One distinguishing characteristic of this year's crypto market is just how much Ethereum (ETH 3.62%) has outperformed its biggest blockchain rivals. Yes, Ethereum is down 67% for the year, but have you seen how much its rivals are down? Former "Ethereum-killer" Solana (SOL -4.79%) is down 92%, while Avalanche (AVAX 2.53%) is down 88%.

In 2022, Ethereum benefited from a clear flight to quality as investors fled all the perceived risky names in the crypto marketplace to focus on trusted, established names like Ethereum. So there's definitely a case to be made that many of Ethereum's blockchain rivals will bounce back in 2023 once investors regain their risk appetite for crypto. Here's a closer look at why Solana and Avalanche can outperform Ethereum in 2023.

Ethereum does not have The Merge next year

In 2022, Ethereum benefited from the hype and anticipation around the system upgrade known as The Merge, which was often described as one of the biggest events in crypto history. This narrative focused investors on the future potential of Ethereum and gave the crypto a boost in price during the summer heading into The Merge.

Computer engineer working at Ethereum mining farm.

Image source: Getty Images.

But, from an investment perspective, The Merge turned out to be underwhelming at best. And while Ethereum will continue to add more tweaks and changes to its blockchain in 2023, it simply doesn't have a catalyst similar to The Merge to attract investor attention. If you haven't heard of Ethereum's upcoming Shanghai upgrade scheduled for next year, there's a good reason: It represents incremental improvements at best.

Solana and Avalanche continue to develop rapidly

If you are only looking at this year's market performance, you might assume that Solana and Avalanche are fading into obscurity. Granted, both are now at risk of falling out of the list of the world's top-20 cryptos by market capitalization. Nonetheless, both continue to develop at a rapid rate. Solana, for example, is making real headway in the non-fungible token (NFT) marketplace, where it now ranks only behind Ethereum in terms of sales-volume activity. And Avalanche has been posting strong transaction activity data for months now, a sign that it may be starting to regain its mojo in the area of decentralized finance (DeFi).

Moreover, both Solana and Avalanche have strategic initiatives planned for 2023 that should attract the attention of investors. Solana, for example, has a new mobile strategy promising "Web3 in your pocket," which is set to kick off in the first quarter of 2023. Avalanche is rolling out a number of Layer-2 scaling solutions that will make it even faster and more efficient in the same way that Ethereum has used Layer-2 scaling solutions to power its growth.

The end of the "winner-takes-all" thesis

Finally, one reason I think both Solana and Avalanche are going to outperform Ethereum in 2023 is that the "winner-takes-all" investment thesis in the blockchain space is no longer as dominant as it once was. In a winner-takes-all scenario, Ethereum pulls off The Merge, increasing its speed and functionality, and thus is in position to obliterate its rivals. Over time, the thinking goes, Solana and Avalanche will simply run out of money and fall out of favor with developers and users. In that scenario, a 90% decline in price for both this year makes sense, signaling that investor see them as worthless. 

But is that really what is happening? One could argue that Solana, for example, has been unfairly pulled down by the whole FTX (FTT) contagion saga, given the links between Sam Bankman-Fried, FTX, and Solana. And Avalanche was pulled down by a controversy of its own involving potentially unfair competitive practices. Combined with the general market meltdown, this extra layer of risk made both Solana and Avalanche too hot to handle for most investors.

The opposite of winner-takes-all is a dynamic, competitive market in which there are several large Layer-1 blockchains to compete with Ethereum. In that case, Solana and Avalanche will continue to co-exist with Ethereum, and each of them will have at least one niche where they excel.

What happens in 2023?

There are a number of events for both Solana and Avalanche that could boost their prospects in 2023. For Solana, it is the revival of the NFT marketplace, which was decimated in 2022. For Avalanche, it is the return of the DeFi market, which got hit by all the scandals, meltdowns, and controversy surrounding players like FTX, Terra Luna (LUNA -0.43%), Genesis, and BlockFi.

The crypto market can't possibly be any worse in 2023 than it was in 2022, right? If risk-seeking behavior returns to the market, investors will begin to seek out beaten-down cryptos that got oversold in 2022. Solana and Avalanche are two of these cryptos, which is why I think they are both attractive buys heading into the new year.