Why I bought Solana, the most serious Ethereum challenger
I bought Solana last week. The technological merits of Solana compared to Ethereum jumped out on me. As an engineer, technological superiority appeals to me.
To appreciate Solana, one has to understand Ethereum first, particularly its limitations. Without getting too technical, investors can view Ethereum as AWS (Amazon Web Services) for DeFi (Decentralized Finance) apps. Ethereum is a platform to build DeFi applications . Whenever a DeFi user makes a transaction on the Ethereum blockchain, he has to pay gas fees with Ether, the Ethereum cryptocurrency.
Chart shows Total Value Locked(USD) into Defi apps from May2020 to May2021
Here is the problem with Ethereum. With DeFi applications growing by 88x in a year, Ethereum has become heavily congested resulting in very high gas fees and slow transactions. Users with time-sensitive transactions can speed up their transactions by opting to pay higher gas fees. This raises gas fees. Since gas fees are paid in Ether, the fast-appreciating value of Ether(up >500% year-to-date) further inflates gas fees. As of 12 Nov 2021, the average Ethereum gas fees was USD5.68. I have heard of people complaining about paying USD400 in some cases.
Where does Solana come in? Solana transaction fees are really cheap. It averages at $0.00025 per transaction which is as good as negligible.
Does cheap come at a lower quality? Not really. Solana processes transactions more than 1000 times faster than Ethereum. This is an important feature because slow transaction is a headache for Ethereum users. The slow speed is also a cap on future growth for projects built on Ethereum. Solana can process 50,000 transactions per second (TPS), faster than even Visa which has a proven payment network.
Imagine that you are a customer of AWS and a new contender charges fees that are 60 thousand times lower with 1000 times faster speed. With both slow speed and high fees being major problems for your business, would you not seriously consider switching to the new vendor?
Although Solana is not the only Ethereum challenger today, I regard it as the most serious challenger because it has the lowest transaction fees and fastest speed among the "Ethereum killers".
Like most engineering solutions, technological improvements come with a trade-off. Solana is not as decentralized as Ethereum. Blockchain's main strength of being trustless and immutable stems from its decentralization. If a blockchain is not decentralized enough, there is a tiny risk that the contents of the blockchain can be manipulated. This is the main criticism levelled at "Ethereum killers" which are less decentralized than Ethereum.
A good measure of decentralization is the number of validators/miners whose job is to process transactions for the blockchain. The more of them, the more decentralized is the blockchain.
The key question is whether the lesser decentralization is tolerable. Binance Smart Chain(BSC) is one of the most popular Ethereum-compatible blockchain today. It has only 21 validators by design. Solana has more than 1000 validators, far more than BSC.
Although the number of validators/miners is a good measure of decentralization in blockchains, it is irrelevant if ownership of the blockchain is concentrated in a few hands, for blockchains that are based on a proof-of-stake mechanism. Blockchains like Solana and BSC runs on a proof-of-stake consensus mechanism.
Theoretically speaking, if someone has more than 51% ownership of a proof-of-stake blockchain token, he has the power to manipulate the blockchain contents. Today, there is ownership concentration in Solana. However, there is no incentive for the majority owner to behave badly in a proof-of-stake blockchain. When news spread about a blockchain being manipulated, the token will crash like a stone. The biggest loser is the party who owns the most token. Who in his right mind will commit this self-destructive action, particularly if he is smart enough to amass so many valuable crypto tokens in the first place?
The greater risk from ownership concentration is if the whales dump their holdings on the rest of us. Since the purpose of investing is to make money, the whales will eventually want to exit at some time but it is most unlikely that they will do a quick massive dump, like what happened to useless shitcoins like the Squid Game coin. I expect the exit to be gradual in big-cap coins like Solana. In fact, bitcoin also suffers from ownership concentration, though it is not as serious as Solana. Ownership concentration is common in stocks too and many family-owned businesses have turned out to be wonderful stocks to own, probably because the majority shareholders have skin in the game.
Some investors will be asking how do you determine the valuation of cryptocurrencies. Are they cheap or expensive? To be honest, I cannot contribute to this discussion because I do not know how to value cryptocurrencies at this point. In fact, all of them look expensive to me. I bought Solana because of its technological superiority to Ethereum and its recent momentum price breakout.
A good technology platform is useless if there are not enough useful applications built on top of it. I am excited to see new DeFi apps being developed on Solana. Ethereum provided the platform to build the first generation of DeFi apps. Unfortunately, these apps were slow and expensive due to Ethereum limitations. Solana will provide the platform to build the second generation of DeFi apps. This time round, the DeFi apps will be fast and cheap.
One Solana project that caught my attention is this one called Wormhole (probably created by a Star Trek fan). With the wormhole, assets between Ethereum and Solana can be moved around quickly and cheaply. This allows existing projects on less efficient blockchains to benefit from Solana's high speed and low cost. I have not personally tried it so far.
One strong factor behind the rise of Solana is strong sponsorship support from FTX. In Oct2021, Sam Bankman-Fried, the founder of FTX, became the youngest billionaire in the world. Being an FTX customer, I noticed that FTX has started listing new tokens from Solana-based projects recently. This sponsor not only has the money but also the expertise and right business to support Solana. FTX calls itself an exchange built by traders, for traders. No wonder they have thrown their support behind Solana. Only Solana has the speed and low cost to support a platform built by traders, for traders. The synergy makes it a win-win situation.
As a happy customer of FTX so far, I wish them every success.
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