Solana (CRYPTO:SOL) is a blockchain platform known for its speed and efficiency. SOL tokens are its native cryptocurrency and are used to pay its transaction fees. Since launching in 2017, Solana has grown to become one of the largest cryptocurrencies in the world.
Because the Solana blockchain has smart contract capability, developers can use it to build decentralized apps (dApps). Its strong growth has helped establish it as a rival to other major programmable blockchains, including Ethereum (CRYPTO:ETH) and Cardano (CRYPTO:ADA).
Solana is in a competitive marketplace, but there are several reasons to be bullish on it. Read on for a detailed guide to Solana to learn more and decide if you should invest.
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What makes Solana unique?
The biggest draws of Solana are its fast and cheap transactions. It’s reportedly able to handle 65,000 transactions per second, and the average cost per transaction is $0.00025.
Solana is able to do that because it uses proof of history, a unique algorithm to validate transactions. Most blockchains use either a proof-of-work or proof-of-stake consensus mechanism, with proof of stake being the more efficient option. Solana uses a hybrid protocol that combines proof of stake with proof of history for even faster processing.
As far as what Solana does, it’s an open-source blockchain, which means that developers can use it in a variety of ways. Here are a few examples of what can be done on the Solana ecosystem:
One of the most exciting developments with Solana has been Solana Pay, a free-to-use payments framework. It allows merchants to accept payments directly from customers through the Solana network. Payments are made in stablecoins such as USD Coin (CRYPTO:USDC) that are designed to maintain a stable price.
By using Solana Pay, businesses can avoid high payment processing fees.
Where Solana came from
In November 2017, Anatoly Yakovenko published a white paper introducing Solana’s proof-of-history concept. Yakovenko was previously a senior staff engineer at Qualcomm and a software engineer at Mesosphere and Dropbox. He went on to work with Greg Fitzgerald, Stephen Akridge, and Raj Gokal in developing a single, scalable blockchain.
The original name for their project was Loom, but Ethereum released Loom Network at the same time. To avoid confusion, the team renamed their project Solana and chose Solana Labs as the company name.
The Solana cryptocurrency was first available in 2019 during private token sales, where Solana Labs raised about $20 million. Both the Solana protocol and SOL tokens were released to the general public in 2020. The Switzerland-based Solana Foundation, which supports the Solana ecosystem today, also was founded in 2020.
Solana vs. Ethereum
Solana’s biggest competitor is Ethereum, and it has been called an “Ethereum killer.” Considering the popularity of each blockchain, prospective investors often wonder how the two match up.
When Ethereum launched, it used the proof-of-work consensus mechanism to validate transactions. Although proof of work was common at the time, it’s not energy-efficient. Ethereum is currently in the process of transitioning to proof of stake, which is used by Solana in conjunction with its proof-of-history algorithm.
That results in a major difference in transaction processing. Solana regularly processes thousands of transactions per second and is theoretically capable of handling 65,000. Ethereum can only handle about 30 transactions per second (although once it completes its upgrades, it will reportedly be able to handle up to 100,000 per second).
Ethereum also has been around for much longer, and it’s still well ahead of Solana in terms of users. For example, according to DeFi Llama, Ethereum had about $120 billion in total value locked (TVL) across its DeFi protocols as of April 2022. Solana had a little more than $7 billion.
How Solana works
Solana is built for scalability, and it accomplishes that through its unique hybrid protocol. This protocol uses both the proof-of-stake consensus mechanism popular with other blockchains, as well as Solana’s proof-of-history algorithm.
Proof of stake is a way to validate blockchain transactions. Validators are chosen based on the amount of crypto tokens that they’ve staked (pledged to the blockchain). Validators receive rewards when they confirm new blocks of transactions and add them to the blockchain.
Proof of history verifies the order of blockchain transactions and the passage of time between them. The timestamps on transactions are built into the blockchain itself. Because the time stamp is built in, validator nodes don’t all need to communicate with each other to confirm transaction times.
