is the time to discover problems and solve them.
Solana has accomplished a lot over the past year. For instance, it's made significant gains in the number of projects and amount of assets in the network. Projects rose from 70 last January to more than 5,000 in December. And total value locked rose from $100 million to $11.4 billion during that period.
Of course, like all cryptocurrencies, Solana carries a fair share of risk. And it must show investors that it can surmount the stability problem. But if it does, it could become a cryptocurrency leader over the long term.
