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Is Solana (SOL) Still a Top Alt-Chain?

By Michael @ CryptoEQ | CryptoEQ | 16 Aug 2022


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Challenges to Adoption for Solana

While Solana brings a robust base-layer blockchain protocol to the crypto ecosystem, there are two key criticisms and notable challenges ahead for the network. Both of these challenges will have an overall effect on adoption as Solana continues to develop.

The three key challenges:

  • Solana is still a relatively young, novel protocol
  • While enabling high speeds and scalability, Solana is arguably compromising on security/trustlessness
  • Competition from other "cheap and fast" alt-L1s

In the cryptocurrency world, something is trustless if users do not have to rely on third parties or intermediaries (like banks) to control their funds. Instead of trusting third parties, users rely on blockchains and smart contracts that run code to execute transactions and protect the funds. Thus, a trustless system is one that does not depend on external actors to facilitate transactions from point A to B.

As a brand new protocol with its mainnet launch having only occurred in 2020, there will be growing pains as well as further developments still to come for the network. Being a younger project means having less time to become established within the crypto space, putting it behind other networks such as Ethereum. Solana being a new protocol means there are far fewer nodes supporting the network currently than more mature projects. For comparison, Ethereum is supported by an estimated 325,000 validator nodes to Solana’s ~1,700. The stake distribution amongst validators is quite concentrated, with ~22 validators controlling ~33% of all staked SOL. This means, that just 22 validators could theoretically halt the network if they colluded.

While lagging behind in nodes and overall network decentralization, Solana being a novel protocol may also be viewed as a potential advantage. Solana has been developed to integrate Proof-of-Stake over Proof-of-Work, as many within the crypto ecosystem cite PoS as much more efficient than PoW. This is something the Ethereum blockchain is now having to painstakingly switch to itself through a series of long upgrades (e.g., the development of PoS Ethereum) with the hope of becoming more efficient, scalable, and user-friendly. Nevertheless, Solana already has a prosperous and expanding ecosystem built on top of its network, including a fast-growing NFT market that has already surpassed $550 million in transactions.

However, the fight for "Ethereum killers" remains a contested one, with more than a dozen alt-L1s competing for market share. Their ability to differentiate from one another, find real adoption (however niche), and sustain healthy transaction/fee levels, remains key to their long-term success.

SOL vs Alt-L1s Q1 2022 SOL vs Alt-L1s Q1 2022. Source smart contract usage august 2022 Source



SOL network revenue july 2022 Solana’s fully diluted market cap compared to the chain’s total revenue. Source

While Solana clearly demonstrates real demand from crypto users, on a relative basis, Solana's price-to-sales ratio (P/S) trades at a substantial premium to other alt-L1s, indicating it may be overvalued based on this one metric. 

SOL P/S june 2022 Source

Additionally, with inflation at ~7%, ~$2.6M USD worth of SOL (at $40 per SOL) is minted per day to incentivize validators. This amount is orders of magnitude higher than the fees generated and burned by the protocol as of Q3 2022. Therefore, Solana's long-term security and economic policy is currently unsustainable (as is nearly every cryptocurrency). 

SOL fees july 2022 Source

 

 

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


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