After being deeply trapped in the FTX predicament, how does Solana cope with internal and external challenges?

Authors: Nianqing, flowie, ChainCatcher

Compared to the glorious peak moments of last year, this year's Solana was much more low-key during the second Breakpoint summit held in Lisbon from November 3 to 7.

But what was even more unexpected was that on November 8, as the situation with FTX took a sharp turn, Solana, still recovering from the joy and fatigue of the conference, was quickly swept into the hurricane of FTX, awkwardly and hastily dealing with the secondary crisis brought on by FTX's collapse, trying to clarify its relationship with FTX and rally support.

Solana was already facing numerous challenges this year: the crypto winter, ongoing outages, unprecedented large-scale attacks on ecosystem projects, and direct competition from new chains like Aptos and Sui. In response to these challenges, Solana has been seeking solutions: finding outage resolutions, seeking EVM compatibility, expanding through L2, and launching the Solana phone Saga. During Breakpoint, Solana planned to focus on GameFi as a new anchor point.

Despite having an active and robust ecosystem, Solana has been criticized as a "VC chain" propped up by capital from a16z, Polychain, FTX Venture, Jump Crypto, and others. After FTX's bankruptcy, can the beleaguered Solana ecosystem withstand this unprecedented "stress test"?

1. "VC Chain" Without VCs

During Breakpoint, Solana announced a series of collaborations with platforms like Google Cloud, Circle, Helium, and Ledger, and these ongoing positive news led to a more than 20% increase in the price of SOL tokens during Breakpoint. However, on November 7, before Breakpoint had concluded, as FTX attempted to withdraw large amounts of funds from secondary exchanges to replenish its hot wallet in response to massive withdrawals, the price of Solana tokens began to plummet.

Data source: CoinmarketCap

SBF has long had deep ties with Solana; his Alameda Research was one of Solana's early investors and played a key role in the birth of early ecosystem projects like Serum and Oxygen. When Solana's institutional investor tokens were unlocked at the beginning of last year, SBF even purchased all SOL assets from investors at a price of $3 through OTC, subsequently investing heavily in many Solana ecosystem projects.

Solana's public relations during the FTX incident appeared somewhat awkward. On the 9th, Solana Labs co-founder Anatoly tweeted, "Solana Labs has no assets on FTX," and emphasized that Solana is an "American" company. Following this, Solana Labs, along with Solana leaders and founders, began to "call" on the community to weather the storm together, seeking help from their "friends and family" including investors and ecosystem projects. Jump Crypto President Kanav Kariya, along with projects like Kin Ecosystem, Teleportxyz, and Magic Eden, began to publicly support Solana, expressing long-term optimism for the platform.

However, the crisis continued to spread, and projects within the Solana ecosystem began to face liquidity crises. The lending protocol Solend accumulated millions of dollars in bad debts after the price of SOL plummeted, the yield aggregator Tulip Protocol paused deposits, and the Solana NFT ecosystem triggered a sell-off… To address the panic, Solana released a lengthy tweet listing data to strongly prove the strength and future potential of its ecosystem.

It wasn't until November 14 that the Solana Foundation officially released data and facts related to FTX's bankruptcy: as of November 6, when FTX.com stopped processing withdrawals, its assets included approximately 3.24 million shares of FTX Trading LTD common stock, about 3.43 million FTT tokens, and approximately 134.54 million SRM tokens (the DEX Serum token on Solana).

Even with this response, Solana still faced skepticism from the community, and the price of SOL continued to decline. As the Solana ecosystem faced ongoing setbacks, some projects began to buckle under pressure and sought to migrate to other chains. The two largest NFT projects on Solana, DeGods and y00ts, saw their floor prices drop by more than 60%, and their pseudonymous creator Frank stated on Twitter that he was considering moving the NFT collection to Ethereum. However, this action was quickly criticized by other builders and collectors in the Solana community, leading him to delete the related tweet.

Uncertainty and fear continued to spread throughout the ecosystem. It can be said that Solana's development today is inseparable from SBF's early support and involvement, and now this "backing" has collapsed. Additionally, other investors in the Solana ecosystem have also been affected to varying degrees by the FTX fallout.

According to data platform rootdata (beta version), the main supporters and investment institutions of Solana ecosystem projects are Solana Ventures, Alameda Research, Coinbase Ventures, Multicoin, and Jump Crypto.

