What to know before investing in Ethereum competitor Solana (SOL)

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As Ethereum’s request, the most used blockchain network, has jumped this year, other projects have emerged in an attempt to compete. Among them is Solana, a blockchain with a native cryptocurrency called SOL.

“Solana is Ethereum’s main competitor,” Matt Hougan, chief investment officer at Bitwise Asset Management, told CNBC Make It. “I wouldn’t put all my chips on it, but I’m a huge fan.”

Hougan is not alone – the global market has also shown support for Solana. This year, SOL is on the rise nearly 17,000%, according to CoinGecko. Now the fifth cryptocurrency by market value, SOL hit a record high of nearly $ 250 Thursday, and currently it has a market cap of over $ 70 billion.

There are several reasons why Ethereum and Solana are often compared. On the one hand, both have smart contract capabilities. Smart contracts, or collections of code that execute a set of instructions on the blockchain, are crucial in the execution of decentralized finance, or DeFi, applications and non-fungible tokens, or NFTs.

“Many of the fastest growing crypto technology applications have been built on Ethereum and rely on the Ethereum blockchain to function,” Hougan said. “If you invest in Solana, you bet its technical sophistication will help it overtake Ethereum.”

Although Solana has been particularly lively lately, it is important to research and understand the risks before investing. After all, financial experts generally consider all cryptocurrencies to be risky, volatile, and speculative investments.

What is Solana?

Solana was officially launched in March 2020. Its founder, Anatoly Yakovenko, designed Solana to support smart contracts and the creation of decentralized applications, or dapps.

The blockchain operates on both a proof of history (PoH) and proof of stake (PoS) model. PoS allows validators to verify transactions based on the number of coins they hold, while PoH allows for faster time stamping and verification of those transactions, Yakovenko wrote in the Solana White Paper.

In combination, “Solana can do more trades per unit of time and has significantly lower fees,” said Sam Trabucco, co-CEO of quantitative cryptocurrency trading firm Alameda Research.

Currently, Ethereum operates on a Proof of Work (PoW) model, where miners must compete against each other to solve complex puzzles in order to validate transactions.

How does it compare to Ethereum?

Although Ethereum is older and more important, “Solana is a viable competitor,” says Brett Harrison, president of the FTX US cryptocurrency exchange.

One of the reasons is that Ethereum “is fundamentally limited in its capacity for applications on a global scale due to the small number of transactions per second it can support,” says Harrison. Solana can support tens of thousands of transactions per second, while Ethereum can support approximately 13 transactions per second.

Solana also has “considerably lower costs,” says Trabucco. One of the main complaints about Ethereum is its often high transaction fees.

Ethereum also has its own advantages. “Ethereum has more users, more existing applications and more stability,” says Trabucco.

It also has a “huge advantage adjacent to the ‘first come’,” he adds, referring to the theory that the first to enter a market automatically has an advantage over the competition.

Ethereum proponents say the blockchain will become more scalable, secure and sustainable after its Eth2 upgrade, scheduled for 2022, during which the network will also transition to a PoS model. They also argue that Solana still has a long way to go before it achieves the same level of quality and importance as Ethereum.

Nonetheless, “I certainly think both have their place,” Trabucco says.

What are the risks ?

Typically, financial experts warn to invest only what you can afford to lose in cryptocurrencies due to their significant risks.

Solana, in particular, has her own risks. First, it has appreciated considerably in a short period of time. Just like with other cryptocurrencies, the potential for large price fluctuations should be considered and understood before investing. As soon as it reaches a new high, it could come down again.

Critics too worry about the decentralization of Solana after suffering a 17-hour blackout in September, during which the network was unable to process transactions. The developers of Solana then blamed what is called “resource depletion”. Bloomberg reported.

In short, “the risks are that [Solana] competes with other technologically sophisticated blockchains and blockchains with very large communities and established user bases, “Hougan says.” It’s like betting on a nifty new software company. “

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