Ethereum is widely accepted as the 2nd most popular crypto in the market behind Bitcoin. It was first to market with smart contracts and has remained the reigning leader of decentralized apps. However, Ethereum experienced heightened competition when Solana hit the market in March 2020 as an alternative layer 1 network.

Since Solana began trading in 2020, it is up about +28,000% compared to Ethereum’s +1500% during the same time, proving to potentially be a so-called “Ethereum Killer.”  

In this report, we will explore the competitive landscape between Ethereum and Solana for layer 1 dominance. While Ethereum’s idea was exceptional and original, execution has been clumsy, opening the door for a better and more efficient option, which is what Solana aims to provide.

While the background and fundamentals are always important to understand, the world of crypto is mostly pre-revenue technologies that are still nascent in their adoption, with little news or earnings reports to review. For this reason, the I/O Fund leans heavily into technical analysis to manage these positions. We expect this drop in Solana to end soon, which should lead to one more swing higher.

Crypto is a staple for the I/O Fund’s portfolio, with two crypto positions seeing gains of 1,000% up to 4,000%, and quick-trade momentum positions gaining 80% to 120%, or more. To access more in-depth analysis on I/O Fund’s crypto holdings, and weekly webinars where we discuss the price levels we’re watching, click here.

Layer 1 Competitive Landscape

One of the fundamental axioms within the world of crypto is what’s known as the blockchain trilemma. Crypto technologies aspire to achieve three critical features: decentralization, security and scalability.

This trifecta is often called the “trilemma” as blockchain technologies can typically solve for two of these problems, yet struggle to solve all three. Instead, current blockchain technologies excel at two of the three, and then must experiment to solve the third with sidechains, sharding and other nascent attempts at solving the third requirement.

For example, Bitcoin’s network has prioritized security and decentralization, while sacrificing scalability. The network sends 7 transactions per second and can take up to 10 minutes to confirm a transaction. The upside is the network’s security is bullet-proof with a hash rate of 460 Exahash per second. It’s impossible today for a supercomputer to crack the Proof-of-Work (PoW) encryption.

Ethereum initially utilized a PoW protocol like Bitcoin. Therefore, in the blockchain trilemma, it sought to be decentralized and secure. However, it accomplished these two features at the cost of scalability. The limitations of a truly secure and decentralized network required multiple nodes confirming each transaction. So, in periods like early 2021, when the demand for the Ethereum network far exceeded its ability to handle high activity, the cost of each transaction rose to astronomical prices, making the network unusable for simple transactions. For example, Time Magazine’s TIMEPieces resulted in exorbitant gas fees where 10 NFTs were priced at 1 ETH for $2500 or $2800 yet due to gas fees, one buyer paid as much as $70,000.

Source: YCharts

Considering that Ethereum is a business that is attempting to disrupt current technologies, not being able to scale is a serious problem. They have attempted to resolve this critical limitation by shifting their confirmation protocol from Proof-of-Work to Proof-of-Stake (PoS). This protocol works by selecting validators in proportion to the quantity of Ethereum holdings being staked. This is done to avoid the computational cost found in the PoW protocol. This has certainly improved the scalability of Ethereum, but at the cost of being decentralized and secure.

To understand these concerns, consider that Ethereum had seen up to 70% of its supply held by whales in 2021, although the latest report is that 43% of ETH supply is held by whales. The concentration is staggering as six of the top crypto wallets have 98% of their wallets allocated to the Ethereum blockchain, according to TechCrunch.

When looking more closely at Proof of Stake (PoS) validators for Ethereum, Lido is the largest Ethereum validator at 33% stake and Coinbase is at 15%. To help illustrate how unusual this concentration is, consider that the Nakamoto Coefficient for Ethereum is 2, which means it takes only two nodes to control the blockchain. Truly, it’s beyond belief the coefficient is this low for the world’s top blockchain Layer 1. Bitcoin’s is estimated to be as high as 9601. The highest Coefficient beyond Bitcoin is 236 for a network called Humanode, and its goal is to increase the coefficient over time. The last time Solana’s was reported in 2023, it stood at a coefficient of 31.

Also consider that PoS requires 32 ETH, or about $96,000 per node, whereas Proof of Work requires a mining setup of less than $10,000. This means Ethereum is far less democratized, leading to some centralization by the very fact Lido has such a large pool of validators at 33%. There was also a report in May of 2024 that one whale staked about $500 million to the network.

When you add the fact there are thousands of nodes globally, a Proof of Work system is truly decentralized whereas a Proof of Stake (PoS) system could still concentrate itself through “whales;” those who own a disproportionate amount of a single token. This results in the wealthiest crypto holders having a higher concentration in what is essentially a lottery system of validators. If a person has a thousand lottery tickets compared to a person with only ten, the person with 1,000 tickets (or nodes in this case) is more likely to be chosen to validate the ledger. This could lead to corruption, and it ultimately does not fit crypto’s ethos that those with a higher concentration of wealth are allowed to be more trusted and have more authority.

The ongoing complaints and limitations of Ethereum, coupled with long, drawn-out attempts to solve these issues, have allowed the opportunity for better layer 1 options, like Solana.

The I/O Fund is also closely analyzing the supply chain to identify overlooked beneficiaries of the AI infrastructure buildout, sharing this information as well as potential buy and sell plans and real time trade alerts with premium members. The I/O Fund recently entered two separate beneficiaries for gains of 23% and 17% since November. Learn more here.

