Solana Needs to Work Through its Growing Pains Quickly

Solana (CCC:SOL-USD) seems to have been hit particularly hard by the recent sell-off in cryptocurrencies. The price of the SOL token is down 42% since the beginning of the year. However, the slide in Solana has been going on since November. That suggests to me this is about more than a flight to safety.  

Concept art of the Solana (SOL-USD) blockchain.
Source: Shutterstock

The crypto market in general is not entirely rational. But it may be becoming more pragmatic. And that may mean that we’ll see evidence of profit taking. That may not make as much sense with Bitcoin (CCC:BTC-USD) which still is widely seen as being a store of value. However, for tokens like Solana, the dynamics may be changing.  

You undoubtedly see crypto owners talk about the idea of holding (or hodling) tokens on the chance they go “to the moon.” I wonder if this will begin to be replaced by more practical considerations. That seems to be what’s happening with Solana. And if my hunch is right that could mean the crypto markets are entering into a very interesting period.  

The Utility More Than the Token 

I’m not a crypto investor at this time. But in looking over the landscape, I’m more attracted to a token like Solana than an altcoin like Dogecoin (CCC:DOGE-USD). I understand that community drives a lot of crypto decisions. In truth, it drives many investment decisions period.  

Maybe it’s my marketing background, but I’m looking for compelling features and benefits. In my mind, that’s the ultimate roadmap for crypto. To my (some would say reptillian) brain, there’s not a lot of logic to having over 6,000 altcoins/tokens. At some point, there’s going to be a winnowing. And the tokens that offer an advantage that’s hard to match will stand out.  

Unfortunately, that’s where things get a little messy for Solana.  

The Race to Be Fastest 

Solana came on the scene as a rival to Ethereum largely due to scalability. So it’s ironic that one issue facing Solana, is scalability concerns. Some developers have been giving Solana the thumbs down recently because of slow transaction times. And their concerns were acknowledged and confirmed by Solana Labs co-founder and chief executive officer (CEO) Anatoly Yakovenko who described the platform’s performance issues as “growing pains” caused by increasingly complex transactions over the network.  

It’s true that an average amount of 800 transactions per second (TPS) is a significant drop from the network’s typical mean of 3,000 TPS. However, the popularity of Solana rests largely on the idea that the network offers developers a more scalable (I.e. faster) network than Ethereum (CCC:ETC-USD).  

And when put in that light, this seems like a tempest in a teapot. The Ethereum blockchain network processes approximately 15 transactions per second. But that is where the largest threat to Solana lies. 

When Will Ethereum 2.0 Launch? 

Sometime in 2022, Ethereum 2.0 is expected to launch. When it does, the platform is promising to deliver 100,000 TPS. And it will use sharding to address issues of security and sustainability. Plus, with Ethereum 2.0, the platform will move to a proof-of-stake (PoS) protocol like Solana.  

In my mind, this represents the larger threat to Solana. When you take the token aspect out of it, an investment in Solana is about investing in blockchain. Right now, it offers developers an advantage that justified its premium price. 

Ethereum 2.0 may reduce that advantage or eliminate it entirely. This makes it reasonable for investors in Solana to wonder how the platform will respond.  

Should You Buy the Dip in Solana? 

Should growing pains steer you away from Solana? Pending more complicated news, I say no. Maybe one could argue that the network should have planned for more “complex transactions.” But I’ll leave that debate for the developers. 

The fact remains that Solana is aware of the problem. And as long as a solution arrives, I see this as perhaps an accelerant of the token’s price drop but not the prime mover. That remains, in my opinion, a natural part of the maturing crypto space.  

What should give you a little more pause is the knowledge that Ethereum 2.0 is on the way. That could prove to be more problematic. Still, if you’re an active trader, Solana seems attractively priced at the moment.  

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.  

Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019. 

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