What is Solana (SOL) Cryptocurrency? Definition and How it Works
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Update Nov. 14, 2022: Solana's price has tumbled in recent days, following a report by CoinDesk that the balance sheet of Alameda Research — a crypto trading firm — showed that it was heavily invested in SOL. Alameda was founded by Sam Bankman-Fried, who also founded the major exchange FTX and its U.S. branch FTX.US. All three companies filed for Chapter 11 bankruptcy on Nov. 11, 2022.
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What is Solana?
Solana, a blockchain network that launched in 2020, saw a rapid increase in interest from both cryptocurrency enthusiasts and developers who started using it to build decentralized applications for industries such as finance, computer science and even art. Developers can use Solana to build products that allow users to carry out secure transactions and execute digital contracts.
Supporters describe Solana as a faster and more efficient competitor to crypto powerhouse Ethereum. The price of Solana’s native cryptocurrency, known as SOL, ranked within the top 10 most valuable cryptocurrencies by market capitalization for most of 2022, according to the market research site CoinMarketCap. Solana still remains in the top 20 cryptocurrencies by market capitalization after its recent price drop.
Like other cryptocurrencies, however, Solana has seen a precipitous drop from its historic highs of 2021. And the decline for Solana has been particularly sharp due in part to some issues with the reliability of its network, which has seen several outages during times of heavy use. And in November, the price of SOL took another drastic downturn when investors fled the asset due to ongoing fears about how it might be tied up in the potential collapse of global cryptocurrency exchange FTX. By mid-Nov. 2022, Solana's price had fallen more than 90% from its 1-year high.
» Interested in other cryptocurrencies? Learn how to invest in Bitcoin.
Solana's strengths
Despite Solana’s recent price drop, the blockchain technology itself still has some advantages worth considering:
Technology | Innovative. One innovation touted by Solana’s supporters is a capability known as “proof of history.” The network uses a timestamp feature in addition to a proof-of-stake consensus mechanism, which helps to increase transaction speeds. The proper ordering of transactions is crucial to network security and functionality, and Solana’s developers say they’ve found a way to reliably record the timing of any message in a way that anyone else on the network will be able to verify, regardless of when they receive it. |
Network Speed | Very fast. Solana’s blockchain network can handle more than 50,000 transactions per second, making it one of the fastest blockchains available. For comparison, Ethereum’s blockchain network can handle only about 30 transactions per second. |
Pricing | Affordable. While the price of each SOL token has dropped dramatically in recent weeks, it has never reached the heights of the largest cryptocurrencies like Bitcoin or Ethereum. |
Transaction fees | Low. Solana’s transaction costs are extremely low, averaging around one-fortieth of a penny for each transaction on the blockchain network. |
Solana controversies and red flags
Solana's rapid growth has caused problems of its own. On Sept. 14, 2021, Solana was offline for about 17 hours after a crash caused by a flood of transactions generated by bots. Solana’s governing organization noted that no funds were lost and that the network was able to recover fully within a day, arguing that the situation was a demonstration of Solana’s resilience.
That was just one in a series of outages to hit the network over the course of a year. And the uncertainty has taken a toll on Solana’s price even as the market in general has been in decline.
More recently, in November 2022, it was revealed that Solana had financial ties to Alameda Research and FTX, both founded by Sam Bankman-Fried. Alameda Research, FTX and its U.S. arm FTX.US all filed for Chapter 11 bankruptcy. In the fallout, Solana’s price dropped about 90% from its one-year high.
Broadly, it’s important to note that many people who trade cryptocurrency are speculating, often taking fliers in search of explosive growth, rather than investing based on firm theories. But whatever your approach, a guideline is to make crypto holdings a small portion of your overall portfolio — say somewhere around 5% to 10% — much as you would with other concentrated investments like individual stocks.
Should I buy SOL?
Buying any cryptocurrency can be a risky move. Solana is a new, relatively untested entrant into a new, relatively untested field.
Blockchain may never develop into the disruptive economic force that many of its devotees anticipate or it may take many years longer than expected to reach its potential. And even if it does, Solana may not wind up being a big winner in this hotly contested space.
“Like anything else, it will be a winner-take-most market,” said Bill Birmingham, head of research for Osprey Funds, a Tarrytown, New York, firm that offers an investment trust focused on Solana.
Birmingham says he is hopeful that Solana will deliver on what he sees as its significant potential.
He also suggests that people thinking about buying any cryptocurrency look at how quickly it is being adopted. Some metrics to examine include the number of active wallets, which are accounts in which users can hold a cryptocurrency, and the number of transactions over time.
» Check out some of the best crypto wallets.
They can also look at how tokens are distributed to get a sense of the risk for inflation. Birmingham says useful data for these purposes is available online through Solana’s Explorer feature and the site Solana Beach.
» Thinking about buying SOL? Here are our picks for best bitcoin and cryptocurrency exchanges.
The author owned Solana, Ethereum and Cardano at the time of publication. The editor owned Ethereum at the time of publication.
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