Solana is a form of digital currency known as a cryptocurrency that operates solely online. Launched in April 2019, Solana initially traded for less than $1 per coin. Since then, its value has experienced significant growth, reaching over $200 before experiencing a decline along with other cryptocurrencies in 2023. As of August 2024, Solana was trading at around $134 and ranked among the top 10 largest cryptocurrencies by total value according to CoinMarketCap.com.
Here is an overview of what Solana is and how it functions.
What is Solana?
Solana is a popular cryptocurrency among the thousands currently in existence. The cryptocurrency’s platform is Solana, and its individual unit is referred to as a sol.
Developed by Anatoly Yakovenko, Solana operates on a decentralized network using blockchain technology. This blockchain ledger manages and records the currency, documenting every transaction that has taken place, similar to a continuous receipt. The network records and verifies the integrity of these transactions in the currency.
This decentralized system enhances the network’s resilience, allowing users to conduct transactions without the need for intermediaries. Solana is recognized as the fastest blockchain globally, capable of validating 65,000 transactions per second at a cost of less than a penny each.
While cryptocurrencies are often viewed solely as a form of currency, it is important to note that they can also serve as tokens that power various applications on the platform. Solana, for instance, can support smart contracts, decentralized finance apps, NFTs, and more.
What does Solana do?
Solana has the capability to power a range of applications offering diverse features, including:
- Currency: Solana can be used through a cryptocurrency wallet to send or receive the coin, as well as for transactions involving goods and services.
- Smart contracts: These are automated applications that execute contract terms once conditions are met.
- Non-fungible tokens (NFTs): Solana can facilitate the creation and sale of NFTs, popular in the digital art realm.
- Decentralized finance: Users can engage in permission-less payments with Solana, bypassing centralized controls.
- Digital apps: In addition to its primary functions, Solana supports the development of various apps such as games, investment platforms, and social media.
- Proof of history approach: Alongside a proof of stake system, Solana timestamps transactions, preventing reordering for validator advantage and ensuring a “censorship-resistant” network.
It is essential to view Solana as a token capable of powering diverse applications rather than merely a currency for monetary transfers.
Where do Solana coins come from?
As of August 2024, approximately 465 million sol were in circulation. Solana follows a structured issuance plan where coins are awarded to those supporting the cryptocurrency. The initial supply growth rate of 8 percent annually decreases by 15 percent each year, eventually settling at a fixed ongoing issuance rate of 1.5 percent annually.
This issuance model differs significantly from other cryptocurrencies such as Bitcoin, which has a fixed total supply of 21 million coins, and Dogecoin, which has no issuance limit.
Solana utilizes a “proof of stake” mechanism for transaction verification, coin supply management, and new coin creation. Participants in the proof of stake system must own the cryptocurrency to earn rewards for contributing to the network’s operation. By staking tokens with a validator, participants place trust in the validator to authorize transactions, with potential financial risks if validated transactions violate system rules.
Validators receive staking rewards in the form of new coins for transaction verification and take a percentage as a commission. The remaining reward is distributed to token holders based on their ownership stakes.
Is Solana a good investment?
Solana experienced rapid growth upon its launch, followed by fluctuations alongside other cryptocurrencies and risky assets amid interest rate hikes by the Federal Reserve. While early Solana investors may have profited, this was more challenging in 2023 and parts of 2023. The cryptocurrency market, including Solana, saw gains in 2024. However, it is crucial to understand what you are investing in rather than solely focusing on recent price movements.
Unlike stocks, which represent fractional ownership in a company with assets and cash flow, popular cryptocurrencies like Solana lack underlying assets and rely on speculation and trader optimism to drive value. Traders believe they can sell the coin to other traders at a higher price in the future, a concept known as the “greater fool theory.” Consequently, speculation primarily fuels the price fluctuations of digital currencies.
If trader optimism diminishes, cryptocurrencies lack a fundamental support system. This distinction is a key reason why many investors, including prominent figures like Warren Buffett, remain cautious about investing in cryptocurrencies.
Bottom line
For individuals interested in speculating on Solana or other cryptocurrencies, direct trading or investment in companies capitalizing on the sector’s growth are options. However, it is essential to be aware of the risks associated with cryptocurrency trading, given its volatility and lack of asset backing. Therefore, only invest funds that you can afford to lose when engaging in cryptocurrency trading.
Editorial Disclaimer: Investors should conduct thorough independent research on investment strategies before making any investment decisions. Past performance of investment products does not guarantee future price appreciation.