Solana Drops 70%
Following the FTX crash, Solana was one of the first projects to get hit. Why? Well, the ties between FTX, Alameda Research, and Solana were very strong. FTX and Alameda were not only holding a large portion of Solana’s token supply, as I have mentioned in my article breaking down the fall of FTX (read full article here). But they were:
- two of the largest investors in Solana, joining the seed round earlier in 2021 where Solana raised $314 million,
- the largest participants in the Solana ecosystem, running an estimated 16% of the validator nodes on Solana network,
- one of the largest builder on the Solana network, investing $100 million in web3, gaming, and application development,
- the developers and liquidity providers of the decentralized exchange (DEX) Project Serum at the core of Solana’s network.
So no surprise this happened after word went around that FTX and Alameda Research were rotten 👇🏼
If the name Solana doesn’t tell you much, here’s an older article introducing the network and all of its exciting projects being developed.
Solana’s Post-Crash Update
The 70% fall in price was mainly caused by a $500 million sell pressure coming from investors following the FTX crisis. However, there is an outstanding $2,2 billion in sell pressure awaiting to be released as part of the bankruptcy proceedings of FTX and Alameda Research.
Since information is very hard to find, I had to do some best guesses my self to get to some sensible numbers. Breaking it down:
SOL Exposure in USD | Acquired in | USD/SOL | SOL Exposure | |
|---|---|---|---|---|
Alameda Research | $1,2 billion | June 2022 | 40 | 30 million |
FTX | $ 1 billion | November 2022 | 33 | 30 million |
This quick estimate does not quite match with the news item where Solana Foundation announces the sale of roughly SOL 50 million to Alameda and FTX. But for this to be true, the price in November would have to be much higher. I am confused.
However, what we do know is that there is an additional sell pressure anywhere between SOL 50-60 million hanging like a wrecking ball. I expect these be sold in the course of the bankruptcy proceedings to repay creditors and users.
If that happens, the additional pressure could cause the price to fall further towards $8-10 per SOL. Not to mention the many projects on the Solana network who will suffer liquidity issues because of their intrinsic exposure to SOL volatility.
How Stable Is Solana Foundation
As mentioned in this previous article, Solana’s activities are coordinated by the Solana Foundation, incorporated in Switzerland.
According to my analysis, on November 6, 2022, the foundation has only 1% of their cash and equivalents invested in FTX and Project Serum (SRM). And, fortunately for them, none of their SOL tokens was custodial on FTX!
Asset | Amount | Value (Nov 20, 2022) |
|---|---|---|
FTX Shares | 3,24 million | Depends on bankruptcy proceedings |
FTT Tokens | 3,43 million | – |
SRM Tokens | 134,54 million | – |
Despite this small exposure in FTX-related assets, the Solana Foundation has to date $100 million reserve in cash which gives them a runway of 30 months. This is definitely good news for the network’s future. However, I am afraid that the Foundation and Solana Labs (development company) will be the only two investors in the Solana network for a while. This will depend on how many projects built on Solana network will survive the storm.
Latest Developments & Projects On Solana Network
Right before FTX’s fall, development on Solana network was booming.
- The custodian Fireblocks launched support for Solana tokens and NFTs, as part of their effort to support decentralized projects and applications,
- Coinbase announced the launch of Solana validators nodes back in September 2022. This is a major improvement of the network’s governance as most of the nodes used to be hosted on Google Big Table,
- Helium, decentralized internet provider, migrated their P2P network to Solana blockchain,
- Trip Protocol, decentralized infrastructure in support of shared-services, launched on Solana,
- Circle to bring EUR-based stable coin EUROC on Solana!,
- Google Cloud launched transaction analytics services to help companies and project teams monitor transactions on the fastest decentralized network in the world! Something that had been notoriously challenging before this tool.
The projects are now on hold. Awaiting the dust to settle to decide what makes sense for their future developments. A potential bankruptcy of Solana’s ecosystem is comparable to the Google Store not being available any longer. What do you think will happen to the millions of apps currently built on that platform!
Strategic Treaths To Solana
Next to the financial implications, there is other challenges the network will be facing in the coming months. I see actually two main challenges.
Technical Competitors
This challenge is actually twofold, with two specific names: Aptos and SUI.
Both are Layer 1 solutions competing against Solana for the creation of a new centralized ecosystem. FTX and Alameda Research were also invested in both networks, but the exposure was significantly smaller compared to Solana’s. This means that Aptos and SUI will have an advantage in the coming months, assuming they manage to retain adoption and continue development.
The news kids on the block are backed by big investors. For example, SUI, which is still in development, has recently raised $300 millions from Coinbase Ventures, Jump Crypto, a16x, Circle Ventures, and many other crypto and angel investors. The main threat for Solana’s ecosystem is how developer-friendly the new networks are while reaching the same transactions processing speed. Of course, they operate at a much smaller scale at this point. And many speculate that the only reason why Solana has managed to remain this fast is because of their extremely hard technical requirements for network validators. So time will tell, I guess.
Regulatory Pressure
With the mid-term behind our backs, the Security and Exchange Commission (SEC) and other regulatory bodies will have their hands free to tackle the FTX case. Many will be part of that investigation, including (I’m afraid) Solana Foundation and Solana Labs, given their strong ties with FTX and that whole ecosystem.
On top of that, the Solana network is based on a proof-of-stake mechanism and still highly centralized at this point. This means that is very likely the SOL token will be classified as a security according to the Howey test. This will have massive implications for Solana’s future, that might include it being delisted from most major exchanges (whoever survives the upcoming scrutiny, that is).
My Final Considerations
🙂 Definitely very positive outlook if I look at the amount of projects in the Solana’s ecosystem. Looking at Layer 1 networks (like Ethereum, Solana, etc.), the value of a network is in its ecosystem. And if I had to draw a final conclusion, I would bet on Solana’s ecosystem being strong enough to survive this.
☹️ However, lack of trust from investors, raising competition from Aptos & SUI, and regulatory pressure might kill Solana’s chances at surviving this crypto winter.
What are the odds? I am not sure at this point. I did not own any Solana. I will definitely keep an eye on the developments of the upcoming months. I remain a fan of the network, technical issues and all. After all, Solana is still in beta! We are still in the very early stages of the network and ecosystem development.
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Disclosure
These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.
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