An investor’s guide to Solana, the Ethereum alternative that's up 300% in the last 30 days

Published Sun, Sep 12 20218:30 AM EDTUpdated Sun, Sep 12 20219:40 PM EDT

Solana, a one and a half-year-old blockchain network, has been getting a lot of attention the past couple weeks as its token, sol, has surged to become the sixth largest cryptocurrency by market cap, according to CoinGecko. Solana is loved among developers, who choose to build applications on it because of its speed and cost effectiveness. While some investors may just be riding the wave, others see a big future for Solana and have helped push the sol token up more than 300% in the last 30 days, according to CoinGecko. Here's what investors need to know about it. What is Solana and why is it suddenly popular? Think of Solana as a faster and cheaper Ethereum . Its blockchain can do more than move the sol token between user (which is what bitcoin does); developers can build DeFi applications, NFTs and other projects on top of it and – unlike with Cardano – they often do. Some of the most popular projects – including the cross-margin trading platform Mango Markets and the NFT project Degenerate Ape Academy – are built on Solana. "Solana has taken a very unique perspective on how to scale a blockchain that is extremely different from all of the others," said Kyle Samani, managing partner at Multicoin Capital, an investor in Solana. "And it appears to be working quite well. Developers are building on it, it is working, the transactions are cheap and it's supporting large spikes like when people do these NFT drops and have a million show up at the same time. But it's not falling over, it's supporting the core theory that you can scale a system in this way." Its goal is to be able to handle billions of users and remain cheap to use forever. The massive success of Ethereum has meant that fees are now too high to make it a viable option for most people to transact on it. With average transaction fees of about $10, according to Ycharts, they're lower than they've been earlier this year, when they reached as high as $71, but they're still high enough to make crypto developers long for the days when they were cheap. Ethereum has also become slower over the years. It does just 15.1 transactions per second, according to EtherScan, while Solana can handle 65,000 transactions per second. That's what makes it so attractive to developers. "The things you can do on Solana – it just opens up a whole new realm of possibilities and the experience, it's magical," said Peter Johnson, an investor at Jump Capital, which invests in many projects built on Solana. How can you be sure it stays cheap forever? Solana can manage a much higher throughput than Ethereum, where the amount of transactions or data that can go through a block on Ethereum for a certain amount of time is fixed. That amount on Solana is higher because it's built differently. The economic incentives of the network are set up in such a way that the components that run the network aren't focused on fees for transactions, they're focused on the volume of each transaction and maximizing transactions per second. It's more like the difference between dial-up internet and high-speed internet. There were many things you could do on dial-up internet that were revolutionary at the time, like sending large files or streaming video clips, but the experience has become much better and, in some cases, cheaper doing those things with high-speed internet. And it's why fees on Ethereum are so high: there's a limited amount of space in each block, which means users need to bid on getting their transactions into a block, according to Johnson. On Solana, that dynamic doesn't exist because each block can handle enough data. Why should you care if you aren't a developer? Like with Ethereum or Cardano, the value is derived from the ecosystem and people looking for an opportunity to make a return see the sol token as an investment in the future and potential of the entire network. That's different from something like bitcoin, where people just buy the coin and hope it goes up in value. Plus, at about $180, sol is a lot cheaper than ether, which is about $3,300 as of Saturday. Digital assets are priced, not valued, Samani said. There's no discounted cash flow model (DCF) to determine whether an asset is over or undervalued, just a function of supply and demand. "If your goal is to get exposure to tech growth crypto, Solana is arguably your best bet," he said. "There is no valuation cap, there's no PE ratio, the price keeps going up and that I think is quite exciting." What's the downside? Like so many cryptocurrencies, volatility, technology and regulation are substantial risks to keep in mind. But the main criticism of Solana itself is that it's "somewhat less decentralized" than Ethereum, according to Johnson. Many end users ultimately might not care very much about decentralization – the network will still be fast and cheap to use for them – but it's important to those building in the ecosystem because censorship resistance, a feature that ensures a central group of power can't halt activity on the network, is a pillar of crypto ideals. He said Solana nodes are typically run from data centers versus someone's house, for example. Hypothetically, it's entirely possible to do that, but no one really does, he said, and for that reason it gets criticized for not being more decentralized. Don't call it an Ethereum killer With Solana's rise it's also grown a reputation as a potential "Ethereum killer," but Samani and Johnson say that's the wrong way to frame it. "They're going to coexist for a long time," Johnson said. "I think of it more like the Apple and Google operating systems. At the end of the day, they're both successful, people build applications for both of them, they both have their pros and cons, and they know they can continue to coexist with each other."

The Solana logo on a phone screen and representation of cryptocurrencies are seen in this photo taken in Krakow, Poland, Aug. 21, 2021.

Jakub Porzycki | NurPhoto | Getty Images