Solana is up 12,000% this year—what to know before buying the Ethereum competitor.

As demand for Ethereum, the most widely used blockchain network, has increased this year, new initiatives have sprung up to compete. Solana, a blockchain with its own cryptocurrency, SOL, is one of them.

"Solana is the leading Ethereum competitor," Bitwise Asset Management's head investment officer Matt Hougan tells CNBC Make It. "I wouldn't bet everything on it, but I'm a strong supporter."

Hougan isn't alone; the market as a whole has indicated support for Solana. According to CoinGecko, SOL is up approximately 12,000 percent this year. SOL, the fourth-largest cryptocurrency by market capitalization, reached an all-time high of around $259.96 on Saturday and now has a market capitalization of over $74 billion.

Ethereum and Solana are frequently compared for a variety of reasons. For starters, they both support smart contracts. Decentralized financial, or DeFi, applications and nonfungible tokens, or NFTs, rely on smart contracts, which are collections of code that carry out a set of instructions on the blockchain.

"On Ethereum, a number of the fastest-growing crypto applications have been developed and rely on the Ethereum blockchain to function,” Hougan says.  "If you invest in Solana, you're wagering that its technical prowess will let it to outperform Ethereum."

Though Solana has received a lot of attention recently, it's critical to do your homework and understand the risks before buying. After all, all cryptocurrencies are considered risky, volatile, and speculative investments by financial professionals.

What’s Solana?

Solana officially launched in March 2020. Solana was created by its founder, Anatoly Yakovenko, to facilitate smart contracts and the development of decentralised applications, or dapps.

Proof of history (PoH) and proof of stake (PoS) are used to operate the blockchain. In the Solana white paper, Yakovenko argued that PoS lets validators to verify transactions based on how many coins they own, but PoH allows transactions to be timestamped and verified more quickly.

"Solana can achieve more transactions per unit of time and has considerably lower fees" than Ethereum, according to Sam Trabucco, Alameda Research, a quantitative cryptocurrency trading firm, has a co-CEO.

Ethereum currently uses a proof-of-work (PoW) model, in which miners compete to solve hard puzzles in order to validate transactions.

How does it compare to Ethereum?

"Solana is a genuine rival," argues Brett Harrison, president of cryptocurrency exchange FTX US, despite the fact that Ethereum is older and more well-known.

One reason is that Ethereum's "capability for global-scale applications is essentially limited due to the tiny number of transactions per second it can support," according to Harrison. Solana can handle tens of thousands of transactions every second, whereas Ethereum can only process roughly 13 transactions per second.

Trabucco claims that Solana has "much lower fees." One of the most common criticisms of Ethereum is its astronomically high transaction fees.

Ethereum, on the other hand, offers its own set of benefits. "Ethereum has more users, more existing apps, and more stability," says Trabucco.

He goes on to say that it has a "huge 'first mover'-adjacent advantage," referring to the belief that the first to join a market has an inevitable advantage over the competition.

Supporters of Ethereum claim that the blockchain will become more scalable, safe, and long-lasting following the Eth2 update in 2022, when the network will also switch to a PoS architecture. They also contend that Solana has a long way to go before achieving the same level of quality and importance as Ethereum.

Nonetheless, Trabucco believes that "both likely have a place."

What are the risks?

Due to the high dangers associated with cryptocurrencies, financial professionals generally advise only investing as much as you can afford to lose.

Solana, in particular, carries its own set of dangers. For starters, it has increased significantly in a short period of time. Before investing, the potential for huge price swings should be acknowledged and recognised, just as it should be with other cryptocurrencies. It could drop as rapidly as it rises to a new high.

Critics are particularly concerned about Solana's decentralisation, following a 17-hour outage in September when the network was unable to execute transactions. Later, the developers of Solana blamed something called "resource exhaustion," Bloomberg reported.

Overall, "the risks are that [Solana] is competing with other technologically sophisticated blockchains, as well as blockchains with extremely substantial communities and established user bases," according to Hougan. "It's like putting your money on a brand-new, shiny software company."

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