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Solana Endures ‘Crucible’ as FTX Connection Deletes 70% of TVL

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There was a time when Solana’s relationship with Sam Bankman-Fried was a good thing.

Not anymore. 

Perhaps no DeFi player has been hit harder by the FTX disaster than Solana, the Layer 1 blockchain that, until recently, had attracted users and buzz with its high-speed, low cost performance. 

Important Test

While Solana was poised to challenge Ethereum at this time last month, now it’s enduring the most important test of its two-year-existence. Solana’s total value locked has plunged almost 70% since Nov. 7, to $303M, and its token has lost a quarter of its value in the last seven days compared to a 7% slide in Ether. 

That’s the price Solana investors have paid as a result of the network’s strong ties with FTX and its sister company, the hedge fund Alameda Research, which invested in nine Solana projects from December 2020, to March 2022. 

FTX, which was handling $10B in daily trading volume before its collapse, declared bankruptcy on Nov. 11 and is being investigated by the U.S. Department of Justice and other federal and state agencies. On Thursday, John J. Ray, FTX’s new CEO and a turnaround specialist, said in a bankruptcy court filing that the company was a “complete failure of corporate control.”

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Raj Gokal, Solana Labs co-founder and COO, tried to rally support for his network. “This crucible moment for the Solana ecosystem is as difficult as the last one,” Gokal tweeted.  “The difference is there are 10x more of us to band together this time.” 

On Nov. 9, Anatoly Yakovenko, Solana Labs co-founder and CEO, tweeted that it has learned the lessons from the 2018 crypto crash and maintains reserves to sustain the company’s current burn rate for approximately 30 months.

Suspended

On Thursday, Binance, the No. 1 cryptocurrency exchange worldwide, temporarily suspended deposits for USDC and USDT on the Solana blockchain with no explanation. USDT soon restarted accepting deposits. OKX, another exchange, said on its website that it will be delisting USDC, and USDT hosted on the Solana blockchain.

Then there’s staking action: On Nov.10, epoch 370 ended, which saw investors unstake SOL at an accelerated rate. Nearly 29.22M SOL tokens halted staking, according to Solana Compass.

Solana stakers from epoch 370 to 372 have unstaked around 39M SOL tokens. This is drastically higher than the almost 4.3M SOL tokens being locked up by stakers for staking purposes, during the same period. This indicates that many SOL investors are turning risk averse.

Top Challenger

Processing more than 3,400 transactions per second compared to Ethereum’s 15, Solana was carving out a position as the top challenger to the backbone of DeFi.  Now its future is clouded by contagion from FTX and Alameda, which Bankman-Fried owned and controlled. 

Seven out of the nine projects with Alameda were exclusive to the Solana blockchain. And Bankman-Fried chose to build a decentralized exchange called Serum on Solana, and its utility token used the ticker SRM. After its launch, Serum became an integral part of the Solana ecosystem. Many protocols based on Solana started using it for their primary source of liquidity.

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Solana Foundation and Solana Labs disclosed hey have sold 58.08M SOL tokens to Alameda Research, and FTX trading, since 2020. This represents approximately 11% of Solana’s total supply. Moreover, Solana Foundation stated it has cash/cash equivalent, common stock of FTX, FTX’s FTT tokens, and Serum’s SRM tokens stuck on the now defunct FTX exchange.

However, Serum’s upgrade key was not in control of the Serum DAO, instead it was held by FTX. As such, to mitigate any future malicious action, Solana anonymous developer Mango Max banded a group of Solana developers to help create a community fork of Serum. The project has already garnered support from multiple protocols, including lending protocol Mango Markets.

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FTX was the entity issuing wrapped Bitcoin, and wrapped Ethereum on Solana. However, since FTX’s demise soBTC, and soETH, have lost their peg, and are now trading significantly below their asset’s reference price.

The FTX collapse struck just as Solana was finding its footing after a series of snafus this year. On Feb.2, Solana’s primary cross-chain bridge, Wormhole, was exploited for $320M. However, the following day, Jump Crypto announced that they will be stepping in to fill the hole left by the hack. This was the first major incident of a DeFi bailout.

Mobile Phone

On May 2, the Solana network was down for seven hours after bots flooded the network to mint NFTs. It was one of several outages that have plagued the venture. 

Then in June, Solana surprised the crypto industry by announcing plans to build Saga, a smartphone designed for the Solana ecosystem. Never mind the difficulty of manufacturing hardware, consumer interest didn’t really catch on for Saga with only 6,545 orders placed for the product, according to Dune Analytics.

Yet none of these challenges will mean much if Solana fails to overcome the FTX fallout. Solana’s market capitalization has dropped more than 63%, to just under $5B., in the last two weeks. It may be cold comfort, but the blockchain provider will have plenty of company as the disaster takes its toll across the industry.

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