According to The Block, Multicoin has 10% of its total assets stuck on FTX; although Jump has not disclosed its risk exposure to FTX/Alameda, crypto researcher FatMan revealed that Alameda and Jump had collaborated to fraudulently inflate Serum's fully diluted valuation, and Cinneamhain Ventures partner Adam Cochran pointed out that Jump suffered significant losses due to over-investment in the Solana ecosystem and joint investments in FTX; Coinbase Ventures has also been continuously reducing its number of investments due to Coinbase's massive losses over the past two quarters; Alameda Research has completely collapsed…

2. Competition from New Chains

If the FTX collapse was a "black swan event" for Solana, then the competitive pressure brought by the development of new chains like Aptos and Sui, which are based on the Move language, feels more like "boiling a frog in warm water."

In the last cycle, new chains led by Solana rapidly rose with an aggressive low-fee, high-speed model, but their lack of stability and reliability gave new chains like Aptos the opportunity to overtake them. The current landscape is that the "Ethereum killer" can no longer kill Ethereum, which has a strong multi-chain ecosystem, while Aptos, dubbed the "Solana killer," is comprehensively eroding Solana, including capital, projects, developers, and users.

Related reading: "Aptos, Solana, and the New Chain Cycle"

Due to outage issues, many teams and projects have begun to lose interest in Solana, turning instead to new chains with better performance. In the past six months, many Solana ecosystem projects have announced expansions to the new chain Aptos, including Saber, Solend, SolanaFM, and Solice, with several projects explaining in related tweets that the pursuit of stability and security was the main reason, particularly highlighting their interest in the Move language.

For example, the metaverse project Solice plans to migrate to Aptos and launch on the Aptos chain instead of Solana. The team stated here: "In the past year, we encountered several issues while building on the Solana mainnet Beta, including network congestion, outages, and incorrect timestamps on the Metaplex auction platform. The team spent too much time building second-layer solutions around Solana to integrate the digital ledger into the game engine and achieve a smooth gaming experience. As a game company, we should focus our time and efforts on game, backend, and network development."

As Solana co-founder Anatoly Yakovenko said, outages have always been Solana's "curse."

Since September 2021, when Solana experienced a 17-hour outage due to insufficient validator memory, outages have become a common occurrence for Solana. In December 2021 and January 2022, the network faced congestion due to DDoS attacks, with the January outage lasting 30 hours. Subsequent outages occurred in April, May, and October.

Additionally, the large-scale theft of Solana ecosystem wallets in August this year pushed Solana into the spotlight. This incident affected nearly ten thousand Solana ecosystem wallets, making it one of the largest security incidents in the crypto industry. Even more concerning was the ambiguity surrounding the cause of the theft, despite the involvement of several well-known developers and engineers in the industry. The Slope wallet was widely blamed as the culprit, but in such a large-scale security incident, Solana appeared to take a very passive approach in both investigating the cause and managing the aftermath.

Although Solana has consistently emphasized that the mechanisms behind the outage issues are now very clear and that the team is steadily advancing solutions, this curse remains a sword hanging over its head, and fixing network issues will be a "long-term" process. After the most recent network outage, Anatoly Yakovenko stated that the second Solana client, Firedancer, announced in August will be a "long-term solution." This solution is being developed in collaboration with Jump Crypto and the Solana Foundation, with its own independent software development team. It is expected to significantly expand Solana, allowing it to handle more transactions more effectively in the next one to two years.

Previously, to address network congestion and outages, Solana had proposed other solutions, such as using the QUIC protocol to prevent bots from sending unlimited traffic, prioritizing certain types of traffic when the volume exceeds what the network can handle through Stake Weighted QoS, and adjusting Fee Markets.

In addition to Solana's outage issues, the Move language is also one of the most favored aspects for projects migrating to new chains like Aptos. One reason the algorithmic stablecoin USA switched from Solana to Aptos was that "Aptos runs on Move VM. Move makes it easier to write secure and auditable contracts." To respond to external competition, in September of this year, the Solana team has incorporated the Move language into its development strategy to increase developer interest and promote community development activities.

The migration of ecosystem projects highlights the vulnerability of public chains; native projects supported by ecosystem funds, hackathons, and venture capital cannot avoid "choosing good trees to rest under." Stability and security have always been the core competitiveness of public chains. If these advantages are lost, they will become "naked swimmers after the tide recedes" in the new round of public chain competition.

3. Breaking Through

Amid internal and external troubles, Solana has gradually taken some actions to address the aforementioned issues.

