Solana (SOL-USD) is currently the ninth largest cryptocurrency by market capitalization. Solana saw a rapid rise in value in the fourth quarter of 2021, reaching an all-time high of over $260 in November before steadily declining to the current price of around $79. Solana is the only major cryptocurrency blockchain which utilizes a proof-of-history (PoH) consensus.
However, despite Solana’s uniqueness, it has some serious issues to consider before you buy it. Solana promises high scalability, security and stability. However, it has faced multiple network outages since September 2021, rendering the entire network unusable for hours at a time.
According to the official Solana website, in the past 90 days, nine recorded some downtime.
It might be understandable that the network might still be in beta. However, even more understandably, investors don’t want to see their money locked up for significant periods of time, especially if it’s losing value.
Naturally, Solana has faced a lot of criticism from the cryptocurrency community. Many people do not seem to trust the Solana Foundation either, as Solana is one of the most centralized cryptocurrency projects. People have also accused the foundation of lying about circulating supply and that the network faced DDoS attacks.
If any of these accusations are true, it only sows more doubt. It invalidates the idea of Solana being a truly decentralized cryptocurrency. My point is that Solana is in muddy waters due to all the skepticism surrounding it. Once a cryptocurrency project loses its credibility, it isn’t easy to regain the trust of its potential investors.
Utility Does Not Guarantee Solana’s Success
Admittedly, Solana is excellent in terms of transactions per second (TPS) and fees. However, there is more to a project’s success than fees and TPS count. For example, Nano (NANO-USD) allows instant, feeless payments, but the project is still more than 95% down from its peak in 2018 of $37.62.
Of course, whenever you try to achieve lower fees, you will have to sacrifice decentralization and safety in some form. It is called the “Scalability Trilemma” by the founder of Ethereum (ETH-USD), Vitalik Buterin. The Solana network seems to be prioritizing scalability over decentralization and security.
The reality is that crypto is not something you normally use to buy a coffee, at least not yet. Massive TPS numbers and meager fees are great. But they do not offset the risk you’ll be taking by investing in an unstable network. I’d be happy to pay a few extra bucks in fees if that guarantees that my investments are stable and cannot be controlled by anyone.
If cryptocurrencies do become the primary method of payment, cryptocurrencies such as Ethereum, Bitcoin (BTC-USD) and Ripple (XRP-USD) already have plans for scalable Layer 2 solutions. By doing so, these cryptocurrencies can keep the main blockchain secure and provide swift and cheap transactions at the same time.
Can Solana Compete?
As I’ve mentioned above, Solana’s lower fees are a double-edged sword due to their risk. To explain more simply, Layer 2 shifts this risk away from the primary blockchain and onto a secondary network. On the contrary, Solana may achieve these incredible speeds on the main blockchain. However, the main blockchain will also have less centralization and less reliability. In the future, a Layer-1 Solana would have to compete with Layer 2 speeds and Layer 1 security of its competitors. It has the speed to do so, but not the decentralization nor the security.
A far more likely scenario is that people will use cryptocurrencies on a mass scale with the help of external networks. Most transactions will no longer directly rely on the main blockchain. In fact, it is already becoming the case as exchanges such as Coinbase (NASDAQ:COIN) and Crypto.com do not charge their users crypto gas fees. All the transactions happen on their platform. Moreover, most people already use cryptocurrency exchanges instead of private wallets.
Solana’s focus on speed and low fees is undoubtedly in good faith. However, it simply cannot compete with its safer and more decentralized competitors in the long run. Solana’s poor reputation will also not do it any favors either.
I believe that Solana is too risky of an investment in both the short term and the long term. I would instead invest in more proven and tested cryptocurrencies such as Ethereum or Bitcoin. They’re popular for a reason, and that is their safety and reliability.
On the date of publication, Omor Ibne Ehsan 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 InvestorPlace.com Publishing Guidelines.
