Ethereum was the first programmable blockchain, a platform where developers can create self-executing programs called smart contracts. Since its launch, this technology has evolved into decentralized applications (dApps) and decentralized financial platforms (DeFi), software that exists on a peer-to-peer network rather than centralized corporate servers.
dApps prevent censorship and protect user privacy, and DeFi products make financial services more efficient and accessible. Given this value proposition, it’s no surprise that both industries are growing in popularity. In fact, there are now over 3,800 dApps and $230 billion invested in DeFi products. And in both cases, Ethereum is the leader by far.
However, scalability issues have hampered adoption of Ethereum-powered products, driving transaction fees up 250% over the past year. And while the Ethereum 2.0 upgrade will solve this problem, other programmable blockchains like Solana ( GROUND 1.71% ) and Earth (MOON 1.26% ) are gaining ground. Not only that, but Solana and Terra have market values of $43 billion and $23 billion, respectively, a fraction of Ethereum’s $369 billion.
Here’s why both look like smart long-term investments.
While Ethereum is certainly the most mature dApp ecosystem, it currently only handles 30 transactions per second (TPS), while global payment networks like MasterCard regularly process over 2,800 TPS. In short, Ethereum lacks the throughput to enable widespread adoption. Solana aims to solve this problem.
The network uses a unique hybrid consensus mechanism, mixing proof of stake (PoS) with proof of history (PoH) to secure the blockchain. Generally speaking, PoS protocols require each node (computer) to confirm each transaction with all other nodes in order to reach consensus. But Solana’s addition of PoH allows transactions to be timestamped as they occur, creating a verifiable order of events. This means that each node can verify transactions independently, without waiting for consensus from all other nodes.
This makes Solana fast – very fast. The platform can theoretically handle 50,000 TPS, and these transactions are finalized in less than a minute. In comparison, Ethereum transactions take six minutes to reach finality (i.e. the time the data is irreversibly added to the blockchain), and the fees are significantly higher than the fees on the Solana blockchain. .
Unsurprisingly, Solana has become popular with dApp developers and DeFi investors. There are currently over 1,100 projects running on the platform and $9.8 billion invested on the blockchain, making Solana the fifth largest DeFi ecosystem. And going forward, assuming dApps and DeFi continue to gain traction – a likely scenario, given the value proposition – Solana should see an increase in usage in the coming years, a trend that would increase demand. for the SOL token, pushing its price higher.
Terra aims to make e-commerce payments and financial services more efficient. To do this, the Terra blockchain offers various stablecoins – cryptocurrencies tied to the price of fiat currency – each powered by the LUNA token. For example, the TerraUSD token is designed to track the US dollar and the TerraEUR token is designed to track the euro. That being said, the forces of supply and demand determine the price of a stablecoin at any given time.
Here’s how it works: When growing demand pushes the price of TerraUSD above $1, the network incentivizes token holders to convert LUNA to TerraUSD. This mechanism leads to an increase in the supply of TerraUSD and a decrease in its price. The system works the same way in reverse. When the drop in demand pushes the price below $1, the network incentivizes token holders to convert TerraUSD to LUNA. This mechanism causes the supply of TerraUSD to fall and its price to rise.
Terra is built on the Cosmos Hub, a blockchain technology powered by the tendermint consensus protocol, which itself is designed for speed and interoperability. Terra can theoretically scale at up to 10,000 TPS and transactions are finalized in just six seconds. This makes Terra much more scalable than Ethereum in its current form.
Additionally, since Terra is built on blockchain technology, it does not rely on banks or other financial institutions. This means that network-powered payment platforms (e.g. the Chai mobile app) benefit from faster settlement times and lower fees, while making cross-border transactions less complicated. But these benefits also extend to other financial products. Of particular note is that the Anchor DeFi protocol allows investors to earn interest in return for providing stable liquidity, and the current payment for TerraUSD lending is 19.5% APY – a phenomenal figure compared to 0.06% you might expect from a savings account.
Here’s the big picture: As payment app Chai, Anchor protocol, and other dApps and DeFi products on Terra become more popular, demand for Terra stablecoins will increase. Therefore, as the LUNA token is designed to absorb stablecoin price volatility, the demand for LUNA will increase, causing its price to rise. And investors have good reason to believe it will happen. Chai has already made a name for himself in South Korea, where more than 2.5 million people use the dApp. And more broadly, Terra is the second largest DeFi ecosystem behind Ethereum, with $15.5 billion invested in the platform. This is why this cryptocurrency looks like a smart long-term investment.
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.