3 Green Flags and 3 Red Flags on Buying "Ethereum Killer" Solana

With its increasing popularity with developers, it's been called an Ethereum (ETH -2.07%) killer. But is the smart-contracts platform Solana (SOL -5.60%) able to live up to its promise? In this episode of "The Crypto Show" on Motley Fool Live, recorded on Feb. 9, Fool.com contributors Chris MacDonald and Jon Quast discuss what the bull and bear cases are for this growing crypto company.

Jon Quast: Let's talk about another cryptocurrency out there, and that is Solana. This is the one that we've ran out of time to talk about last week. We just bumped it to this week. This is one that has really been taking off here recently, Chris, and it's very different from Bitcoin. I know that it's easy on the outside to lump all these together, but Bitcoin is not like Solana as much as Ethereum is like Solana, correct?

Chris MacDonald: Yeah, that's a good characterization. Solana has been often referred to as "Ethereum killer" just because the Solana network has more of a robust ecosystem aimed at decentralized finance and the applications that are built on top of the blockchain. Solana, like Ethereum, is a layer-1 smart contract-enabled network, whereas Bitcoin is viewed more as a network for transactions. Solana's big advantage, let's say, over Ethereum is its cost and speed structure. This is something that I've dove into a little bit in the past, but not to get too technical, but it is interesting because there's a lot of proof-of-stake networks out there. Proof-of-stake refers to networks that are validated and secured via holders of the given token, staking them on the network to validate transactions. Proof-of-work is what Bitcoin does, which requires complex mathematical problems to be solved for that validation to happen, and that requires a lot more energy and generally is the crux of the issue with a lot of investors. Proof-of-stake is where crypto is headed, and Solana is attractive just on that basis alone. But Solana's proof-of-stake mechanism is actually different than a lot of its competitors. When blocks come in to get validated, a lot of times when you have multiple blocks coming in in the same fraction of a second, they need to be ordered by the network. So what Solana has done is they've introduced time stamps into their validation process and essentially made it so that via a proof-of-history model, they can see which transactions have come in and order them quicker, and that's been the key advantage for this network. What that's led to is a number of cost advantages for which Solana transaction can often be a fraction of a penny. For an NFT transaction that's $10, let's say, you're going to want to do that on Solana versus Ethereum, where [laughs] the costs can be much higher, and in often cases, higher than the NFT itself. There's the NFT thing, which I know Travis is going to touch on, and I know he's going to touch on the Solana Pay thing, too, which is very interesting, which is essentially a peer-to-peer crypto purchasing service for merchants. Right now, my understanding is that most of the offerings out there which you can pay in crypto for things actually get settled in U.S. dollars. You pay with your crypto, it's converted to USD, and then the transaction is via credit card or what have you or PayPal is settled in USD, whereas Solana Pay is crypto to crypto. So it's kind of first of its class in terms of being a high-profile project in the space. The other big catalyst, I think, that investors are looking at this past week is that Coinbase listed two SPL tokens. And SPL tokens are like ERC tokens for Ethereum. They're projects that are based on the Solana network. Those projects got listed on Coinbase. So that's a first and that's definitely a big catalyst.

Quast: These are tokens that aren't Solana, but they are built on Solana. So they give Solana a more of a use case, right?

MacDonald: Yeah. They highlight the ecosystem of Solana, similar to Ethereum, and they're based on Solana. So it shows that as a layer-1 network, it's got a bunch of projects that are being built on top and it's growing in terms of attractiveness to investors in that way. Then do you want me to cover the bear case as well?

Quast: Sure. Why don't we go ahead and lay out the bear case, and then I know Travis had some things to share about Solana.

MacDonald: That sounds good. So in terms of what are investors' concerns with Solana right now, there has been some slowdowns and some actual outages with the Solana network. And I think over the past three months there has been four or five times when the network has been down for various periods of time and the developer team behind Solana has attributed this to high compute transactions and growing pains. I think the concern among many investors is that Solana might be a victim of its own success, because it's growing so fast. Potentially, congestion could lead to similar outcomes like what we've seen with Ethereum. And then following that line of reasoning, Ethereum's undertaking an update to go to Ethereum 2.0, which would be a proof-of-stake network. They are currently proof-of-work right now, similar to Bitcoin, and that would improve their speeds and lower their costs, which in theory could diminish Solana's investment thesis. Those are some interesting things to watch.