Solana vs. Ethereum: It Hasn't Been a Fair Fight Lately

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Much ado has been made about the potential of various “Ethereum killers” in the market. Certainly, Solana and its market capitalization of $75 billion (ranked fifth in the entire crypto sector in terms of market capitalization) ought to be the first layer-1 network investors can think of as potentially competing with Ethereum over the long-term.

This view has been exacerbated by Solana’s incredible 63% upside over the past month, relative to Ethereum’s strong, but noticeably smaller, return of “only” 12% over this same time frame.

So, what gives? Both blockchains play an integral role as the infrastructure or plumbing of the decentralized finance (DeFi) movement. But why is Solana outperforming Ethereum to this degree?

Let’s dive in.

Solana’s Core Technology Spurring Projects Resonating With Users

Solana (SOL)
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A physical Solana token on a black background

Like Ethereum, developers can create decentralized applications on Solana’s network which users benefit from. This is the sort of utility-generating flywheel we like to focus on, and it’s a key reason why Solana’s valuation has continued to soar. Its lightweight, fast, and inexpensive transaction capabilities have allowed projects tied to non-fungible tokens (NFTs) and meme projects to prosper. Given Ethereum’s sky-high gas fees (which have been around $70 per transaction in recent days), users simply won’t use the Ethereum network directly for smaller transactions (to say nothing of layer-2 networks, but that’s a whole other discussion).

In a sense, Solana’s network is much better-designed via its infrastructure to deal with the sort of NFT and meme projects that are garnering so much attention right now. Currently, that’s the narrative investors want to focus on. And whether it’s Dogwifhat, Bonk, or others, there’s a growing ecosystem of very engaged users that are now flocking to Solana.

Picking up tokens of the main blockchain supporting these projects certainly makes sense, as Solana directly and indirectly benefits from these active communities. While hard to value, this is the sort of bullish sentiment many have been waiting for when it comes to Solana, with investors clearly reaping the benefits of this latest wave of momentum in the crypto sector right now.

What’s the Bull Case for Ethereum?

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Ethereum largely represents the old guard in the world of DeFi. And by all accounts, most serious major projects continue to build on top of Ethereum due to its ubiquity and stability. These are factors many developers simply don’t want to mess with, and it’s just easier to tie into the Ethereum ecosystem. In other words, there are real and meaningful entrenched network effects at play when it comes to Ethereum.

That’s the core investing thesis for the Ethereum network, and it’s why Ethereum is still valued at a market capitalization more than five-times that of Solana. The project’s recent Dencun release should bring down costs and improve efficiency over time, though much of these effects will be seen as a result of the layer-2 networks built on top of Ethereum. Ethereum’s massive size, for good and bad, is the key reason why it remains a core holding for so many investors.

Let’s not also forget that an upcoming SEC ruling on spot Ethereum ETFs could be coming down the pike shortly. While this decision has been delayed, and could be delayed further, we’ve seen what a rush of capital into one token can do for its price (ahem, Bitcoin). Given Ethereum’s less-inflationary nature of late, any significant uptick in demand could result in a similar dislocation Bitcoin has seen, driving Ethereum prices higher over time.

So, Which Is the Better Bet Moving Forward?

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Clearly, Solana is the proof-of-stake network with the most momentum right now in terms of the large-cap projects most investors are watching. This network is where much of the building in high-growth projects is right now. Thus, at least for the near-term, it appears Solana has a shot of seeing outsized growth relative to Ethereum for the time being.

That said, if positive data following Ethereum’s recent upgrades leads to greater adoption, or spot ETFs are announced for the world’s second-largest cryptocurrency, all bets are off with respect to how high this token could be valued. There’s still a large gap between Ethereum and Bitcoin, and many expect this gap to close over time. So, there’s certainly overhead room for a 4x run higher, if that’s the case.

Personally, I can’t say with any degree of certainly whether this Solana outperformance will continue indefinitely, but it’s certainly something to watch. For now, I do think the better risk/reward sits with Solana due to its growth rate tied to new project launches and user growth. Until that slows down, this will be the key project to watch, in my view.

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