There are a few other technical design reasons for Solana’s relative speed advantages, but the end result is that proof of history helps optimize the transaction process. It cuts down on the work that validators need to do, enabling much shorter processing times.
Partnerships
The Solana ecosystem is absolutely massive, and it’s constantly growing. It’s home to DeFi projects, NFT marketplaces, crypto lending protocols, and Web3 apps. During 2021, the number of projects on Solana grew from 70 to more than 5,100.
Here’s a selection of a few notable partners and projects:
- Solana and crypto exchange FTX worked together to build Serum, a high-speed, decentralized crypto exchange on Solana’s blockchain.
- Michael Jordan launched his debut NFT collection on HEIR, a Solana-based platform.
- NFT marketplace OpenSea is now listing Solana-based NFTs. It previously only offered Ethereum-based NFTs.
- Audius, an app designed to build a decentralized music community, chose to move to Solana. It researched more than 20 blockchain platforms before deciding.
- Solana also partners with the Arweave blockchain to permanently store large amounts of Solana’s data, including transaction history and NFT data files.
Can I make passive income with Solana?
You can make passive income with Solana. Since Solana uses proof of stake to validate transactions, it gives you the opportunity to stake your crypto and earn rewards.
When you stake Solana, you pledge your SOL tokens to a validator node that checks transactions. In return, you’ll receive a portion of the block rewards that the validator receives. It requires setting up a blockchain wallet and choosing a validator, but it’s a good way to get more SOL tokens.
It’s always worth mentioning that cryptocurrency is a very different type of passive income than cash. Like other cryptocurrencies, Solana is volatile. If the price drops, your earnings might not make up for the losses.
Unique risks
Solana’s not without its issues. The most prominent is an uneven power structure, which you can see in both its initial token distribution and its validators.
Crypto research company Messari found that 48% of Solana’s initial token allocation went to insiders, including the team, company, and venture capital companies. Another 13% went to the Solana Foundation.
The Solana network has well over 1,000 validators, but more than one-third of the cumulative stake is held by fewer than 25 validators. This means a relatively small number of validator nodes are responsible for verifying more than a third of Solana’s transactions.
Outages have also become a concern as Solana has grown more popular. The Solana network experienced multiple outages in both 2021 and 2022, including a 48-hour outage in January 2022 that liquidated many users of the Solend lending protocol.
It takes time to stabilize a blockchain, and Solana is far from the only one to go through outages. But the frequency has attracted criticism and worried Solana supporters. Additionally, Solana has not yet declared the blockchain’s mainnet to have completed its “beta” development period.
Is Solana a good investment?
Solana clearly has potential. With the speed and low costs it offers, it has positioned itself as a faster, cheaper alternative to Ethereum. It’s building a large ecosystem of different projects and could become a popular choice for merchants with Solana Pay.
Although Solana has grown quite a bit, its market cap is still just a fraction of Ethereum’s. It’s easy to see a scenario where Solana continues to expand as a cryptocurrency investment.
The fact that you can stake Solana is also a plus. You’ll earn more SOL tokens based on the amount you stake, so if you already believe in the project, being able to stake is another benefit of investing.
That being said, Solana is a high-risk investment. Cryptocurrencies are extremely volatile, and there are plenty of seemingly great projects that fall off the map. Only invest in Solana if you’re comfortable with the risk, and make sure not to spend more than you can afford to lose. Also, keep in mind that long-term changes will affect your portfolio much more than weekly swings.
How to buy Solana
Buying Solana is fairly straightforward since there are many crypto exchanges that list it. Here are a few of the most popular options:
You can sign up for an account on one of these, or any other crypto exchange with Solana, to buy it.
Solana took the crypto market by storm in 2021. Although it has had some issues with outages, the speed it offers and the number of projects on the horizon make it an exciting blockchain platform.
Lyle Daly has positions in Cardano, Ethereum, Solana, and USD Coin. The Motley Fool has positions in and recommends Coinbase Global, Inc., Ethereum, Lightspeed Commerce, and Solana. The Motley Fool has a
disclosure policy.
