Is Solana A Good Investment? A Plain English Guide
Investing legend Peter Lynch once said: “Know what you own, and know why you own it”. So if you’re wondering if Solana is a good investment, this guide’s got you covered. First, we’ll focus on understanding what Solana is and how it works. We’ll then explore its potential long-term investment case. So, let’s jump in.
What is Solana?
Like Ethereum, Solana is a “smart contract” blockchain – only faster. You can think of smart contracts as robots that live inside the blockchain. These robots are smart, and they can be programmed to do complicated tasks on the blockchain. The code is their law, and they always obey it.
For example, a developer on Solana (or Ethereum) can program a smart contract to send crypto to Jill if she wins a bet. Or send it to Jack if he wins the bet. The smart contract sits between Jack and Jill – and can hold that crypto until the outcome of the bet is decided.
Note that this can all be done on a decentralized blockchain, meaning that no centralized middleman decides whether Jack or Jill gets paid. In other words, you don’t need Bob to decide the outcome – it’s just between Jack and Jill.
Because of these smart contracts, we can do all sorts of things on the blockchain (with no middleman). Here are just a few examples:
- DeFI (decentralized finance): Do complicated financial deals like trading, investing, lending & borrowing.
- NFTs (Non-fungible tokens): Create and exchange tokens that are unique (i.e. non-fungible).
- Blockchain games: Play online games to earn crypto and in-game NFT items (like a rare sword or card).
Side note: If you’d like to learn more about Ethereum (and go further down the smart contract rabbit hole) check out our Ethereum guide here.
How the Solana blockchain works (staking)
Blockchains don’t have a middleman (like a bank) to process transactions. Instead, that responsibility is split among the network. But in order to make that work, the network needs to agree on things each time there’s a transaction.
So if Jill wins the bet and receives her winnings, the blockchain needs to reflect it.
With Proof-of-Work blockchains (like Bitcoin), miners process transactions, create new coins, and keep the blockchain secure (you can read all about Bitcoin mining here). But Solana works more like the modern-day Ethereum: it’s a Proof-of-Stake blockchain, with “validators” instead of miners.
Validators act like security depositors. They deposit (i.e. stake) their own SOL coins into smart contracts to keep the blockchain running smoothly. And in return, they earn SOL (which is also how new coins are created on Solana).
The more SOL a validator stakes, the more staking rewards they earn. So in the (way over-simplified) example below, Validator 1 staked the most SOL (40%) to validate a block of Solana transactions. So, Validator 1 would earn the most SOL out of the group. And Validator 5, who only staked 5%, would earn the least.
How the Solana blockchain works (Proof of History)
Most blockchains group transactions into blocks and process them based on certain criteria, like transaction fees. This can sometimes confuse the order of transactions. For example, if Alice sent crypto to Bob 5 seconds before sending it to Joe, you’d expect Bob to get his crypto first. But that doesn’t always happen on most blockchains.
Solana fixes this problem with a unique feature called Proof of History (PoH). Think of PoH like a super accurate clock that keeps track of each transaction in the exact order it was made. The clock also records how much time took place between each transaction. So with Solana, Bob would always get paid 5 seconds before Joe in our earlier example.
PoH also means validators always know exactly what to do, and when to do it. There’s no confusion over which transactions to process first. This saves the validation process a lot of time, making Solana one of the fastest blockchains around.
But it’s not just PoH that makes Solana run like a race car. It has a few more features that clear the track and speed up its engine. There’s Turbo Vote, which lets validators vote on the state of the network without delays. Gulf Stream ensures transactions reach validators faster. And Sealevel allows multiple smart contracts to execute simultaneously.
The end result? Solana now does about 5,000 transactions per second (TPS). But in theory, it can achieve a TPS of up to 65,000. To put those numbers into perspective, Ethereum’s TPS is currently between 10 and 30.
Besides speed, what else is good about Solana?
Solana has a few other things going for it that make it a standout blockchain. Here are some of its advantages.
It’s cheap. Solana transactions cost next to nothing – currently about 0.00005 SOL (roughly $0.0001 cents today). Compare that with Ethereum’s fees, which cost about $1.00 per transaction. Keep in mind that Ethereum’s fees can spike up massively when the network gets clogged up with transactions. So not only are Solana’s fees much lower, but they’re also a lot steadier.
It lets developers get more creative. Solana developers use a programming language called Rust. While Rust has a steeper learning curve, it’s extremely powerful. With Rust, you can potentially make smart contracts do more than with Solidity (Ethereum’s programming language). What’s more, Elon Musk reckons Artificial General Intelligence (AGI) will be built with Rust.
