Solana (SOL -0.31%) was a red-hot growth story that increased by 100-fold between November 2020 and November 2021. Then it fell more than 85% from its all-time high in a matter of months. Solana suffered a pair of network outages in May and June, which added more downward pressure in conjunction with tumbling crypto and equity markets.
SOL -- the native token of the Solana blockchain -- is now less than $40. Here's why it may be time to buy Solana and why Solana could even be a better buy than Ethereum (ETH 1.03%) for certain investors.
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Differences between Solana and Ethereum
It can be challenging to differentiate among the thousands of cryptos, let alone the different types of crypto investments. But when it comes to building decentralized applications (dApps), Solana, Ethereum, and Cardano (ADA 0.26%) are in a league of their own. They are known as layer-1 blockchains that provide the platform upon which layer-2 protocols and smart contracts -- agreements that self-executive when certain terms are met -- can be built.
Ethereum is more decentralized than Solana. It was envisioned by then 19-year-old Vitalik Buterin, who authored the Ethereum whitepaper in 2013 before launching Ethereum in 2015. The Ethereum Foundation is a non-profit organization that supports Ethereum. But there isn't a for-profit company that calls the shots.
By comparison, Solana was launched in 2017 by Solana Labs, a California-based, for-profit company that has a lot of control over the blockchain. Because Solana is more centralized, it can do things faster than Ethereum. Upgrades take less time. And there's more accountability for outages. Transaction fees are dirt cheap, and transaction times are lightning fast. However, because Solana is more centralized than Ethereum, it's also less secure.
Solana's advantages
Most large projects are built on Ethereum. But Solana has carved out a unique niche for itself. Since it is faster and cheaper, it has been used as a growing marketplace for non-fungible tokens (NFTs). Lower minting costs and fast speeds also make Solana a great place for smaller developers to build their projects. Solana may be riskier than Ethereum, but its ecosystem should become more sophisticated with time.
Even though more NFTs have historically been bought and sold on Ethereum, there have been periods when Solana's daily NFT sales volume has exceeded Ethereum's.
For investors who are optimistic about the growth of NFTs, Solana -- with a market cap roughly a 10th the size of Ethereum's -- could be a better investment.
Risks worth considering
The Ethereum merge, which will transition Ethereum from a proof-of-work consensus mechanism to a proof-of-stake mechanism (like Solana), should drastically increase Ethereum's speed and scalability while lowering its transaction fees. If all goes according to plan, the upgrade could take away a lot of Solana's advantages.
Aside from the threat of the merge, there are other layer-1 protocols that are competing with Solana. While Solana has taken a "throw it at the wall and see if it sticks" approach, Cardano has been slow and steady. Despite heavy criticism in the crypto community, former Ethereum co-founder Charles Hoskinson, a founder of Cardana, has resisted the temptation to implement Cardano upgrades until they are ready.
A high-risk, high-reward buy
Given the extent of the Solana sell-off, now could be a great time for highly risk-tolerant investors who believe in Solana's ability to work out its kinks, reduce outages, and continue to be a major player in the NFT marketplace. However, Bitcoin (BTC 0.87%) and Ethereum remain safer alternatives for investor with lower risk tolerance.
