Can Solana Survive the Collapse of FTX?
Solana's future hangs in the balance as it faces a mass exodus of user funds, despite developer activity reaching an all time high.
Last weekend, Solana (SOL) reached its lowest price since February 2021, falling to under $8.41 from its all-time high of $259 about a year earlier.
This decrease is likely due to the close relationship between Solana, FTX and Sam-Bankman Fried (SBF).
SBF associated himself closely with the network through investments in the Solana ecosystem and integration with FTX — both of which were supported by copious amounts of publicity.
Additionally, FTX and Solana were mutually invested in each other, with a significant portion of Solana's treasury now stuck on FTX. FTX also invested in several high-profile Solana projects, including the development of the Serum exchange, which was a major DeFi platform on the Solana network.
However, it appears that this association has now become detrimental, as funds, users and several major projects are leaving the platform.
The FTX connection
Alameda Research — a FTX-owned hedge fund — acquired roughly 58 million SOL between 2020 and 2021, accounting for slightly over 10% of SOL's total supply. As a result, it became one of the largest single holders of SOL outside of the Solana Foundation.
The future of these tokens is now of major concern, given that FTX's administrators may have to sell them off en masse to cover creditor losses.
On the flip side, the Solana Foundation — the core development team responsible for Solana’s development — had significant exposure to FTX.
- ~3.24 million shares of FTX Trading LTD common stock
- ~3.43 million FTX (FTT) tokens
- ~134.54 million Serum (SRM) tokens
- ~1$ million USD in cash or cash equivalents
Both FTT and SRM are issued by FTX and were used by Alameda to take out circular loans from FTX, which were paid with user deposits. Their subsequent crash in price is one of the major contributors to FTX's collapse.
In addition to direct investments between the two parties, FTX and Alameda invested in several high-profile projects in the Solana ecosystem.
The most significant of these investments was in the decentralized exchange Serum, which was the heartbeat of the DeFi ecosystem on Solana up until FTX collapsed. FTX and Alameda co-developed Serum, with the firms also providing liquidity to the protocol.
As a result, the remaining members of the Serum DAO voted to hard fork the protocol and essentially start fresh. This was due to FTX having access to the protocol's private keys which posed a major security risk.
The SRM token’s future is now unclear, as the Serum team acknowledges continuing to use it would pose a major risk based on FTX's substantial holdings.
Price isn't the only thing crumbling either: On-chain activity, trade volume and DeFi liquidity are all in decline.
According to DeFiLlama, Solana's Total Value Locked (TVL) has seen a dramatic decrease of 98% from its record high of $10.17 billion, falling to $206 million earlier this week. This marks a 27% drop in TVL over the past month.
According to The Block, Value Moved On-chain was the lowest on record in November 2022 and daily transactions have dropped by half since August 2022.
Evidently DeFi activity on Solana is drying up, and developers have taken notice.
In November Tether removed $1 billion of its USDT stablecoin from Solana, while several major exchanges including Binance, Crypto.com and OKX all paused Solana-based deposits and withdrawals for USDT and USDC.
More recently, major NFT projects including Magic Eden, DeGods and y00ts have all announced plans to migrate to other chains.
It's not over yet
Despite all this, at least one major project has chosen to double-down on Solana.
Helium is a blockchain-based data network with links to T-mobile. Its community has decided to go ahead and migrate off its own blockchain onto Solana, with 81% of voting token holders opting for the switch.
This could indicate that developers still see enough value in Solana's underlying technology to outweigh any slumps in user activity.
Unsurprisingly, Solana cofounders Anatoly Yakovenko and Raj Gokal share this sentiment.
In a recent interview with Blockworks, they highlighted that Stripe recently integrated with Solana, and that new projects like Teleport (a blockchain-based Uber) and Hivemapper (a blockchain-based Google Maps) recently showcased demos that couldn't have operated on any other blockchain.
Given that none of Solana's high-scalability technology has fundamentally changed, it has the potential to rebound as long as developers stay engaged and are able to shake off the recent exodus of funds and users from the platform.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.