After reaching a peak valuation of nearly $3 trillion in November of last year, the entire cryptocurrency market has come crashing down. With a market cap as of this writing of about $870 billion, digital assets have completely fallen out of favor with investors. This troubling situation has resulted in industry layoffs and insolvency for some crypto businesses.
Among the recent turmoil, there are still some promising blockchain projects out there, and Solana (SOL -6.38%) is one of them. Although the price of its native token SOL has dropped about 80% in 2022, I think the network has a bright future. In fact, reaching $500 per token is not out of the realm of possibilities.
Solana's focus on speed and scalability
Founded by ex-Qualcomm engineers, Solana was released to the public in April 2020. And over the following 19 months, the price of one SOL skyrocketed 33,000% to an all-time high of $260 in November 2021. As of June 30, Solana was the ninth-most-valuable cryptocurrency, with a market valuation of $11 billion.
What makes Solana truly special is its innovative consensus mechanism. The network operates a proof-of-stake system, which requires token holders to validate new transactions and earn new SOL. In addition to this, Solana also runs something called a proof-of-history algorithm. This neat feature places a timestamp on different blocks in the blockchain to speed up the processing of transactions.
According to Coinbase, Solana can process an incredible 50,000 transactions per second (TPS), most likely making it the fastest blockchain project in the world. For comparison's sake, Visa, the biggest payments network, can theoretically handle 65,000 TPS. Bitcoin and Ethereum (ETH -6.99%), the two most valuable and well-known cryptocurrencies, can only handle three TPS and 13 TPS, respectively, right now.
However, one key risk to pay attention to is the upcoming Merge on Ethereum's blockchain, which will transition it from a slow and energy-intensive proof-of-work system to a scalable proof-of-stake system. Nonetheless, Solana's emphasis on speed and scalability from the beginning -- two areas that Bitcoin and Ethereum have historically lacked -- has made it an attractive blockchain for developers to build decentralized applications (dApps).
As of now, Solana remains one of the fastest and cheapest networks out there. With more than 20,000 different cryptocurrencies on the market, having a competitive edge is critical for survival.
Building crypto's most promising use case
For Solana to reach $500 per token, which equates to a 15-fold return, compared to the $33.45 price on June 30, it needs to create real-world use cases. Luckily, the speed and low costs of the network have made it an attractive blockchain for crypto's most promising use case, a type of dApp known as decentralized finance, or DeFi.
In particular, Solana is making a play in the payments sector with the launch of Solana Pay. While the current payments industry is a complex web of banks, processors, and card networks, which all take a small cut of the transaction amount, Solana Pay allows consumers and merchants to make a direct connection at checkout, resulting in instant settlement and almost no fees.
The added bonus is that, because everything takes place on the blockchain, new features can be implemented. For example, the merchant's digital relationship with the customer not only allows for the deployment of loyalty programs, but non-fungible tokens (NFT) can also be involved. The customer can receive the actual physical product, let's say, plus an NFT version of the goods, which could have a range of benefits. It's not hard to see how Solana Pay could unlock incredible value in the world of commerce.
While it's impossible to predict what will happen with crypto prices in the next year, I believe that over the long term, digital assets will be a bigger part of consumers' daily lives. And as has historically been the case, I think cryptocurrencies will overcome this current slump and reach even higher highs in the future.
With that being said, the most likely time frame for SOL to reach $500 is probably 10 years, at the earliest. At that price, the value of the entire network would total about $164 billion. If Solana Pay takes off and achieves significant adoption, that figure isn't a stretch. Visa and Mastercard have a combined market cap of almost $700 billion.
It's also important to keep in mind that Solana's projected return would easily crush whatever the S&P 500 can produce in the next decade.