The Solana logo displayed on a phone screen and a cryptocurrency representation are seen in an illustrative photo taken in Krakow, Poland on August 21, 2021.
Jakub Porzycki NurPhoto | Getty Images
Solana is said to be a cryptocurrency that will challenge ether with an environmentally friendly approach, faster transaction speeds and more consistent fees.
Investors who made those bets had a miserable year. The token’s market capitalization fell from more than $55 billion in January to barely above $3 billion by the end of the year.
Among Solana’s biggest problems at the end of 2022 is his close relationship with FTX founder Sam Bankman-Fried, who is facing eight criminal fraud charges after the crypto exchange went bankrupt last month. The unassuming former crypto billionaire is one of Solana’s most public supporters, touting the advantages of blockchain technology and investing more than half a billion dollars in Solana tokens.
“Sell all you want,” Bankman-Fried told one skeptic in January 2021. “Then go f— off.”
Bankman-Fried’s company held nearly $1.2 billion in tokens and associated assets as of June, according to documents seen by CoinDesk.
When FTX collapsed, investors bailed out Solana to the tune of about $8 billion. But in recent times, as the rest of the crypto world has quieted down and the price has stabilized, Solana is on the decline.
Two of the largest non-fungible token (NFT) projects built on Solana announced their migration from the Solana platform on Christmas Day. But the new slide came after the news broke, making Solana’s new slide a mystery.
In the past week, Solana has dropped more than 30%. Ether has continued steadily, shedding 1.7% at the same time, when bitcoin it has only decreased by 1.2%. Among the 20 most valuable cryptocurrencies tracked by CoinMarketCap, the biggest losers in this regard are Dogecoinwhich has decreased by 9%.
In just one hour of trading on Thursday, Solana fell 5.8%, its lowest since early 2021, when Bankman-Fried began with vocals provide support for the project.
Solana is starting to decline, with a market cap now exceeding $3.5 billion. 24-hour trading volume increased by more than 200% on a relative basis.
During the heyday of the crypto market in 2021, Bankman-Fried is hardly alone in his bullishness.
Developers rave about Solana’s support for smart contracts, pieces of code that implement pre-programmed directives, as well as an innovative historical proof-of-concept consensus mechanism.
The consensus mechanism is how blockchain platforms establish the validity of executed transactions, track who owns what and how the system works based on consensus between multiple record computers called nodes.
Bitcoin uses a proof-of-work mechanism. Ethereum and its rival Solana use proof-of-stake. Instead of relying on energy-intensive mining, proof-of-stake systems ask large users to pledge their bonds, or stakes, to serve as “validators.” Instead of solving cryptographic hashes, like bitcoin, proof-of-work validators verify transaction activity and maintain a “book” of blocks, in exchange for a proportional cut of transaction fees.
Solana’s perceived differentiating factor is supplementing proof of stake with historical proof – the ability to prove that a transaction occurred at a specific time.
Solana surged in 2021, with one token gaining 12,000% for the year and reaching $250 in November. But before the collapse of FTX, Solana faced several public struggles, which challenged the protocol’s claim to be a superior technology.
Much of Solana’s popularity was built around the growing interest in NFTs. Serum, another exchange supported by Bankman-Fried, was built in Solana. As the calendar turns to 2022, Solana’s limitations begin to appear.
No month of the year does a network outage cause Solana to be down for more than 24 hours. Solana token dropped from $141 to less than $94. In May, Solana experienced a seven-hour outage after NFT minting flooded its validators and crashed the network.
A “record four million transactions [per second]” took Solana and caused the price of the token to drop by 7%, CoinTelegraph reported at the time, pushing it further into the red during the bruising start of the crypto season.
In June, another disruption led to a 12% decline. Hours of downtime come after validators stop processing blocks, immobilizing a consensus mechanism called Solana and forcing a restart of the network.
The disruption is enough for a protocol that seeks to increase its ether dominance and assert itself as a stable and fast platform. Solana suffered in public. This project was first built in 2020 and is a younger protocol than ether, which was launched in 2015.
Technological challenges are to be expected. Unfortunately for Solana, there are more in the Bahamas.
The SEC called it a “brazen” scam. Bankman-Fried’s use of customers’ money in FTX to finance everything from trading and borrowing at the hedge fund, Alameda Research, to luxury lifestyles in the Caribbean is disrupting the crypto market. Bankman-Fried was released for $250 million bond last week while awaiting trial on fraud and other criminal charges in the Southern District of New York.
Solana from November 2022, the month FTX failed and filed for bankruptcy protection.
Solana lost more than 70% in total value in the weeks following FTX’s November bankruptcy filing. Investors fled anything related to Bankman-Fried, with prices of FTT (FTX’s native token), Solana, and Serum dropping dramatically.
Solana founder Anatoly Yakovenko told Bloomberg that instead of focusing on price action, the community 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 suffered the worst, losing almost all its value. But Solana has seen flights continue in recent days, reflecting ongoing concerns about FTX contagion and skepticism about the long-term viability of the protocol itself.
Developer flight is the most important issue. Solana’s raison d’etre is to overcome bitcoin and ether’s struggle “to scale beyond 15 transactions per second worldwide,” according to developer documentation. But active developers on the platform dropped to 67 from an October 2021 high of 159, according to Token Terminal.
Multicoin Capital, a cryptocurrency investment company, has maintained a bullish stance on Solana. Even after the implosion of FTX, Multicoin continues to strike an optimistic tone about the suddenly beleaguered blockchain.
“We recognize that SOL may underperform in the near term as it relates to SBF
and FTX; However, since the crisis began, we decided to hold the position based on various factors,” wrote Multicoin in a message to partners obtained by CNBC.
Multicoin, and other prominent crypto voices, maintain that the fall of FTX emphasizes the need to return to the basics for the crypto industry: A transition away from juggernaut centralized exchanges to support decentralized finance (DeFi) and self-custody.
The current unprecedented increase in daily activity on Binance may indicate that many crypto-enthusiasts have yet to heed the message.
No wonder Yakovenko continues to trust Solana. But even Vitalik Buterin, the man behind ethereum, expressed his support for Solana on Thursday. “It’s hard for me to tell from the outside, but I hope the community gets a fair chance to develop,” Buterin wrote. on Twitter.
Chris Burniske, a partner in the Placeholder venture capital firm Web3, said he “still misses” Solana in a December 29 Twitter thread.
Crypto is seeing mass adoption thanks to centralized platforms like FTX, Crypto.com, and Binance. FTX spent millions of dollars on stadium bids and naming rights. Crypto.com invests heavily in important advertising campaigns. Even Binance announced a sponsorship tie with the Grammys.
2023 could prove to be a seminal year for defi, as crypto-savvy investors look for safer ways to generate returns and protect their assets. Bitcoin was born from the financial crisis of 2008. Now the cryptocurrency industry is facing its own test.
“Lehman was not the end of the banking industry. Enron was not the end of the energy industry.
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.