Solana (SOL -4.65%) was launched on March 24, 2020 with an initial coin offering price of $0.22 per token. Today, it trades at $164 -- so a $100 investment then would be worth about $75,000 today. That 74,900% gain was fueled by the growth of its ecosystem for developing decentralized finance (DeFi) apps and non-fungible tokens (NFTs), its speed and scalability, and Solana Pay's growing number of fintech and e-commerce partnerships.
Yet some investors expect Solana's price to soar even higher. VanEck, which submitted the first U.S. application for a Solana exchange-traded fund (ETF) last year, expects its price to surge another 1,850% to more than $3,200 by 2030 in its bull case scenario. Let's see why the investment firm expects Solana to rally, and if investors should buy the token before it heats up again.
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Why did Solana soar during the past five years?
Like Ethereum, Solana's blockchain uses a proof-of-stake (PoS) consensus mechanism to validate its transactions. That approach consumes less energy than the proof-of-work mechanism used to mine Bitcoin, since its tokens are only staked (locked up for interest-like rewards) instead of mined. PoS blockchains also support smart contracts, which are used to develop decentralized applications (dApps) and other tokens.
Many developers launched new tokens on Ethereum's blockchain, but Solana operates its own independent blockchain. It differentiates itself from its competitors by upgrading its own PoS blockchain with a proprietary proof-of-history (PoH) mechanism, which helps it process transactions at much faster speeds than Ethereum's main Layer-1 blockchain.
Solana has a theoretical maximum speed of 65,000 transactions per second (TPS), compared to Ethereum's theoretical top speed of 30 TPS for its Layer-1 transactions. But for real-world transactions, which face network congestion and other limitations, Solana has a daily average speed of 1,436 TPS -- versus Ethereum's daily average speed of 19 TPS.
That superior speed makes Solana a popular blockchain for developing DeFi apps and non-fungible tokens (NFTs). In early 2022, its developers launched Solana Pay, an open peer-to-peer payment protocol that let merchants accept stablecoins, Solana, and other Solana-based tokens at high speeds with near-zero fees. Visa, Shopify, and other companies subsequently integrated Solana Pay into their digital wallets and e-commerce ecosystems.
The bull case for Solana
VanEck's 2030 outlook for Solana features a price target of $9.81 in its bear case scenario and a target of $3,211.28 in its bull case scenario. Its "baseline" estimate only sees Solana roughly doubling to about $335 per token during the next five years.
Its bull case relies on the expansion of Solana's DeFi ecosystem and increased user growth. Solana only serves about 1.5 million daily active users (DAUs), according to Artemis Analytics, but VanEck thinks its user base might expand to more than 100 million DAUs as it hosts more DeFi, metaverse, social, gaming, and infrastructure applications.
VanEck admits that achieving that explosive growth would rely on "killer apps" that finally turn Solana into a mainstream platform for processing digital transactions. But it also warns that hosting an application with more than 100 million users on its blockchain would push its scalability "to its limits." Any congestion would also reduce the speed of its transactions, but Solana's planned Firedancer upgrade this year might allay some of those concerns.
Another potential catalyst could be the approvals of the first Solana ETFs. Those listings could stabilize its price by attracting more retail and institutional investors. Declining interest rates could also drive more investors back to Solana and other cryptocurrencies.
The bear case against Solana
VanEck's bull case for Solana is highly speculative, but the bear case is more straightforward. Solana is an inflationary token with no maximum supply, so its value will always be pinned to the growth of its developer ecosystem instead of its scarcity. It's impressing its developers with the speed of its unique PoS/PoH mechanism, but it still faces tough competition from Ethereum's Layer-2 rollups, which bundle together its transactions and process them off-chain at real world speeds of 1,000 to 4,000 TPS. Unlike Ethereum, Solana isn't cross-compatible with other blockchains, and its Rust and C developer languages have a steeper learning curve than Ethereum's Solidity.
So even if a "killer" DeFi app finally arrives, it might launch on Ethereum instead of Solana. All of those challenges could hold Solana back during the next five years.
Should you buy Solana?
Solana's proprietary mechanism, speed, and low fees will help it stay more relevant than other blockchains for the foreseeable future. But it's simply not as compelling an investment as Bitcoin, which is valued by its scarcity, or Ethereum, which remains the top developer blockchain. So for now, I'd stick with those two blue chip cryptocurrencies instead of putting too much faith in VanEck's bull case scenario for Solana.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Shopify, Solana, and Visa. The Motley Fool has a disclosure policy.
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