Solana may be becoming a victim of its own success. The cryptocurrency had been red hot lately, with backers calling it “Solana summer” thanks to the token’s scorching gains. On Tuesday, Sept. 14, however, Solana – whose ticker on crypto exchanges is SOL – faced major network instability issues. The organization’s Twitter account blamed “resource exhaustion,” in part caused by an unusually large number of transactions on the network.
This unexpected activity flooded the network and caused it to malfunction. The failure resembled a distributed denial-of-service, or DDoS, attack, though it’s unclear who, if anyone, was behind the outage. The price of Solana fell as much as 15% that day in response to the negative news.
In the grand scheme of things, however, this is arguably the best sort of problem that an emerging cryptocurrency could face. Too much network activity speaks to Solana’s incredible success that it has had in attracting developers, decentralized finance, or DeFi, projects and end users to the platform in just a matter of months. Solana has leveraged that growing user buzz into one of the year’s most impressive price charts. Even with the recent sell-off, SOL is up approximately 1,000% over the past six months.
Recent network outages notwithstanding, why has Solana generated so much buzz in the crypto community and become one of the top 10 tokens by market capitalization? And should you invest in Solana?
How Ethereum and Solana Are Disrupting Finance
For a long time, Bitcoin was the undisputed champion of the cryptocurrency arena. Over the past year, however, the value of Ethereum has appreciated sharply compared to Bitcoin. This is, in large part, because of a highly active developer community and an ever-increasing number of applications built on Ethereum. Ethereum has led the way in offering smart contracts, DeFi, nonfungible tokens, known as NFTs, and more.
Bitcoin retains a large loyal fan base due to its first-mover advantage and powerful brand. However, as far as actual usefulness in financial transactions goes, Ethereum has become the dominant force lately.
Here’s where Solana enters the picture. Solana has become one of the main rivals to Ethereum. Others have certainly tried. Cardano, for example, may theoretically solve many of the issues with resource usage and high transaction fees that currently limit Ethereum. But Cardano has rolled out smart contracts and other advanced features at a slow pace.
Solana, by contrast, has had no issues converting its technological promise into tangible results. Blake Richman, senior portfolio manager at Sarson Funds, highlighted the activity on Solana. “There’s nearly 400 dApps (decentralized applications) on Solana now; similar to what you would find on Ethereum, including DeFi, NFTs and gaming. There’s now nearly $12 billion locked in DeFi applications on Solana, growing from $2 billion in 30 days,” Richman says.
Solana has made particular inroads with NFTs. Its Degenerate Ape collection of art, for example, has been a huge hit. Some Degenerate Ape NFTs have sold for more than $1 million each. And that’s far from the only social activity gaining popularity on Solana. “It feels like there is a new NFT minting event on Solana every day, and there are a few hotly anticipated blockchain-based games being released on Solana, such as Star Atlas,” Richman says.
A big reason why Solana is exploding in popularity is due to its rock-bottom transaction fees. Ben Weiss, CEO and co-founder of Bitcoin ATM operator CoinFlip, noted that the average transaction cost on Solana is only $0.00025. That’s orders of magnitude cheaper than Ethereum and other leading cryptocurrencies. “The ability to transact so quickly and cheaply sets Solana apart from the pack in many ways,” Weiss says.
This has become a pivotal issue this year as so-called “gas” fees to use the Ethereum network have exploded. While Ethereum still works well enough for bigger smart contracts or NFT purchases, it has put a damper on many types of commerce.
For applications such as gaming and micropayments, Ethereum’s current fee structure won’t cut it. The Ethereum community has a roadmap in place to try to relieve this obstacle. For now, though, there’s a big opportunity to take market share from Ethereum. Solana is making the most of the opportunity, and that’s a major reason the SOL coin price has been rallying.
SOL: More Than Just Low Fees
Solana has some other things going for it as well. While its developer community is still much smaller than Ethereum’s, Solana’s easy-to-use Rust programming language could help drive further community adoption. The combination of low fees and a quicker learning curve could be the winning combination. “As blockchains currently stand, Solana is the most efficient by the majority of metrics,” Weiss says.
That upbeat take isn’t an isolated view. Josh Goodbody is the chief operating officer of Qredo and previously served as Europe, Middle East and Africa director at Binance. Goodbody also sees SOL as a strong competitor to Ethereum. “Solana’s hallmarks are speed of transactions and low gas fees, due to an innovative proof-of-history protocol. Thanks to this powerful infrastructure, they have raised over $300 million this year from the likes of a16z and Polychain,” Goodbody says.
Goodbody presciently warned that Solana would need to decentralize further and obtain more network validators. This weakness came to light recently in the wake of Solana’s widespread network problems. Despite that, with its strong backers and fast transaction network, Solana has a good shot at bouncing back.
Not everyone is so enamored with Solana, however. Andrew Keys, co-founder and managing partner at Darma Capital, sees Ethereum retaining its market-leading position.
“The work that Solana has done and the technology they have developed is cool, but they have made important trade-offs to do it, offering a more centralized solution akin to a traditional server. Solana will work well for a number of use cases, but ultimately, the base layer for the majority of DeFi and Web3 will be Ethereum amplified by layer 2 (scaling solutions),” Keys says.
While investors should heed that cautionary note, there’s still a lot to like about SOL. “The future for Solana is exciting, as its speed and low fees provide a better user experience. Further, Solana may ultimately be a better environment for certain financial applications that require high rates of transactions or data transference,” Richman says.
Solana is recovering from a large and embarrassing technical problem with its network. If its engineers can’t improve network stability, the value proposition for the SOL coin could be impaired. Still, this seems like the sort of growing pain that a rapidly expanding network would face.
There are tons of applications and users on Solana; it’s achieved far more real-world relevancy than meme tokens such as Dogecoin or Safemoon. Solana is worth taking seriously, and if it sells off further due to its technical problems, traders should consider buying the dip.