Debate has accelerated in recent days over the future prospects of Solana, a layer 1 smart-contract blockchain that in some respects competes with Ethereum. The chain grew rapidly and saw immense hype during the 2020-2021 bull market, particularly from venture capitalists. But the recent departure of major projects to other chains and a massive drop in total value on the Solana chain have raised questions about its future prospects.
Lingering technological challenges are a common worry cited by doubters. Competition from Ethereum layer 2s represent a growing threat to Solana’s core premise of faster and lower-cost transactions. But the biggest cloud shading Solana’s sunshine is the fall of Sam Bankman-Fried, founder of the FTX exchange and hedge fund Alameda Research.
David Z. Morris is CoinDesk’s chief insights columnist.
Bankman-Fried was perhaps the single most prominent backer of Solana, and skeptics could reasonably argue that the price appreciation of the $SOL token and related assets from 2020-2021 was driven at least in part by Bankman-Fried’s market interventions and advocacy.
The consequences of growing Solana skepticism have been dire, based purely on numbers. From a peak price of $258.78 on Nov. 6,2021, Solana’s SOL token has declined to just over $10 today, Dec. 28. That’s a drop of -96.1%, vastly sharper than the drawdowns from peak for BTC (-74.5%) and ETH (-74.6%). It’s even a sharper drop, incredibly, than dogecoin has seen in the bear market – the memecoin is down a mere 76% since its October 2021 peak.
From its position as the fifth most valuable crypto token in early November, Solana’s SOL token has dropped to 19th place, per data from CoinGecko.
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The total value of tokens staked in decentralized finance (DeFi) protocols on Solana has declined even more dramatically, from nearly $10.2 billion on Nov. 9, 2021 to under $210 million at press time – a decline of nearly 98%. Solana is now only the 12th largest DeFi chain by total value locked or TVL, trailing not only Ethereum layer 2s like Polygon and Optimism, but also far more obscure projects like Cronos and DefiChain.
Samcoins
The single sharpest percentage drop in Solana’s metrics came in early November following the collapse of FTX, and mounting evidence of massive fraud by Sam Bankman-Fried. It now seems increasingly likely that some of Bankman-Fried’s extensive support for the chain was funded via FTX’s wholesale theft of customer funds.
Former Alameda executives including CEO Caroline Ellison, moreover, have claimed in recent statements to the SEC that Bankman-Fried encouraged market manipulation of FTX’s FTT token. Given that, it seems improbable that Bankman-Fried was not also manipulating the price of Solana-based projects he helped launch, controlled large stakes in and used in the accounting and loan fraud that formed the core of the FTX swindle.
Those related projects, including the Serum decentralized exchange and the self-described DeFi brokerage Oxygen, are sometimes derisively referred to as “Samcoins.” They have seen catastrophic declines in their own token prices, and Serum was rendered “defunct” by the collapse of FTX, necessitating a community fork.
Market manipulation via Alameda would have effectively been funded by the clandestine redirection of FTX customer funds from other assets, such as bitcoin and ether, towards the trading of SOL or other ecosystem tokens. Alameda’s market-making and trading activities as a whole appear in retrospect to have been wildly unprofitable. Some critics have argued that their SOL activity would have amounted to propping up the value of Solana, while artificially holding down the price of blue-chips like ETH and BTC.
This chaos has led to hints of something like a death spiral as developers and projects depart the struggling chain. Most dramatically, the DeGods and Y00ts NFT projects were confirmed to be leaving Solana for Ethereum and Polygon, respectively. In November, Tether swapped $1 billion of USDT from Solana to Ethereum.
Lingering issues
All this comes on top of worries that predated the collapse of FTX. Solana has experienced repeated chain halts 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 as a faster, cheaper layer 1 than Ethereum: for a blockchain, lower transaction costs and higher speed often come as a tradeoff for security and stability.
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Moreover, that value proposition may itself be less compelling than it was when Solana launched in March of 2020. The years since have seen significant growth in “layer 2” solutions on Ethereum that offer faster and less expensive transactions, but gain the benefit of Ethereum’s security, mostly through the use of “rollup” technology. Those new competitors include Optimism, a layer 2 that launched in December of 2021 but now has more than twice as much value locked as Solana.
These are serious headwinds, and commentators across the crypto industry have been debating the chain’s prospects in recent days. In a best case scenario, Solana’s remaining builders face a long road back to ecosystem health and relevance. The big question is whether there are enough of them, with enough conviction, to go the distance.
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