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.
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.
