Cryptocurrency Solana has tremendous momentum.
Solana has been a top performer in 2021, rising through the ranks of altcoins to become the fourth-most-valuable cryptocurrency in the world. Solana is now valued at $64.2 billion, and its growing community of investors is excited about how Solana’s technology compares to market leaders Bitcoin (BTC) and Ethereum (ETH). Investors should remember that Solana is a relative newcomer, however, and the crypto’s extreme volatility in 2021 suggests that it is still a high-risk speculative investment at this point. For investors willing to take on the risk, here are three pros and three cons to buying Solana.
Pro: Speed and fees
Perhaps the biggest selling point of Solana is its transaction speed. Solana may be the best potential Ethereum rival among altcoins, largely because of its speed. Solana can support tens of thousands of transactions per second compared to only about 13 transactions for Ethereum, which currently operates on a proof-of-work, or PoW, model that requires miners to complete complex calculations to validate transactions. Solana’s proof-of-history, or PoH, and proof-of-stake, or PoS, models verify transactions based on coin ownership. This ease of verification also helps Solana have lower fees than Ethereum. Solana’s average fee is less than 1 cent per transaction.
Because Solana has a smaller community of users and a shorter track record than Ethereum, investors may not be able to rely as much on the network’s stability. In September, Solana’s reputation took a hit when the Solana Foundation tweeted that the Solana blockchain was experiencing “intermittent instability.” Solana Labs CEO Anatoly Yakovenko said that the network had experienced similar stability issues in the previous week as well. The company blamed “resource exhaustion” for the problems and said its engineers were resolving the issues. Reliability is key for cryptocurrency investors, many of whom weren’t happy with the relatively vague explanation.
Pro: NFTs and smart contracts
Ethereum was the first cryptocurrency to introduce smart contracts, which is code that allows blockchain platforms to run decentralized applications, or dApps. However, the popularity of smart contracts and dApps has led to congestion on the Ethereum network, opening the door for faster alternatives. Solana is also rapidly gaining market share in the high-growth non-fungible token world. NFT marketplace Solanart runs on the Solana network, allowing NFT buyers to enjoy faster transaction speeds and lower fees than buyers on the Ethereum network. Booming demand for smart contracts and NFTs could open the door for both Ethereum and Solana to succeed in the long term.
Con: Fewer projects
Ethereum’s first-mover advantage means that the network has far more projects than Solana. There are currently 2,887 Ethereum dApps, according to the website State of the dApps. Solana claims to have about 350 total projects on its network. These projects include decentralized finance, or DeFi, applications, NFT projects and gaming apps. The more word of Solana’s speed and low fee structure spreads, the more new projects may choose Solana over Ethereum. However, it remains to be seen just how valuable Ethereum’s first-mover advantage is and whether or not Solana can build up its network of programs enough to truly compete with Ethereum.
Pro: Environmental impact
One of the biggest criticisms of Bitcoin and Ethereum as next-generation technology is their negative environmental impact. The computing power needed for mining Bitcoin and verifying transactions via its PoW model currently generates about 60 million tons of carbon dioxide per year, giving Bitcoin roughly the same carbon footprint as the entire country of Greece. Bitcoin’s carbon footprint is also why Elon Musk reversed course on Tesla Inc. (ticker: TSLA) accepting Bitcoin as payment earlier this year. Solana’s PoS and PoH verification process is far less energy-intensive, potentially making the crypto a greener alternative to Bitcoin and Ethereum.
One of the biggest reasons investors flocked to cryptocurrencies in 2020 was to seek refuge from inflation. Many cryptocurrencies have hard caps on the total number of coins that will ever exist. Bitcoin, for example, is limited to 21 million coins, and the final coin is expected to be mined in 2140. Solana, on the other hand, does not have a fixed number of coins. Solana started out increasing its supply by 8% annually. That inflation rate declines by 15% annually until it reaches 1.5%, where it will remain indefinitely. Crypto investors seeking zero inflation should look elsewhere.
Pros and cons of buying Solana:
— Pro: Speed and fees
— Con: Stability
— Pro: NFTs and smart contracts
— Con: Fewer projects
— Pro: Environmental impact
— Con: Inflation
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