Table of Contents
What is Solana?
What is Ethereum?
Solana vs. Ethereum: Key differences
The bottom line
Aug 8, 2022
5 min read
Learn how Ethereum remains vastly more valuable than Solana and other upstarts, and investors and crypto entrepreneurs alike are anxiously waiting for The Merge and Ethereum 2.0.
Ever since Ethereum hit the market in 2015, legions of fans have flocked to the cryptocurrency. Crypto entrepreneurs use Ethereum to make decentralized applications, or dApps, which function on vast global networks of computers. They also use Ethereum’s smart contracts, which are software programs that automate agreements and transactions and can be packed with valuable financial data such as terms and interest payments.
Ethereum has spurred the development of hundreds of crypto ventures, from lending platforms to games to online marketplaces for NFTs, or non-fungible tokens, which are unique digital images. Ethereum has proven a far more versatile crypto than its more valuable and older sibling, Bitcoin.
But there’s a problem: Ethereum is too slow and too expensive to meet demand.
Solana has jumped into the breach. In two years, this new cryptocurrency network has challenged Ethereum’s dominance in dApps and smart contracts by running faster and cheaper. It’s one of a new breed of blockchain networks that are challenging Ethereum’s model with innovations of their own.
While Solana has become a top 10 cryptocurrency in terms of market value, it is confronting problems and competition from an even newer crop of blockchain networks.
Solana is a next generation blockchain, a decentralized database that facilitates and records financial transactions on the internet. Solana is what’s known as a Layer 1 blockchain, meaning it is one level up from Ethereum, which is deemed a Layer 0, or base blockchain.
Put another way, Solana is akin to the Windows operating system that underpins Microsoft’s suite of software programs, or Apple’s macOS. Solana’s blockchain supports the development of dApps and smart contracts, just like Ethereum. And as an open source system, it invites developers to download its code and create their own projects based on its platform. Solana’s native token, SOL, is an integral part of its operation. It trades in the cryptocurrency marketplace.
, which went live in 2009, may be the most popular blockchain yet Ethereum has provided cryptocurrency users with the most utility. Founders of crypto projects such as OpenSea, the leading NFT marketplace, or Uniswap, a decentralized finance exchange, use Ethereum’s blockchain to support their ventures. In this sense, Ethereum has become a crypto ecosystem for numerous projects involving digital assets.
While Ether, Ethereum’s native token, is traded just like Bitcoin, it is not meant primarily to be a digital form of money. Instead, it is a piece of programming that enables Ethereum to transmit assets across its network.
The two networks have much in common, but contrast in key areas:
There may be no better measure of the scale of a cryptocurrency than multiplying the number of tokens in its circulating supply by its market price. Ethereum’s market capitalization has exceeded $100 billion since Jan. 4, 2021, and peaked at $569 billion in November of that year.
Solana came out of nowhere in 2021 amid a surge of demand for its turbocharged blockchain system. Its market cap multiplied 780-fold that year, hitting an all-time high of $78 billion on Nov. 6.
Ethereum and Solana use different methods for processing transactions and maintaining their respective blockchains. These are called consensus mechanisms because they are predicated on getting computers to agree to add data sets to a network.
Ethereum runs its network and mints new tokens by requiring a group of programmers called miners to solve mathematical problems and “hash,” or create, new blocks of data as fast as possible. First developed by Satoshi Nakamoto, the creator of Bitcoin 13 years ago, Proof-of-work (PoW) is an energy-intensive and rather clunky way to maintain blockchains.
Solana runs its network and mints new tokens by using cryptographic clocks to sync the computers comprising its network. This time-based approach, known as Proof-of-history (PoH), enables the computers to “trust” each other and work together at greater speeds. Solana uses PoH in conjunction with the Proof-of-stake (PoS) approach. Instead of requiring miners to compete to add blocks to a chain, PoS gets them to work together and “stake,” or offer, their tokens to participate in validating transactions.
Ethereum and Solana vary greatly on the number of transactions that can be processed on their systems. Ethereum processes an average of about 15 transactions per second (TPS). Solana processes about 2,500 TPS but has stated it is capable of handling 750,000. By comparison, Visa processes about 1,700 TPS.
Growing fast enough to meet demand is one of the thorniest problems in crypto. Solving that problem has dogged Ethereum and created an opportunity for a new breed of Layer 1 blockchains, which are the main infrastructure of crypto projects.
Solana, along with other next level blockchains such as Cardano and Algorand, have demonstrated they can grow or scale to meet rising demand by dramatically increasing the number of transactions per second (TPS) they can process. This spurs crypto entrepreneurs to build their projects for Solana instead of Ethereum.
Ethereum isn’t sitting still. It is undertaking a major upgrade by switching from a PoW consensus mechanism to a PoS approach. This shift is called The Merge because it fuses Ethereum’s mainnet, its base blockchain, with Ethereum’s new Beacon blockchain, a PoS network. Moreover, Ethereum is supporting a group of new blockchains called Layer 2s designed to work even faster than Solana and other Layer 1s. They include Optimism, Arbitrum, and Avalanche.
The high cost of using the Ethereum blockchain has become a sore spot with crypto users and prompted many to seek out Layer 1s. The problem is congestion—so many users have been jumping on Ethereum that it’s clogging the network with transaction flow, and raising so-called gas, or user, fees. The average transaction cost on Ethereum is $15 though the price soared to $196 in May 2022.
But thanks to its PoH approach, Solana can scale far more efficiently than Ethereum. Its gas fees are $0.00025 per transaction.
Both systems have their challenges. Ethereum is betting that its transition to PoS will solve its scalability problem. Yet until The Merge goes live, no one will know just how effective Ethereum 2.0 will be. And The Merge has suffered delays, which is typical with major software upgrades.
Solanahas gone offline five times in 2021 because of bugs in its programming, paralyzing its blockchain for hours at a time. This isn’t acceptable for an industrial-scale blockchain no matter how fast it is.
In technology, it’s perfectly natural for new generations of ventures to improve, and in some cases, replace their forerunners. For all the breakthroughs Ethereum has made in cryptocurrency systems, it must solve its scalability issue or faster rivals such as Solana will keep attracting new projects and capturing market share.
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