Solana
Why Solana was decimated by the fall of Bankman-Fried
Debate has accelerated in recent days over the future prospects of Solana, a layer 1 smart contract blockchain that in some ways competes with Ethereum. The channel grew rapidly and saw immense hype during the 2020-2021 bull market, especially from venture capitalists. But the recent departure of major projects to other chains and a massive drop in the total value of the Solana chain have raised questions about its future prospects.
Persistent technological challenges are a common concern cited by skeptics. Competition from Ethereum’s Layer 2s poses a growing threat to Solana’s core principle of faster, cheaper transactions. But the biggest cloud darkening Solana’s sun is the fall of Sam Bankman-Fried, founder of the FTX exchange and Alameda Research hedge fund.
David Z. Morris is CoinDesk’s chief news columnist.
Bankman-Fried was perhaps Solana’s primary financial backer, and skeptics might reasonably argue that the price appreciation of GROUND tokens and associated assets from 2020 to 2021 were driven at least in part by the Bankman-Fried market interventions and advocacy.
The consequences of Solana’s growing skepticism have been disastrous, based on numbers alone. From a peak price of $258.78 on November 6, 2021, Solana’s SOL token has fallen to just over $10. This represents a drop of 96%, much larger than the drop from the peak of BTC (-74.5%) and ETH (-74.6%). This is an even steeper decline, incredibly, than dogecoin (DOGE) saw in the bear market – the meme coin is down just 76% compared to its local peak in October 2021, although it is down 87% from its all-time high in May 2021.
From its position as the fifth most valuable crypto token in early November, Solana’s SOL token fell to 19th place, according to CoinGecko data.
The total value of tokens involved in decentralized finance (Challenge) protocols on Solana declined even more dramatically, from nearly $10.2 billion on November 9, 2021 to less than $210 million at press time, a drop of almost 98%. Solana is now only the 12th largest DeFi chain by total value locked or TVL, behind not only Ethereum Layer 2s like Polygon and Optimism, but also much more obscure projects like Cronos and DefiChain.
The largest percentage drop in Solana’s metrics occurred in early November, following the collapse of FTX and mounting evidence of massive fraud on the part of Sam Bankman-Fried. It now seems increasingly likely that some of Bankman-Fried’s massive support for the channel was funded via Massive Theft of Client Funds by FTX.
These related projects, including decentralized exchange Serum and self-described DeFi broker Oxygen, are sometimes derisively referred to as “Samcoins.” They saw catastrophic declines in their own symbolic prices, and the serum was rendered “deceased” by the collapse of FTX, requiring a community range.
Market manipulation through Alameda was effectively financed by clandestinely redirecting FTX client funds from other assets, such as bitcoin and ether, into trading SOL or other ecosystem tokens. In retrospect, Alameda’s market making and trading activities appear to have been extremely unprofitable. Some critics have argued that their SOL activity would have been about propping up the value of Solana, while keeping the price of blue chips like ETH and BTC artificially low.
This chaos has given rise to hints of something resembling a death spiral as developers and projects leave the struggling chain. More dramatically, the DeGods and Y00ts NFTs (non-fungible token) the projects have been confirmed leave Solana for Ethereum and Polygon, respectively. In November, stablecoin issuer Tether traded $1 billion worth of USDT from Solana to Ethereum.
All of this adds to the concerns that preceded FTX’s collapse. Solana experienced repeated chain stops since its inception, often caused by botting or other forms of spam overwhelming the network. This is inextricably linked to Solana’s core value proposition of faster and cheaper Layer 1 than Ethereum: for a blockchain, lower transaction costs and higher speed are often a trade-off between security and stability.
Additionally, this value proposition may itself be less compelling than it was when Solana launched in March 2020. The years since have seen significant growth in “layer 2” products on Ethereum that offer faster and cheaper transactions, but benefit from the security of Ethereum. , mainly through the use of rollup technology. These new competitors include Optimisma layer 2 launched in December 2021 and which now has more than twice as much value locked as Solana.
These are serious headwinds, and crypto industry commentators have been discuss the channel’s prospects in the last days. In the best-case scenario, Solana’s remaining builders will face a long road back to ecosystem health and relevance. The big question is whether there are enough of them, with enough conviction, to hold on.