SOL

Up More Than 900%, Can Solana Really Steal Ethereum's Crown?

One of the hottest debates in crypto right now is about Ethereum (CRYPTO: ETH) vs. Solana (CRYPTO: SOL). While the former remains the reigning champion of blockchain development, Solana is building considerable momentum to unseat Ethereum.

Does Solana have what it takes? Or will Ethereum cement itself as the home of decentralized development?

The answer is not straightforward, and there are several gray areas to consider. Let's look closer at the state of affairs between Solana and Ethereum to determine which cryptocurrency is a better investment.

A person looking at stock trends on computer and holding a coin.

Image source: Getty Images.

A little background first

Ethereum's launch in 2015 changed crypto forever. Its novel smart contracts meant developers could build blockchain-based applications, essentially making Ethereum the first programmable cryptocurrency. With this new functionality, non-fungible tokens (NFTs), stablecoins, yield farming, and many other aspects of today's decentralized finance (DeFi) economy could all be built.

Like any technology, subsequent iterations eventually came along. Enter Solana. Given the title "Ethereum killer," Solana arrived in 2019 and offered developers similar smart-contract capabilities, except with the added benefit of blazing speeds and low fees. As two of Ethereum's primary pinch points, Solana has become one of Ethereum's most formidable challengers.

Solana starts to expand as Ethereum lags

Over the past year, Solana experienced significant growth. After losing more than 95% of its value and falling to just $9 at the depths of the "crypto winter," Solana has since rebounded to more than $100 today. This resurgence is likely fueled by growing momentum in the broader crypto market, as well as its flourishing ecosystem. A quick look at key metrics such as active addresses, total transactions, and total volume on the blockchain reveals that they are all near record levels and hint at a bright future for Solana, especially in this new bull market.

Then there's Ethereum. While Solana has taken center stage, the original smart-contract blockchain has more or less watched from the sidelines. As Solana jumped more than 900% in 2023, Ethereum notched a modest 90% gain. Furthermore, while its blockchain remains one of the busiest in all of crypto, it has not seen an increase as impressive as Solana's. By most accounts, it looks like Solana is closing the lead that Ethereum has enjoyed over the last few years.

Ethereum's not standing still

Solana's run over the past year has been nothing short of remarkable. But here's the harsh reality. There's still considerable room separating it from Ethereum.

Today, Ethereum's total market cap is more than $340 billion. Solana's is just $45 billion. Then there's DeFi. Currently, nearly 60% of the total value within the DeFi economy calls Ethereum home. Solana makes up only 2.7%.

Is it true that Solana is faster and cheaper to use? Absolutely. But this increased throughput isn't without trade-offs. To provide such capabilities, Solana's design makes known sacrifices in decentralization and security -- two crucial factors to consider when investing in cryptocurrencies.

As of last count, Ethereum has roughly 900,000 validators around the world. Solana comes in with around 2,000. In addition, Solana has become notorious for network outages. Over the last three years, Solana's blockchain has gone offline six times, with the most recent occurring in early February 2024. Ethereum's blockchain has never had such a lapse.

The shiny features that Solana touts will likely fade with time. It often falls on deaf ears, but Ethereum is not a finished product. With the most developers of any blockchain (and five times more than Solana), Ethereum is constantly improving and boasts an impressive roadmap outlining future upgrades that will make the blockchain more capable, faster, and cheaper to use.

Take the Dencun upgrade as an example. Slated for implementation next month, Dencun will introduce new mechanisms that will enable Ethereum to process transactions through its expansive Layer 2 ecosystem at a much cheaper rate. Some estimates project that Dencun will reduce pesky gas fees by up to 10 times.

Building a strategic portfolio

No blockchain is perfect, but some are closer than others. The case for an investment in Solana would be that it's still in its early days and has more room to grow. But with Ethereum, the investment thesis is abundantly more apparent. It still holds a stranglehold on DeFi. It has the most developers. It has a proven track record of functionality and is one of the most secure and decentralized blockchains in the world.

I own both Solana and Ethereum. There are plenty of reasons to believe that Solana's network could keep growing, but it makes up a smaller portion of my portfolio as there is considerably more risk involved. Conversely, I have much more confidence in Ethereum over the long haul, so it receives greater allocation. For investors, the choice comes down to whether they prefer the new kid on the block or the seasoned veteran who has done this a time or two.

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RJ Fulton has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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