Solana (CRYPTO: SOL), the native cryptocurrency of the Solana blockchain, turned a lot of its early investors into millionaires. It was officially launched in 2020, but it previously sold some of its tokens at just $0.04 in a seed sale in 2018. Solana now trades at about $185, so a $1,000 investment in that seed sale would be worth almost $5 million today.
However, Solana trades more than 35% below its all-time high from this January. Let’s see why this cryptocurrency initially rallied, why it pulled back, and whether it can churn a fresh $1,000 investment into $1 million again during the next few years.
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Unlike Bitcoin (CRYPTO: BTC), which is mined with the energy-intensive proof-of-work (PoW) consensus mechanism, Solana uses the more energy-efficient proof-of-stake (PoS) mechanism to validate its transactions. Therefore, Solana’s tokens can only be staked (locked up for interest-like rewards) instead of mined.
So, while Bitcoin is a deflationary token with a set maximum supply, Solana is an inflationary one with no maximum supply. That makes Solana, which has a circulating supply of nearly 540 million tokens, difficult to value by its scarcity. Instead, it’s mainly valued by the growth of its developer ecosystem.
As a PoS blockchain, Solana supports smart contracts, which are used to create decentralized apps (dApps), non-fungible tokens (NFTs), and other tokenized assets. Its Layer-1 (L1) blockchain, which has a real-world top speed of about 4,000 transactions per second (TPS), is much faster than other L1 PoS blockchains, such as Ethereum (CRYPTO: ETH) and Cardano(CRYPTO: ADA), which have comparable maximum speeds of about 15 and 250 TPS, respectively.
Solana achieves those higher speeds by integrating its own proof-of-history (PoH) validation mechanism (which timestamps transactions before they’re validated) into its PoS blockchain. Those higher speeds drew in more developers and investors who expected it to disrupt Ethereum and other developer-oriented PoS blockchains.
That enthusiasm, along with expectations for lower interest rates and more relaxed regulations for cryptocurrencies, drove Solana’s price to its record high earlier this year. Solana’s expansion of its own ecosystem with its digital payments platform Solana Pay, support for stablecoins, and the launch of its own Android phone fanned those flames.
Solana has some obvious strengths, but it also has three glaring weaknesses. First, its L1 blockchain often struggles with network congestion, outages, and security issues. Those problems could outweigh the advantages of its faster transactions.
Second, Solana isn’t natively cross-compatible with other blockchains, like Ethereum, and its main developer languages (Rust and C) have a steeper learning curve than Ethereum’s Solidity. That’s why Solana still attracts a much smaller pool of developers than Ethereum.
Lastly, its competitors are using more Layer-2 (L2) solutions, which bundle together multiple transactions and process them off-chain at higher speeds to ease the congestion on their L1 blockchains. For example, Ethereum’s L2s “rollups” can achieve real-world speeds of up to 4,000 TPS, while Cardano’s L2 “hydra heads” can each achieve real-world speeds of up to 1,000 TPS. Those solutions could lure more developers away from Solana’s speedy but volatile network.
Solana needs to address those issues, but a few major catalysts could be on the horizon. First, new exchange-traded funds (ETFs) for Solana could stabilize its price while drawing in more retail and institutional investors. The REX-Osprey Solana + Staking ETF(NYSEMKT: SSK) already started trading in the U.S. last month as the first Solana ETF. Instead of being directly approved by the Securities and Exchange Commission (SEC), that ETF was launched after the SEC simply didn’t object to its filing.
Several filings for Solana ETFs from bigger firms — including VanEck, 21Shares, and Franklin Templeton — are still being reviewed by the SEC, but they could be launched in the near future. As interest rates decline, more investors should shift back toward cryptocurrencies and other riskier investments. Solana’s high staking yield of 7% to 8% could also attract more yield-seeking investors than Ethereum, which has a staking yield of 3% to 4%.
Solana’s expansion of its ecosystem with more digital payment partners, which already include Visa(NYSE: V) and Shopify(NASDAQ: SHOP), could attract more developers. Its future network upgrades should also reduce its congestion issues and fortify its security features.
But for a $1,000 investment to grow into $1 million, its price would need to skyrocket 1,000-fold to $185,000 and boost its market cap from about $100 billion to $100 trillion. That would make it more valuable than gold, which has a market cap of $22.8 trillion; Bitcoin, which is worth $2.3 trillion; and Ethereum, which is valued at $530 billion. That doesn’t seem like a realistic goal. So, while Solana might stabilize and rise in the future, it probably won’t come close to replicating its previous millionaire-making gains.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Shopify, Solana, and Visa. The Motley Fool has a disclosure policy.