Solana’s Proof of History Protocol, Upcoming Firedancer Upgrade

Started in 2017 by an ex-Qualcomm engineer, the primary improvement the Solana network offered was that it was based on a new Proof of History (PoH) protocol.  This revolutionary protocol offers a high throughput of 65,000 transactions per second on GPUs, although other blockchain networks have a higher time to finality. Solana accomplishes this without second layers or side chains by using the Proof of History (PoH) consensus mechanism. PoH creates a historical record that proves an event occurred at a specific moment in time. Rather than validators agreeing on a time, Solana validators maintain their own clock by encoding the time with a cryptographic hash function (SHA-256). This circumvents the need to wait for confirmation, thereby resulting in a higher throughput.

In short, Solana is a much more efficient layer 1 -- it is significantly faster than Ethereum’s updated PoS protocol, and more secure. This is one reason why Solana is meaningfully outperforming Ethereum since it started trading in 2020. While this technology is still very nascent and not adopted on the level that would make it comparable to your standard hyperscalers, it is providing significant alpha when managed properly.

This year, Solana is expecting to undergo a massive network upgrade, expanding to its fourth validator, Firedancer. Developed by Jump Trading, the new validator client has been built to significantly improve Solana’s transaction processing capabilities. Jump says that Firedancer can allow the Solana network to process more than 1,000,000 transactions per second, boosting speeds and substantially boosting network security.

Such a boost in performance will further enhance Solana’s competitive standing in the layer 1 ecosystem, letting it keep pace with Bitcoin and Ethereum, which is also planning an upgrade this year (Prague/Electra), focusing on scalability and security.

Technical Analysis and Crypto

As stated, crypto tends to have little news moving the price swings. They have no earnings reports, and most are pre-revenue. So, one is left to believe that the large price swings are truly random or governed by a different set of rules.

For those that study crypto price charts, it is apparent that the swings are not random and lend themselves to technical analysis. Technical analysis is simply the study of herd sentiment, which manifests in repeatable patterns, time and time again.

This is the technique the I/O Fund has used to manage a large Bitcoin position since 2019. For example, in early 2021, we reduced our Bitcoin position in half around the $50K region.

Source: Knox Ridley’s X

We then boldly stated that Bitcoin was going to rally from the $16,000 region in December of 2022. We backed this analysis up with 12 buy alerts within our premium service between $27,000 and $62,000.

Source: I/O Fund’s Real-Time Notifications

We have since started taking well deserved gains, as Bitcoin has reached our long-term targets. However, based on the same techniques used to call a top in 2021, and a bottom in 2022, we see a low developing, which should be followed with one more swing higher into the $114,000 - $150,000. This is where we would reduce our Bitcoin holdings significantly. Until then, we see this dip as a buying opportunity for the more nimble investors.

What’s important to understand about herd sentiment is that it moves in 5 waves. The 3rd wave is the moment where everyone realizes at once the true direction of the trend. We see shorts covering at the same time and early adopters want to buy more. This is met with a vertical movement in price that is accompanied with max volume and max momentum. This was clearly the period between September 2023 and March of 2024.

The final 5th wave is where the herd pushes for one more swing high. The early adopter tends to take gains in the 3rd wave, while those who missed out are looking to finally get in, under the belief that the uptrend is just starting. The 5th wave is a move to new highs in price, but on lower volume and lower momentum.

From our estimation, we are in wave 4 of this final 5th wave. As long as this drop holds over $75,000, we expect a final swing into the $114K - $150K region.

Regarding Solana, the I/O Fund started buying in the $99 - $112 region, and closed our position between $210 and $241. This led to a ~117% gain from our initial buys to our closing prices. We used the same techniques to manage this move and see a similar setup going forward.

Like Bitcoin, Solana is clearly in a 5th wave uptrend that is incomplete. Note the vertical price movement from late 2023 – early 2024. This was met with max volume and max momentum. We are now pushing higher with less volume and less momentum in the 5th wave.

If we zoom in, we can see that this next swing higher is worth playing. Like Bitcoin, I see Solana in a 4th wave correction that is targeting between $170 - $135. As long as any further weakness holds over $120, we expect to see the next swing approach the $325 - $390 region.

In conclusion, being first to market with an idea does not guarantee dominance, especially when adoption of the new technology is early. Until Decentralized Apps and Web3 have an app go viral for more mass consumer adoption, it remains quite risky for investors. The adoption rate for blockchain has not hit the hockey stick vertical move that we like to see in developing tech trends, rather has stagnated in the low hundreds of millions (similar to Pinterest size audience; about half of Snap’s audience) rather than the billions that investors like to see.

This fact, coupled with Solana offering a better layer 1 option, means the landscape has not been decided. Until it is, we believe these cryptos warrant investment attention, and must be governed under strict risk management protocols that can be found in technical analysis.

We do believe crypto is sniffing out a bottom over the coming weeks. As long as critical supports hold, we see this as a buying opportunity for our portfolio.

If you own Bitcoin or Solana, are sitting on sizable gains and do not want to lose them, or if you are interested in owning crypto and not sure where to start, we invite you to join our weekly market webinars. Next Thursday, 1/23/25, at 4:30 EST (1:30 PST), we will hold a special webinar with a focus in crypto where we discuss our risk management game plan with several cryptos. Learn more here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

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