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Solana's Accelerated One-Year Downfall Destroys Over $50 Billion

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The Solana logo displayed on a phone’s screen and the representation of cryptocurrencies are seen in this illustrative photo taken in Krakow, Poland, on Aug. 21, 2021.

Jakub Porzycki | NurPhoto | Getty Images

solana was touted as the cryptocurrency that would challenge ether with a greener approach, faster transaction speeds and more consistent costs.

Investors who made that bet had a miserable year. The token’s market cap dropped from over $55 billion in January to just over $3 billion at the end of the year.

Among Solana’s biggest issues in late 2022 was his close relationship with FTX founder Sam Bankman-Fried, who faces eight criminal fraud charges after his cryptocurrency exchange went bankrupt last month. The disgraced former crypto billionaire was one of Solana’s most public boosters, touting the advantages of blockchain technology and investing over half a billion dollars in Solana tokens.

“Sell me anything you want” Bankman-Fried told a skeptic in January 2021. “Then go fuck yourself.”

Bankman-Fried’s companies held nearly $1.2 billion in tokens and associated assets as of June, according to documents reviewed by CoinDesk.

When FTX collapsed, investors bailed Solana out for about $8 billion. But in recent days, with the rest of the cryptocurrency world relatively quiet and prices stable, Solana has plummeted even further.

Solana fires as Bahamian regulator says seized $3.5 billion in FTX assets: CNBC Crypto World

Two of the largest non-fungible token (NFT) projects built on Solana announced their migration from the Solana platform on Christmas Day. But the recent slides came after the news had already broken, making Solana’s recent slide something of a mystery.

In the last week, Solana is down more than 30%. Ether held steady, losing 1.7% over the same period, while bitcoin fell just 1.2%. Among the top 20 most valuable cryptocurrencies tracked by CoinMarketCap, the next biggest loser on this stretch is dogecoinwhich dropped 9%.

In just one hour of trading on Thursday, Solana was down 5.8%, hitting the lowest level since the start of 2021, around the time Bankman-Fried began to vocally offer your support to the project.

Solana has since climbed out of the lows, with a market capitalization now surpassing $3.5 billion. Its 24-hour trading volume increased by more than 200% on a relative basis.

During the cryptocurrency market boom of 2021, Bankman-Fried was not alone in his optimism.

Developers loved Solana’s support for smart contracts, code snippets that execute pre-programmed directives, as well as an innovative proof-of-history consensus mechanism.

Consensus mechanisms are how blockchain platforms assess the validity of an executed transaction, tracking who owns what and how well the system is working based on a consensus between multiple record-keeping computers called nodes.

Bitcoin uses a proof-of-work mechanism. Ethereum and rival Solana use proof-of-stake. Rather than relying on energy-intensive mining, proof-of-stake systems ask large users to provide collateral, or stakes, to become “validators”. Rather than resolving a cryptographic hash, as with bitcoin, proof-of-work validators verify transaction activity and keep the blockchain’s “books” in exchange for a commensurate cut in transaction fees.

Solana’s purported differentiator was augmenting proof of stake with proof of history—the ability to prove that a transaction happened at a certain point in time.

Solana has soared throughout 2021, with a single token gaining 12,000% for the year and hitting $250 in November. However, even before the collapse of FTX, Solana faced a series of public struggles, which challenged the protocol’s claim that it was a superior technology.

Much of Solana’s popularity has been built around the growing interest in NFTs. Serum, another Bankman-Fried-backed exchange, was built in Solana. As the calendar turned to 2022, Solana’s limitations began to become apparent.

Just a month into the year, a network outage knocked Solana out for more than 24 hours. Solana’s token dropped from $141 to a low of just over $94. In May, Solana suffered a seven-hour outage after NFT coinage flooded validators and crashed the network.

A “record four million transactions [per second]” took out Solana and sent his token’s price down 7%, CoinTelegraph reported at the time, pushing it further into the red during the start of the crypto winter.

Why Anatoly Yakovenko left traditional technology to co-found Solana

In June, another outage triggered a 12% drop. The hours of downtime occurred after validators stopped processing blocks, immobilizing Solana’s consensus engine and forcing the network to restart.

The outages were worrying enough for a protocol looking to topple ether’s dominance and assert itself as a fast and stable platform. Solana was experiencing growing pains in public. The project was first built in 2020 and is a younger protocol than ether, which was released in 2015.

Technological challenges are expected. Unfortunately for Solana, something else was brewing in the Bahamas.

The SEC called it “blatant” fraud. Bankman-Fried’s use of client money at FTX to fund everything from trades and loans in his hedge fund, Alameda Research, to his luxurious Caribbean lifestyle, has stirred up crypto markets. Bankman-Fried was launched in a $250 million bail last week pending trial on fraud and other criminal charges in the Southern District of New York.

Solana since November 2022, the month FTX went bankrupt and filed for bankruptcy protection.

Solana lost more than 70% of its total value in the weeks following FTX’s bankruptcy filing in November. Investors fled anything associated with Bankman-Fried, with FTT (FTX native token), Solana, and Serum prices plummeting sharply.

Solana founder Anatoly Yakovenko told Bloomberg that instead of focusing on price action, the public should remain focused on “getting people to build something amazing that is decentralized.”

Yakovenko did not immediately respond to CNBC’s request for comment.

FTT was the worst, losing virtually all of its value. But Solana has seen continued flight in recent days, reflecting continued concerns about FTX contagion and skepticism about the long-term viability of its own protocol.

Developer flight is the most pressing concern. Solana’s raison d’être was to resolve the struggle of bitcoin and ether “to scale beyond 15 transactions per second worldwide,” according to the developer’s documentation. But active developers on the platform have dropped to 67 from a high of 159 in October 2021, according to Token Terminal.

Multicoin Capital, a cryptocurrency investment firm, remained bullish on Solana. Even after the FTX implosion, Multicoin continued to present an upbeat tone about the suddenly beleaguered blockchain.

“We recognize that SOL would likely underperform in the near term given the affiliation with the SBF
and FTX; however, since the onset of the crisis, we have decided to maintain the position based on a variety of factors,” Multicoin wrote in a message to partners obtained by CNBC.

Multicoin and other prominent crypto voices maintain that the FTX fallout underscores the need for a return to basics for the crypto industry: a transition away from centralized exchanges in favor of decentralized finance (DeFi) and self-custody.

What is DeFi and could it bring down finance as we know it?

A spike in daily activity on the now peerless Binance may suggest that many cryptocurrency enthusiasts have yet to take this missive seriously.

Not surprisingly, Yakovenko continues to believe in Solana. Even so, Vitalik Buterin, the man behind ethereum, voiced his support for Solana on Thursday. “It’s hard for me to say from the outside, but I hope the community is given a fair chance to thrive,” Buterin wrote. on twitter.

Chris Burniske, a partner at Web3 venture capital firm Placeholder, said he was “still pining” for Solana in a Dec. 29 Twitter thread.

Crypto has seen mass adoption thanks to centralized platforms like FTX, Crypto.com and Binance. FTX spent millions of dollars on stadium deals and naming rights. Crypto.com has invested heavily in prominent advertising campaigns. Even Binance announced a sponsorship partnership with the Grammys.

2023 could be a seminal year for defi, as crypto-curious investors look for safer ways to earn returns and custody of their assets. Bitcoin was born out of the 2008 financial crisis. Now, the cryptocurrency industry faces a test of its own.

“Lehman was not the end of banking. Enron was not the end of energy.
And FTX will not be the end of the crypto industry,” Multicoin told investors.

– CNBC’s Ari Levy and MacKenzie Sigalos contributed to this report.

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