While Ethereum (ETH 0.55%) remains the acknowledged market leader among Layer 1 blockchains, it's no longer as dominant as it once was. In 2022, Ethereum appears to have dedicated much of its attention to The Merge, which has opened the door for challengers like Solana (SOL +1.86%) to take market share away from Ethereum in areas ranging from non-fungible tokens (NFTs) to gaming.
Moreover, let's be honest: The Merge has been a dud from an investment perspective. During the summer, it looked like Ethereum was going to skyrocket to new highs. But after briefly approaching the $2,000 mark in mid-August, Ethereum is now trading around $1,300.
Blockchain developers might be super jazzed about The Merge, but crypto investors are not. So is Ethereum or Solana the better buy right now?
Image source: Getty Images.
NFT market share
At the beginning of 2022, we started to see the first cracks in Ethereum's NFT dominance. JPMorgan released a report suggesting that Ethereum's market share had dropped to 80%, thanks to the arrival of players such as Solana. In 2021, Ethereum controlled almost 95% of the NFT market, but 80% is still 80% -- most companies would be happy with that kind of market share.
But now reports are surfacing that Solana-based NFT marketplace Magic Eden is rapidly gaining ground on OpenSea, the most popular Ethereum NFT marketplace. Developers are warning about disruptions to NFT sales on Ethereum as a result of The Merge. And while trading volume in Ethereum NFTs was down markedly over the summer, Solana is actually posting the highest trading volumes it has seen since May. The hottest Solana NFT collection these days is y00ts, a set of 15,000 NFTs that has already attracted the attention of celebrities. This NFT collection now regularly ranks in the top 10 of all NFT sales on a daily basis and is responsible for a huge spike in Solana NFT activity.
Performance metrics
And it's not just the NFT marketplace where Ethereum seems to be ceding market share. A new report from blockchain analytics platform Nansen suggests that Solana strongly outperformed Ethereum in the second quarter of the year. Nansen, which focuses on the crypto and blockchain industry, looked at metrics such as the number of new digital wallets being created and the number of average daily transactions, and the conclusions are startling. According to these figures, Solana is now seeing 40 times the daily average transaction volume of Ethereum.
This is due in large part to the faster transaction speeds, lower fees, and higher throughput capacity of Solana. Simply stated, it's just easier, faster, and cheaper to do everything on Solana than it is on Ethereum, so it only makes sense that Solana is seeing an impressive surge in activity.
And Solana is not resting on its laurels, either. It just announced its first-ever Layer 2 scaling solution that will make Solana even faster, more scalable, and more interoperable with other blockchains.
Solana has earned an innovation premium
The area that I'm most concerned about is the innovation potential of these two blockchains. At one time, Ethereum was leading the way. It single-handedly created the NFT category and the concept of smart contracts. But now it looks like Solana is starting to become the new category creator.
What was the hottest gaming project of the year? Yep, it was STEPN, the revolutionary move-to-earn game on the Solana blockchain. What was the first blockchain to offer a crypto phone? You guessed it -- it was Solana. What was the first crypto to unveil an in-person retail store experience? Again, it was Solana.
This is all remarkable evidence that Solana is arguably the biggest innovation powerhouse in the blockchain and crypto space. As an investor, I'm willing to pay a premium for access to this type of innovation.
Solana's future prospects
Of course, not all is sunny for Solana. The crypto is down more than 80% for the year, and almost 90% from an all-time-high of $260. In contrast, Ethereum is "only" down 65% for the year. And Ethereum has always had the first-mover advantage over Solana. There are some areas, such as decentralized finance (DeFi), where I don't think Solana has caught up to Ethereum yet.
CRYPTO: SOL
Key Data Points
But it's getting increasingly difficult to ignore the fact that Solana is really starting to separate from its other Layer 1 blockchain rivals. It is now starting to narrow the gap with Ethereum as well, and I wouldn't be surprised if Solana outperforms Ethereum over the next 12 months. If Ethereum can't show dramatic performance improvements after The Merge, then I think Solana is easily the better buy.
