Bankless: Will Solana be down and out after the FTX collapse?

Author: Ben Giove, Bankless

Compiled by: Deep Tide TechFlow

The collapse of FTX and Alameda Research has brought disaster to the entire cryptocurrency space, with lenders, exchanges, and funds going bankrupt. The aftermath of the explosion has also impacted the market, with the total market capitalization of cryptocurrencies dropping from $1 trillion on November 6 to around $860 billion now, a decrease of 14%.

Many individual tokens have even fallen further, with tokens held by Alameda Research—including Solana—being particularly hard hit. According to a CoinDesk report on the trading firm's balance sheet, Alameda held approximately $1.2 billion in SOL tokens as of June 30.

While it is still unclear to what extent the recent drop was driven by Alameda itself or by traders' fears—SOL plummeted from $35 to a low of $11 (68.5%) in the weeks following the FTX/Alameda collapse.

After being one of the best-performing tokens in the 2021 bull market, SOL is now down nearly 95% from its all-time high. Such a degree of collapse not only shakes the confidence of supporters but also poses significant risks to its DeFi ecosystem and the overall security of the network.

This raises the question… Is Solana going to die? Can it be reborn from the ashes?

Let’s review the aftermath of the collapse and look ahead to Solana's future to see if we can answer this question.

Crisis: Network Security and Stability

A native token of an L1 dropping 60% within 72 hours is a massive stress test.

A collapse of this magnitude not only poses risks to the on-chain DeFi ecosystem through large-scale liquidations, leading lending protocols into bad debts, but also brings stability and security risks by increasing the likelihood of outages (a problem Solana has been struggling to address) and lowering the cost of network attacks.

Security Issues

After the FTX collapse, SOLANA experienced a massive outflow of assets.

Since November 6, 54.6 million SOL have been unstaked over 9 Epochs (which typically last 2-3 days), reducing the total supply of SOL from 411.2 million to 356.6 million, a decrease of 13.2%. This accounts for about 15% of the circulating SOL supply.

During the dangerous peak from November 7 to 10, as much as 29.1 million (53% of the net total) SOL were unstaked.

The dollar value of the staked SOL securing the network has decreased even more. Considering its price at the start of the 370th Epoch and the end of the 378th Epoch, the value of the SOL protecting the network plummeted 65.3% from $14.7B to $5.1B.

Had it not been for the Solana Foundation's decision to delay their plan to unstake 28.5 million SOL at the end of the 370th Epoch, the outflow of staked assets could have been even larger.

Despite these outflows and possibly due to a delay of about 3-4 days when unstaked balances turned into liquid assets, Solana did not encounter any security issues or major attacks. Even after this asset outflow, the L1 still ranks fourth in dollar-denominated staked amounts among PoS networks tracked by Staking Rewards, with a staking rate ranked 19th.

Stability

Extreme market conditions can affect network security and stability. This is because during turbulent times, the demand for on-chain block space surges, putting pressure on validators as users and bots frantically attempt to top up collateral, execute liquidations, and capture other arbitrage opportunities created by market chaos.

These issues have long been a headache for Solana, which has experienced multiple performance declines and outages.

Since September 2021, the network has experienced four complete outages, with a total downtime of 37 hours and 11 minutes.

The Solana community has been working on remedies to improve activity, including upgrades like Quality of Service (QoS) for staking weights and QUIC for mainnet launch. Other improvement plans, such as fee market and transaction scale increases, are set to roll out in the coming months.

These upgrades seem to be making an impact, as Solana did not experience any outages or performance declines throughout the crisis.

Regardless of the situation, 100% uptime is the expectation for a blockchain. However, given its history and the severity of the crisis, Solana's performance during this period is noteworthy and serves as an encouraging sign that the network is becoming more resilient.

Crisis: Solana DeFi

Liquidity Crunch

Solana experienced a significant liquidity crunch following the FTX collapse.

The network's DeFi TVL in dollar terms dropped 72.1% from $1 billion on November 6 to $278.3 million.

