Closely tied to the disgraced founder of FTX, Solana was severely injured by the collapse. Here are the headwinds looking at the formerly hot project and its SOL token.
Fall of a giant: Solana
cryptocoin.com As you follow, Solana was a powerful blockchain that competed with Ethereum in some respects. However, the debate over Solana’s future prospects has accelerated in recent days. Blockchain has grown rapidly. It also attracted great interest, especially from venture capitalists, in the 2020-2021 bull market. However, the recent move of major projects to other blockchains has led to a massive drop in Solana’s overall value. This raised questions about future prospects.
Ongoing technological challenges are a common concern expressed by skeptics. Competition from Ethereum layer-2s represents a growing threat to Solana. Because they take away the basic premise of faster and lower-cost transactions. But the biggest cloud shadowing Solana’s sunshine is the fall of Sam Bankman-Fried, founder of FTX exchange and hedge fund Alameda Research.
Bankman-Fried was perhaps Solana’s single most prominent supporter. Skeptics can reasonably argue that the price increase of the SOL token and related assets between 2020-2021 was driven, at least in part, by Bankman-Fried’s market interventions and advocacy.
Sharp drop in crypto and blockchain league
The consequences of growing Solana skepticism were dire, based entirely on numbers. From its peak price of $258.78 on November 6, 2021, SOL dropped to just over $10. This is a 96% drop for BTC (74.5%) and ETH (74.6%), which is much sharper than the drop from the top. In fact, it’s an incredibly sharp drop than what Dogecoin (DOGE) saw in the bear market. Because the meme coin has dropped 87% from its all-time high in May 2021. According to data from CoinGecko, Solana fell from the 5th most valuable crypto position in early November to 19th place.
The total value of tokens staked in decentralized finance (DeFi) protocols in Solana has dropped from approximately $10.2 billion on November 9, 2021 to less than $210 million at the time of writing. Thus, it experienced an even more dramatic decline (around 98%). Solana fell behind not only Ethereum layer-2s like Polygon and Optimism, but also much more obscure projects like Cronos and DefiChain. Currently, it is only the 12th largest DeFi Blockchain in terms of total locked value (TVL).
Solana is also a ‘Samcoin’
The sharpest percentage drop in Solana’s measurements came in early November after the collapse of FTX and growing evidence of Sam Bankman-Fried’s massive scam. It is likely that some of Bankman-Fried’s extensive support for Blockchain was financed with client funds from FTX.
Also, former Alameda executives, including CEO Caroline Ellison, claimed in recent statements to the U.S. Securities and Exchange Commission that Bankman-Fried promoted market manipulation of FTX’s FTT token. Given this, it’s unlikely that Bankman-Fried also manipulated the price of the Solana-based projects that he controlled and helped launch, used in accounting and credit scams at the core of the FTX scam.
These related projects, including the decentralized Serum exchange and self-described DeFi broker Oxygen, are sometimes sarcastically referred to as ‘Samcoins’. They have seen catastrophic drops in their own token prices. Also, with the collapse of FTX, Serum went bankrupt. Afterwards, a community hard forked.
Market manipulation through Alameda would have been effectively funded by surreptitiously diverting FTX client funds from other assets such as Bitcoin and Ethereum to trading SOL or other ecosystem tokens. Alameda’s market-making and trading activities as a whole are extremely unprofitable. Some critics argue that while artificially lowering the price of blue chips such as ETH and BTC, SOL activities will mean increasing the value of Solana.
This chaos started a death spiral as developers and projects left Blockchain. Most notably, the DeGods and Y00ts NFT projects split from Solana for Ethereum and Polygon, respectively. In November, stablecoin issuer Tether transferred $1 billion USDT from Solana to Ethereum.
Ongoing issues in Solana
All of this builds on the concerns that preceded the collapse of FTX. Solana has had recurring blockchain outage issues since its inception, often caused by ‘bot’ or other forms of spam crushing the network. This ties tightly to Solana’s faster, cheaper core value proposition than Ethereum. For a Blockchain, lower transaction costs and higher speed often mean a tradeoff for security and stability.
Also, this value proposition itself may be less compelling than when Solana launched in March 2020. Since then, there has been significant growth in ‘layer-2’ products that offer faster and cheaper transactions on Ethereum but take advantage of Ethereum’s security. Among these new competitors is Optimism, a tier 2 that was released in December 2021 and currently has more than double the unlocked value of Solana.
These are serious headwinds. Also, commentators in the crypto industry have been discussing the future of Blockchain lately. In the best-case scenario, Solana’s remaining builders face a long road to returning to ecosystem health and relevance. The big question is whether there are enough of them with enough faith to go the distance.