As mentioned earlier, Solana is taking measures to resolve outage issues, but compared to other ecosystems, Solana has the disadvantage of being somewhat closed off.

To address this, Solana first needs to seek EVM compatibility. Compared to other public chains, Solana has clearly lagged behind in this area, but it has recently accelerated its progress. One solution is the Neon EVM, a smart contract layer based on Ethereum that allows developers to migrate code directly without needing to rewrite it in Rust. Neon Labs plans to launch Neon EVM on December 12. After its mainnet goes live, Ethereum projects like Aave, Curve, and Sobal plan to deploy on Neon EVM.

Last year, Neon Labs attracted attention when it proposed a Solana EVM compatibility solution and secured $40 million in private funding from venture capital firms like Jump Capital and Solana Capital. However, given Solana's current predicament, it may be difficult to attract a large number of overflow projects from Ethereum.

Facing a multi-chain future, Solana is also beginning to seek connections with other ecosystems. Nitro is the first Solana VM chain built on Cosmos. As an Optimistic Rollup compatible with the Sealevel Virtual Machine (SVM), it enables developers to launch their Solana dApps on Cosmos and access IBC assets. Currently, Nitro has deployed a developer testnet called Nitro Devnet.

Additionally, Solana is also pursuing vertical scaling. If Solana has pushed L1 scaling to the extreme, then L2 scaling solutions built on its foundation have the potential for better performance. Similar to Ethereum's multi-chain expansion architecture, Layer N is built on Solana (previously invested in by FTX Ventures). According to official promotion, Layer N will break through the limits of user throughput and latency on Solana, with on-chain computing approaching the performance of centralized servers, potentially accelerating the development of DeFi derivatives and on-chain social networks. Layer N is expected to launch its mainnet next year and plans to deploy a public "sandbox" testing environment by the end of this year.

Of course, among these responses, Solana's boldest attempt is the launch of the Web3 Android phone, Saga. A year ago at the first Breakpoint, Anatoly Yakovenko conceived the idea of starting a mobile crypto era. Eight months later, Solana Mobile released Saga and the technology Solana Mobile Stack (SMS) to widely unlock the Web3 ecosystem on mobile devices.

Saga will include a Web3 dApp store, integrated Solana Pay to facilitate QR code-based on-chain payments, a mobile wallet adapter, and a "seed vault" for storing private keys. The phone is planned to launch in early 2023 at a price of $1,000. During the recent Breakpoint, Saga also announced collaborations with Helium and Ledger.

But distant water cannot quench nearby fire. At this moment, no one understands the weight of the phrase "confidence is more important than gold" better than Solana, which will continue to be affected until the FTX incident concludes.

According to DefiLlama data, Solana's total locked value has rapidly shrunk to $320 million in the past week, down over 90% from its previous peak, trailing behind networks like BNB Chain, Polygon, and Avalanche, ranking twelfth among all networks. Even without the impact of the FTX incident, its decline in locked value is significantly greater than that of other leading public chains in this bear market. The price of SOL has already dropped to $14.

Objectively speaking, if it weren't for this "black swan event," even facing asset and developer outflows, development activity on Solana would still be active. According to @sec3dev, on November 8, developers used 1,092 programs on Solana, with over 25,000 independent developers writing, deploying, and auditing Solana programs.

Compared to other emerging networks, Solana's core advantage is its relatively prosperous community ecosystem, which is a result of its first-mover advantage and SBF's long-term strong support. Previously, when many applications were leaving to build their own blockchains, Helium's decision to migrate to Solana was based on the consideration of Solana's vast ecosystem. Helium's founder explained that Solana gathers a large number of developers, applications, and teams, and additionally, HNT is natively compatible with other innovative projects in the Solana ecosystem, allowing HNT, MOBILE, and IOT token holders to gain more use cases. After the FTX incident, Helium stated that it would still migrate to Solana, and the evaluation criteria for L1 blockchains had not changed; the market's severe impact was not a factor in their decision-making.

Overall, the collapse of industry leaders like FTX will inevitably have a negative impact on the development momentum of new public chains, and it may fundamentally shake the industry's confidence in so-called high-performance public chains. Especially in the absence of capital support and with diminished price attractiveness, market attention will also significantly decline. Against this backdrop, Solana will face a daunting challenge in restoring market confidence; it may either falter or be reborn from the ashes. Solana's fate will be revealed in the coming years.