Solana was a top performer in 2021, rising through the ranks of altcoins to become the 6th largest cryptocurrency in the world currently. SOL’s market cap now stands at $32.2 billion, according to Coinmarketcap, and the growing investor community is excited to see how Solana’s technology compares to market leaders like Bitcoin and Ethereum.
Although the cryptocurrency is relatively new to the market, investments in Solana are gaining momentum despite its extreme volatility. But there are still many cryptocurrency traders who are unsure about Solana’s winning streak and are considering investing in it.
In this article, we will be discussing if Solana is a good investment for new traders.
What is Solana?
Solana (SOL) is a fourth-generation blockchain and cryptocurrency that leverages open infrastructure to provide greater scalability. Solana was officially launched in March 2020. Its founder Anatoly Yakovenko developed Solana to support the creation of smart contracts and decentralised applications or DApps.
The blockchain works with the Proof of History (PoH) and Proof of Stake (PoS) models. Yakovenko wrote in the Solana whitepaper that PoS allows validators to verify transactions based on the number of coins they hold. In contrast, PoH allows for time-stamping and faster verification of those transactions.
Sam Trabucco, co-CEO of quantitative cryptocurrency trading firm Alameda Research said that “Solana allows for more transactions per unit of time with significantly lower fees” compared to Ethereum.
How Solana (SOL) works
In order for Solana to achieve all of its goals, developers need to think outside the box. As a result, the network is full of proprietary systems. These systems work together to create a very useful and reliable blockchain network.
Solana is a Delegated Proof of Stake (PoS) network. DPoS networks differ from PoS networks in several ways. Both mechanisms use validators to process transactions. Validators are selected based on their total holdings on the network. The more SOL you have, the better your chances of being selected as a validator. This strategy ensures that only those who belong to the network can hold the position.
Validators are rewarded for approving transactions and adding them to the blockchain. Those who are not validators can still make easy gains by delegating their wealth to one of the validators. The system allows everyone to participate in securing the network and allows users to decide which nodes are worth validating transactions.
DPoS networks are many times faster than PoS blockchains. Solana’s average block time is 2.34 seconds. However, benchmarks show that the network can approve blocks in 1.6 seconds. Considering Bitcoin takes 10 minutes to complete this task, it’s easy to see why DPoS blockchains continue to gain momentum.
Proof of History (PoH)
The PoH mechanism plays an important role in the Solana ecosystem. The protocol increases the efficiency of the blockchain by incorporating timestamps into every transaction approval. These timestamps allow the nodes to build sequences of events. In this way, the system acts as a cryptographic clock for the network.
Solana Native Token (SOL)
SOL is the native token of the Solana network. This versatile cryptocurrency allows users to earn passive rewards through the network’s delegated staking option. It is worth noting that the SOL is currently trading at $95.75.
Pros of Solana
Fast Transactions and Low Fees
Crypto enthusiasts consider Solana to be Ethereum’s biggest competitor. ETH can currently process 14 transactions per second (TPS), while SOL can support 50,000 TPS. Ethereum is moving from a proof-of-work consensus algorithm to proof-of-stake as gas fees are very expensive. But SOL still has advantages in terms of transaction speed and cost.
Solana Has the Third Largest Futures Market
Solana currently has the third-largest open interest in futures, which is the most relevant metric in derivatives contracts—aggregated to indicate the total number of contracts held by market participants in their network, regardless of their current trading opportunities. Despite the sharp price drop in early November, current open futures positions remain at their previous levels.
NFTs and Smart Contracts
The NFT industry has gone wild over the past year. Non-fungible tokens became a high-growth industry opportunity, followed by epic sales hosted by prominent digital artists. Solana took advantage of this expanding industry and entered the market to share NFT options. Solana is gaining market share through Solanart, an NFT marketplace running on the network. One of the biggest advantages of using this platform for NFT fans is the minimal fees and transaction speed.
Solana Leads in TVL, Users, and Derivatives Market
There is no doubt that incredible activity is taking place in Solana’s on-chain data and derivatives markets. The network’s TVL has grown by more than 15% over the past six months. It appears to be rapidly closing the gap between TVL, active users and derivatives markets.
SOL’s ecosystem has strong institutional appeal: Solana’s market cap is more than double that of Avalanche and Terra. 2021 is a strong testament to SOL’s growing investor community, and as investor acceptance increases, so does institutional acceptance.
Cons of Solana
Since Solana has a smaller user community and track record compared to Ethereum, investors may not be able to count on the network’s stability as much. Solana’s reputation took a hit in September when the Solana Foundation tweeted that the Solana blockchain was “temporarily unstable.” Solana Labs CEO Anatoly Yakovenko said the network had been experiencing similar stability issues over the past week. The company blamed “resource depletion” for the problems and said its engineers are working on it. Reliability is key for cryptocurrency investors, many of whom are unhappy with the relatively vague explanation.
Ethereum’s first-mover advantage means there are far more projects on the network than Solana. According to the State of the dApps website, there are currently 2,887 Ethereum dApps. Solana claims to have around 350 projects on its network. These projects include decentralised finance (DeFi), applications, NFT projects and gaming applications. As Solana’s speed and low fee structure spread, new projects are more likely to choose Solana over Ethereum. However, it remains to be seen how valuable Ethereum’s first-mover advantage is and whether Solana can build a network of programs that can truly compete with Ethereum.
One of the main reasons investors were flocking to cryptocurrencies in 2020 is to escape inflation. Many cryptocurrency pairs have hard caps on the total number of coins in existence. For example, Bitcoin is limited to 21 million coins, and the last coin is expected to be mined in 2140. Solana, on the other hand, does not have a fixed amount of coins. Solana began increasing its supply by 8% per year. Inflation falls 15% a year until it hits 1.5%, where it will stay indefinitely. Cryptocurrency investors aiming for zero inflation should look elsewhere.
Where to Buy Solana (SOL)?
Solana (SOL) is currently available for purchase on the following exchanges
Binance: Binance is best suited for Australia, Canada, Singapore, UK and most of the world. US citizens are prohibited from purchasing most tokens.
KuCoin: The KuCoin exchange currently offers cryptocurrency trading in over 300 other popular tokens. It is often the first to offer purchase options for new tokens. The exchange currently accepts international and US citizens.
WazirX: The WazirX exchange is part of the Binance Group, which ensures high quality standards. This is the best exchange for Indian residents.
Coinbase: Coinbase exchange is a very popular US based exchange with customers all over the world.
Solana is an impressive cryptocurrency. There are thousands of cryptocurrencies in the market and it is different in that it shows continuous growth and potential. But investors estimate the value that they are safe to risk and then dive into experimenting with their luck in crypto investments.