3 Green Flags and 3 Red Flags on Buying “Ethereum Killer” Solana

3 Green Flags and 3 Red Flags on Buying “Ethereum Killer” Solana

With its growing popularity among developers, it has been called a Ethereum (ETH 0.90% ) killer. But does the smart contract platform Solana ( GROUND 0.12% ) able to keep his promise? In this episode of “The Crypto Show” on Motley Fool Live, recorded on February contributors Chris MacDonald and Jon Quast discuss the bullish and bearish cases for this growing crypto company.

Jon Quast: Let’s talk about another cryptocurrency out there, and that is Solana. This is the one we didn’t have time to talk about last week. We just pushed it back to this week. He’s the one that’s really taken off here lately, Chris, and it’s very different from Bitcoin. I know it’s easy on the outside to lump it all together, but Bitcoin isn’t like Solana as much as Ethereum is like Solana, is it?

Chris McDonald: Yes, that’s a good characterization. Solana has often been referred to as the “Ethereum killer” simply because the Solana network has a more robust ecosystem for decentralized finance and applications built on top of the blockchain. Solana, like Ethereum, is a layer 1 network compatible with smart contracts, while Bitcoin is considered more of a transaction network. Solana’s big advantage over, say, Ethereum is its cost and speed structure. This is something I’ve delved into a bit in the past, but without getting too technical, but it’s interesting because there are plenty of proof-of-stake networks out there. Proof of Stake refers to networks that are validated and secured through holders of the given token, staking them on the network to validate transactions. Proof of work is what Bitcoin does, which requires solving complex math problems for that validation to happen, and that takes a lot more energy and is usually the crux of the matter with many investors. Proof-of-stake is the destination of crypto, and Solana is attractive solely on that basis. But Solana’s proof-of-stake mechanism is actually different from that of many of its competitors. When blocks arrive for validation, often when multiple blocks arrive in the same fraction of a second, they must be ordered by the network. So what Solana did is they introduced timestamps into their validation process and made it so that through a proof of history model they could see what transactions happened and order them faster, and this is the main advantage for this network. This has led to a number of cost advantages where the Solana transaction can often be a fraction of a penny. For a $10 NFT transaction, say, you’re going to want to do this on Solana against Ethereum, where [laughs] the costs can be much higher, and often higher than the NFT itself. There’s the NFT thing, which I know Travis is going to touch on, and I know he’s also going to touch on the Solana Pay thing, which is very interesting, which is basically a peer-to-peer crypto buying service for the merchands. Right now, it’s my understanding that most of the offers you can pay in crypto are actually settled in US dollars. You pay with your crypto, it is converted to USD, then the transaction is done by credit card or what you have or PayPal is settled in USD, whereas Solana Pay is crypto to crypto. So it’s sort of the first of its kind as a large-scale project in space. The other big catalyst I think investors are looking at in the last week is that Coinbase listed two SPL tokens. And SPL tokens are like ERC tokens for Ethereum. These are projects based on the Solana network. These projects have been listed on Coinbase. So it’s a first and it’s certainly a big catalyst.

Quest: These are tokens that are not Solana, but they are built on Solana. So they give Solana a bigger use case, right?

Mcdonalds: Yeah. They highlight the Solana ecosystem, similar to Ethereum, and they are based on Solana. So it shows that as a layer 1 network, there are a bunch of projects that are being built on top of it and it’s increasing in terms of attractiveness for investors that way. So do you want me to take care of the bear case too?

Quest: Sure. Why don’t we go ahead and lay out the bear case, and then I know Travis had some things to share about Solana.

Mcdonalds: It sounds good. So in terms of investor concerns about Solana right now, there have been some real slowdowns and outages with the Solana network. And I think in the last three months there have been four or five times where the network has been down for various periods of time and the dev team behind Solana has attributed this to high compute transactions and difficulties of growth. I think the concern of many investors is that Solana could be a victim of its own success because it is growing so rapidly. Potentially, congestion could lead to results similar to what we saw with Ethereum. And then, following this reasoning, Ethereum undertakes an update to move to Ethereum 2.0, which would be a proof-of-stake network. They are currently proof of work right now, similar to Bitcoin, and this would improve their speeds and lower their costs, which in theory could diminish Solana’s investment thesis. These are interesting things to watch.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.