This was to be expected, as many assets deposited in DeFi protocols, such as SOL, ETH, and BTC, are volatile. For this reason, the decline in TVL does not necessarily indicate that users are withdrawing their funds from SOLFi.

However, the TVL in SOL terms tells a different story, having dropped from $27.2 million to $19.7 million, a decrease of 27.5% since November 6.

This suggests that the decline in dollar-denominated TVL may not solely be a result of falling prices but also due to users withdrawing their assets from DeFi.

In recent weeks, the supply of stablecoins on Solana has also contracted significantly.

Since November 6, the market cap of stablecoins on the network has shrunk from $3.9 billion to $2.1 billion, a reduction of 46.1%.

This decline has largely been driven by Tether's "Chain-Wrap," as the USDT issuer migrated $1 billion in supply from Solana to Ethereum on November 18.

This transaction accounted for 55.5% of the total stablecoin outflows since the crisis.

Serum's New Low

Many DeFi protocols have suffered severe blows after FTX, with projects closely related to Alameda being hit the hardest.

The most notable is Serum, an order book-based DEX, whose governance token SRM has become emblematic of the "low circulation, high FDV" token design, allowing the project to secure large loans at inflated valuations.

Even after a 69.2% price drop over the past three and a half weeks, SRM's FDV still stands at $2.4 billion.

Serum is also a core fundamental primitive of Solana DeFi, with projects like Raydium, Zeta Markets, PsyOptions, and others built on this protocol.

If Serum's contracts were immutable, this might not be a problem, as the protocol could still function normally despite the collapse of its governance token.

However, Serum's contract keys are in the hands of FTX. This puts Serum, and the Solana ecosystem, at risk, as any potential rug pull from Serum could lead to catastrophic cascading effects.

So far, Serum's TVL has dropped 99.6% from its pre-crisis level of $121.7 million, leaving only $434,000, with Raydium pausing market-making on the DEX and Zeta Options halting deposits in an effort to avoid disaster.

The Solana DeFi community has also deployed a Serum fork called OpenBook, which has attracted $1.5 million in TVL.

Whether this fork can survive remains to be seen, but it may provide a temporary solution for Serum-based projects during this period, serving as a liquidity venue with lower risks than its parent protocol.

Down but Not Out

As we have seen, Solana is struggling but not out.

While the price of SOL is closer to the "3" dollar figure mentioned in SBF's tweet a few weeks ago, Solana as a network has shown good resilience, with no outages or performance declines during extreme volatility events. So far, the chain has also withstood a significant portion of asset outflows.

While this is more a case of the blockchain meeting expectations rather than any major achievements, it is commendable given Solana's history of instability and outages. Operating smoothly during this turbulent period should help gain deeper trust as the network moves forward.

However, this is not to say that Solana's future is entirely bright.

Solana DeFi has suffered significant blows, with massive liquidity outflows—projects closely related to FTX and Alameda, such as Serum, being hit particularly hard.

The blockchain also needs time to shake off the threat posed by FTX, which many consider a key ally of Solana.

Additionally, it remains unclear how much SOL Alameda, which has filed for bankruptcy reorganization, holds; they will certainly liquidate anything left on the books during the litigation.

Concerns about Solana's long-term competitiveness on a technical level also persist, as they may have to adopt modularity rather than sticking to a monolithic architecture. It is questionable whether developers and community members who may not have previously experienced a 95% or more shrinkage will stick around in the coming months and years.

That said, crypto natives know that Solana is not just SBF's pet; its usage remains high even during bear markets.

The recent hackathon on the blockchain saw 750 projects submitted, and SOL-denominated NFT trading volume grew by 102% month-over-month.

In the long run, losing FTX and Alameda may also be beneficial, as the ecosystem will not be influenced by their business practices and token designs.

Solana may thus become a more decentralized and fair place.

So yes, Solana is in poor shape, that is undeniable. But so far, it is far from being truly out.