As I write this, data from Coinmarketcap.com reveals that we’re on the cusp of 14,000 different cryptocurrencies that investors can choose from. Yeah, 14,000. On a purely statistical basis, Solana (CCC:SOL-USD) is just one of a sea of digital coins and tokens floating around in cyberspace.
On paper, it has very little chance of success.
But on white paper, the narrative for Solana is intriguing. If I may inject more of my opinion, let’s call it extremely intriguing, at least on a technical basis.
Essentially, Solana represents the ongoing evolution of the crypto narrative. At first, Bitcoin (CCC:BTC-USD) emerged onto the scene, proving that parties can transact tokens of economic value across a frictionless, decentralized network.
Later, Ethereum (CCC:ETH-USD) entered the scene, using blockchain technology but asking a deeper question. Rather than merely decentralizing peer-to-peer transactions, what if we can use decentralized protocols to disrupt intermediary agents in other transactions?
Thus was born the idea of the smart contract.
Solana is on the same principle of progress but its primary purpose is to foster a more secure blockchain ecosystem. You see, cryptocurrencies have answered the basic inquiries of journalism regarding the need for a new financial mechanism.
- Who: People interested in conducting quick, private transactions.
- What: Through blockchain, transactions can occur without a centralized intermediary.
- Where: Anywhere there is internet (i.e. borderless).
- Why: For whatever reason anyone sees fit, which is a central tenet of decentralized anything.
- How: Via a consensus mechanism where participation is rewarded through “equity” units.
Of course, the big question that’s missing is when. As the Solana white paper points out, a lack of a trusted source of time poses a problem in blockchain networks. We know the whos, the whats, the wheres and the hows but we don’t quite know when.
Solana Built a Better Mousetrap but Needs Mice
Under the Solana directive, its developing team aims to resolve the time component of blockchain transactions through a protocol called proof of history (PoH). From what I understand, PoH is not a competing mechanism to existing protocols like proof of work (PoW) or proof of stake (PoS) but rather a complementary one.
While a full-blown discussion on blockchain protocols will make this article incredibly unwieldy, for our purposes, both PoW or PoS basically involve different incentivization structures to foster the same goal: participation in a consensus-algorithm-driven network.
Long story short, a blockchain network must find a way to “pay” contributors to keep the system running. The beauty of Solana is that its PoH protocol helps ensure that transactions occurring in either a PoW or PoS blockchain are truly legitimate.
In that sense, I can appreciate why Solana coins have skyrocketed since their debut.
To put it into simple terms, Solana is a better mousetrap — and I mean this absolutely respectfully. That’s the technical advantage. But the economic component lingers awkwardly in the backdrop: where are the mice?
Of course, there are plenty of mice, enough to drive Solana to a market capitalization of nearly $72 billion at time of writing. But is this merely the accelerated trajectory of the greater fool theory or is there true demand behind the innovation?
To be clear, secure blockchain transactions are in everyone’s best interest — so long as they’re on the blockchain. So you should be asking yourself, will a large enough pool of transactions occur via decentralized mechanisms?
Here, I’m doubtful. Solana can securely transact SOL coins and other cryptos. But it can’t transact U.S. dollars or currencies of other nations. That’s their respective central banking authorities’ job. And that brings up the classic conundrum that faces all cryptos.
All Roads End in Fiat
Make no mistake, Solana represents a remarkable technology. Given the progress of the blockchain, the next generation of cryptos will be faster, smarter and more applicable. But they’re relevant to the blockchain. Eventually, you’ll need to step off la-la land and into the jurisdiction of a sovereign nation.
And sovereign nations, despite some playing coy with cryptos, depend on their fiat currencies for the lion’s share of transactions and economic activities. Yes, some 15,000 businesses worldwide accept Bitcoin as payment. That sounds like a lot until you realize that over 213 million companies operate worldwide.
I’m sorry but 15,000 businesses wouldn’t even register as a blip on the radar.
As I said, you can make cryptocurrencies infinitesimally efficient, but unless all nations agree to use cryptos as actual currencies, you’re going to have to come back to reality.
That’s the wake-up call that makes me hesitant about putting too much money at risk with Solana or any other crypto for that matter.
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Read More: How to Avoid Popular Cryptocurrency Scams
On the date of publication, Josh Enomoto held a LONG position in BTC and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