It’s more decentralized than some think. While there’s talk about Solana being too centralized, it’s not all true. It has a growing number of validators, and the more there are, the more decentralized it becomes. Plus, anyone holding SOL can become a validator, or delegate others to validate for them. This setup helps shift the power of the network to the many, rather than the few.
Side note: Render (RNDR) migrated to Solana earlier this year. You can read our RDNR token guide here.
What’s not so good about Solana?
Like all blockchains, Solana isn’t perfect.
It’s had its share of outages. The Solana network has occasionally gone down for several hours at a time because of various technical issues. But while that sounds bad, Ethereum has its own challenges. When too many people use Ethereum, its network gets clogged up, making it super slow and expensive.
It doesn’t work well with Ethereum. As we covered earlier, Solana’s Rust programming language is extremely powerful. But Rust doesn’t easily translate into Ethereum. This makes it a lot harder for developers to transfer Ethereum dapps over to Solana. Compare this with other smart contact blockchains, like Avalanche, which use the same programming language as Ethereum.
Side note: Dapps are decentralized applications. Think of them like apps on your phone – if your phone was a decentralized blockchain. So in this analogy, transferring an app made for Apple (Ethereum) to Android (Solana) would be difficult. You can learn more about dapps in our Ethereum guide.
Is Solana a good investment?
Now that you know what Solana is and how it works, you’re in a better position to decide if you want to own it. But as with any crypto investment, there are a few more things to consider before you YOLO in. Investing is a game of risk versus reward potential, so you’ll want to understand each of these before making a decision.
Three risks of investing in Solana
All investments have risk, and crypto investments like Solana tend to have even more. Think of it like a venture capital investment: it could be a home run or a strikeout. So, here are 3 potential curveballs to watch out for.
Risk 1: Solona is still recovering from its FTX hangover. The collapse of crypto exchange FTX in 2022 hit Solana harder than most other crypto projects. FTX CEO Sam Bankman-Fried and his hedge fund, Alameda Research, were propping up the price of SOL with massive leverage. So when SBF’s house of cards fell down, the price of SOL went down with it. The price has recovered a bit since then, but Solana’s association with SBF and his crew could leave a scar on its reputation.
Risk 2: Possible coin price dilution from increased supply. The supply of new SOL currently increases by about 6% per year. That means SOL’s “inflation rate” is nowhere near as low as Bitcoin’s, for example. On top of that, Alameda also had a decent chunk of SOL on its books when it filed for bankruptcy. And those coins will likely be sold at some point to pay off its creditors as part of bankruptcy proceedings.
But here’s the good news: Solana’s yearly inflation rate is expected to drop by about 15% each year, and will eventually be 1.5%. And as for the Alameda issue, it’s unlikely that those coins will be dumped on the market all at once. They’ll probably be sold in smaller batches over time.
Risk 3: Ethereum. With its Rust programming language, it’s hard for developers to integrate Ethereum’s best dapps with Solana. If they could, it’d bring way more users to the network. Instead, they’ve got to build those dapps from scratch and poach the competition.
Apart from the above, Solana has the usual roster of risks you’ll find in most crypto projects. Clampdowns from the regulator and massive price volatility are just part of the deal.
So all risks considered, is Solana a good investment?
At a crypto conference in 2021, Solana CEO Anatoly Yakovenko made a compelling statement. “Part of our culture is to eat glass”, he said. And I think that’s where Solana’s biggest strength lies. Unlike many of its newer competitors, Solana is a battle-tested project. Founded in 2017, it’s survived two bear markets and come out stronger every time.
Solana has one of the biggest crypto communities there is – that’s across developers, users, and partnerships. The modern world needs a fast, cheap, and scalable smart contract blockchain. And based on its tech, Solana is a leading contender on that front.
So yes, Solana could (potentially) be a good investment. But as always, it’s important to understand the risks. As with all volatile investments, using technical analysis to look for “safer” buying opportunities can help. You can check out the first video of my technical analysis course (for free) below to learn more about that.
The usual disclaimer: None of this is investment advice. It’s just for information and education. Always DYOR.
Key Takeaways:
- Solana offers fast and cheap transactions, making it a standout in the blockchain space.
- Despite its advantages, Solana has faced technical outages and doesn’t easily integrate with Ethereum’s ecosystem.
- Solana’s supply increases by about 6% per year, but this rate is set to decrease, mitigating inflation concerns.
- Solana has survived multiple market downturns and has a strong community, making it a potentially resilient long-term investment.
