What Made Solana Outperform Ethereum By Over 500%?

What Made Solana Outperform Ethereum By Over 500%?

The longer Ethereum’s upgrade takes, the more likely it is that competing blockchains will gain traction.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Popular for its speed and potentially comparable functionality to Ethereum, Solana is a rising blockchain star having increased by nearly 300% in the last month. Is Solana a serious future competitor to Ethereum, or is the recent price spike just a fluke?

Ethereum: A Rising Tide Lifting all Blockchain Boats

In the crypto space, trends move so fast that it is sometimes difficult for investors to keep track of them. Take Ethereum for example. At the beginning of the year, ETH traded at $730, over five times less than its current price tag of ~$3,800. A 400% gain in just over half a year is quite rare in the world of stocks, usually triggered by some significant event.

Look no further than Zoom Video Communications, which rallied by nearly 600% last year, as nearly everyone used the service for remote work, learning, and conferencing. With DeFi, we didn’t see a trigger as much as we saw the paving of the road toward Finance 2.0. After the DeFi summer boom of 2020, it became clear that Ethereum would be the main constructor of that road—at least for now.

At the end of March, the Tokenist made the case that, given available data, Ethereum is best poised to win the smart contract wars based on the following criteria:

  • More developers are involved in Ethereum than in all other smart contract blockchains combined.
  • Greatest number and range of dApps, from yield farming DEXes to NFT marketplaces.
  • The inertia propelled forward by familiarity, the first mover advantage, staking, and market share.

However, it also bears noting that Ethereum’s transition from proof-of-work to proof-of-stake is an ongoing process, leaving space wide open for competitors to jump in. Cardano, BSC, Polkadot, Algorand, and Solana are the top players in the dApp town, trying to vie for dominance. While Cardano is yet to enable smart contracts this month with the Alonzo upgrade, all Ethereum competitors already run on some version of a proof-of-stake consensus mechanism.

Given the performance level between Ethereum and Solana, let’s examine the latter in closer detail. Does it have what it takes to usurp Ethereum’s position as the king of dApps?

In three months, since June to the end of August, SOL price went up by 270%, source: TradingView.com
Join our Telegram group and never miss a breaking DeFi story.

How Exactly Does Solana Work?

Although the work on a scalable, smart-contract-enabled blockchain began in 2017, Solana officially launched relatively recently, in March 2020. Headed by Anatoly Yakovenko and Greg Fitzgerald, the Solana project is handled by the Swiss-based Solana Foundation in Geneva. From the get-go, the goal was to create an enterprise-grade blockchain.

Meaning, it had to feature fast transaction processing that doesn’t slow down as more users are onboarded. As you recall, this made BSC hugely popular as Ethereum struggled to handle transactions at affordable gas fees. Theoretically, Solana is capable of processing up to 50,000 tps, while Ethereum’s capacity is currently much lower.

That may seem a crippling gap in network’s performance, but Vitalik Buterin, in charge of Ethereum’s development, noted that layer-2 solutions will enable its tps to double that of Solana even before the full ETH 2.0 upgrade

Although Solana has tens of thousands of times lower transaction fees, Ethereum’s Layer 2 scaling continues to bring fruit. Just this month, a popular DEX aggregator – 1inch – onboarded Optimistic Ethereum, promising to lower gas fees up to 10X.

On the other hand, Solana has no need to embark on major overhauls. It already uses a unique combo of consensus algorithms – Proof-of-History (PoH) with Proof-of-Stake (PoS). Anatoly Yakovenko explained PoH as Solana’s backbone innovation in 2018, summing it up as a way of using timestamps to cost-effectively verify transactions:

“When you take a photograph with the cover of New York Times, you are creating a proof that your photograph was taken after that newspaper was published, or you have some way to influence what New York Times publishes. With Proof of History, you can create a historical record that proves that an event has occurred at a specific moment in time.”

On top of PoH, PoS validates each block set generated. On the technical side of things, this puts Solana in a more favorable position, at least temporarily. Nonetheless, although both Ethereum and Solana are permissionless and open-source, the former is far more decentralized. Compared to Solana’s 927 validators, Ethereum has 223,812 at press time.  

With that said, Proof-of-Stake has yet to prove itself on a large scale regardless of Ethereum or its competition. Thus far, Bitcoin’s PoW consensus is proven to offer unassailable security for the blockchain network. Although the concerns about novel PoS largely stem from the “The Nothing at Stake Theory”, there has yet to be found a scenario in which penalizing malicious validators wouldn’t provide sufficient security.

Finance is changing.
Learn how, with Five Minute Finance.
A weekly newsletter that covers the big trends in FinTech and Decentralized Finance.

Who Has More Developers: Ethereum or Solana?

As previously mentioned, Ethereum has more developers overall compared to other blockchain projects. However, there is a difference between the total number of people involved and those who are active. According to The Astronaut, by counting GitHub commits (snapshots of code submissions), Solana is in the lead by having the most active developers.

While this doesn’t capture the full range of dev activity, much of which is private, it does put Solana in a positive light despite having only 5.5% of Ethereum’s market cap. Furthermore, if we take into account that Solana devs are not overhauling the network to a new consensus, but building upon existing one, it is an open question how much brain power is needed to gain an advantage.

In other words, what if more of Ethereum’s dev expenditure is spent on the ETH 2.0 upgrade instead of enriching the ecosystem? Accordingly, this may be the space in which Solana has an advantage. A good gauge would be to take a look at the incoming cash flow.

Who Receives More Funding: Ethereum or Solana?

Solana currently has over 400 dApps, compared to Ethereum’s 2,840 dApps. Due to the surge of NFT activity and considerably bigger ETH gas fees, Solana has gained momentum in the last few months. Specifically, its Degenerates Apes collection alone is responsible for $66 million worth of trades in SOL.

This is precisely the factor that spurred ETH price upward during March and April, until it was stopped, largely by Elon Musk’s tweet, that crashed the whole market.

Bombastic headlines outlining millions in NFT sales contributed to ETH bullrun, source: nonfungible.com

This time, people are discovering that other blockchains are offering negligible and stable transaction fees on NFT marketplaces, giving Solana a tailwind. Likewise, in partnership with FTX, Alameda Research, and the Solana Foundation, some DeFi protocols have risen to prominence as well. One of them is Serum DEX.

Within one month, since August 1st, Serum’s market cap increased by 131%, at $435 million. Moreover, after TikTok, the social media juggernaut, picked Solana’s Audius (AUDIO) for its decentralized music streaming protocol, its market cap too surged, surpassing $1 billion.

As far as direct funding goes, Solana’s biggest one this year was led by Andreessen Horowitz (a16z), managing to raise $314 million. At the same time, Ethereum is not losing steam. On August 31st, Offchain Labs, the company mainly responsible for upscaling Ethereum, raised $120 million in Series B funding led by Lightspeed Venture Partners.

When all considered, it is safe to say that both users and Solana will keep taking advantage of Ethereum’s higher gas fees. In the end, with the Wormhole bridge between Solana and Ethereum already set up, their relationship should be mutually beneficial.

If the NFT space deflates again, do you think Solana (SOL) price will return to its pre-August range? Let us know in the comments below.