Right now, the crypto market is sending a clear signal that Ethereum (ETH -1.29%) has won the battle of the Layer 1 blockchains. While it might be down 65% for the year, every one of its primary Layer 1 blockchain challengers has seen even bigger losses. For example, Cardano (ADA -0.13%) is down 73%, Algorand (ALGO 1.03%) is down 81%, Solana (SOL 2.52%) is down 82%, Avalanche (AVAX 2.43%) is down 86%, and Fantom (FTM 2.71%) is down 92%. 

Of these, the two that have the most potential to pop are Solana and Avalanche. Both are former "Ethereum killers" that generated a tremendous amount of buzz heading into this year. Given recent market performance, both appear to be oversold compared to Ethereum, and both could be ready to jump in 2023.

The case for Avalanche

It's almost staggering just how far Avalanche has fallen in the past 12 months. In fact, it has been one of the worst-performing altcoins of the year. Although it still has some of the lowest transaction costs and fastest transaction processing speeds of any blockchain, it has had a hard time gaining traction in 2022.

Avalanche has made tentative steps to diversify away from its traditional strength in decentralized finance (DeFi), but it has been tough sledding thus far in areas like non-fungible tokens (NFTs), Web3 gaming, and the metaverse. NFTs, for example, stand out as a particular area of weakness for the crypto. 

Two investors looking at a tablet together.

Image source: Getty Images.

But there have been some encouraging signs of late. In August, online brokerage Robinhood (HOOD -1.36%) listed Avalanche for trading, a sign of support for the currency. Moreover, in September, one of the most popular NFT marketplaces in the world, OpenSea, began listing Avalanche NFTs and expanded its support for its NFT projects. This could really help the digital currency reach more mainstream investors and allay doubts about its efforts in the NFT space.

Perhaps the biggest reason Avalanche could pop, though, is that investors appear to be unfairly punishing it for an alleged scandal that came to light at the end of August. At that time, an anonymous whistleblower forwarded information to Crypto Leaks (sort of like a WikiLeaks for the crypto industry) about potential market manipulation by AVA Labs, the New York-based firm that promotes and develops the Avalanche blockchain. AVA Labs has strenuously denied any allegations, but the market is not giving Avalanche the benefit of the doubt. 

There have been so many scandals in the crypto industry this year that it appears investors are exercising an abundance of caution with Avalanche. If this controversy can finally be put behind it, the token could have room to run in 2023.

The case for Solana

Solana, too, is another of the "Ethereum killers" that investors loved to tout back in 2021. The primary reason Solana is being beaten down this year seems to be growing concern about outages and glitches on its blockchain network. At the beginning of the year, Solana suffered a much-publicized blackout of 18 hours. And there have been shorter outages throughout the year, at regular intervals. As a result, some investors have apparently given up on Solana.

But Solana has a lot going for it that makes it an attractive investment. For one, it is clearly catching up to Ethereum in the NFT market, and now commands close to 25% of the entire market in terms of trading volume. On a daily basis, there is sometimes more trading in Solana NFTs than in Ethereum NFTs. At the beginning of the year, that would have been unthinkable.

Solana also continues to wow with its new product launches. At the beginning of the year, it was Solana Pay, and during the summer, it was Solana Mobile. Solana is also the blockchain network that gave us the big breakout crypto hit of 2022: the exercise-to-earn game STEPN (GMT 2.08%).

Looking to 2023, Solana is poised to reestablish itself as the innovation leader in the blockchain and crypto market. Thanks to its renewed efforts at brand building, the token will be launching more of its in-real-life (IRL) crypto retail stores. And thanks to its pioneering efforts in mobile, the digital currency is going to launch the world's first-ever "crypto phone" in the year's first quarter. The phone is designed to making it simpler to buy and sell crypto than on other mobile devices. This summer, Solana also launched a $100 million fund to invest in the next generation of projects.

Two options just waiting to break out

In 2022, all the buzz was focused on Ethereum and the first phase of its system upgrade, The Merge. That, in turn, led to investors pushing down the prices of all Ethereum challengers. As a result, both Solana and Avalanche are now down more than 80% for the year and have markedly underperformed versus Ethereum. 

While both of these cryptos have had their share of problems this year, sentiment could change quickly. Remember that both are former crypto darlings and both have been relentlessly talked up as "the next Ethereum" in the recent past.

So it's certainly not out of the range of possibility that they rebound in the year ahead, especially if Ethereum stumbles at any point with the implementation of The Merge.