How does the Solana ecosystem's DeFi restart after the Serum crisis?

Original Title: 《Life After FTX: How Solana DeFi Is Starting Over---Without SBF's Serum》

Author: Stacy Elliott, Decrypt

Translator: Qianwen, ChainCatcher

The collapse of SBF led to the downfall of the $32 billion cryptocurrency exchange FTX, which severely impacted the development of decentralized finance on the Solana blockchain that it supported.

Serum was co-founded in August 2020 by the Solana Foundation, FTX, Alameda Research, and other institutions. It served as a core decentralized trading platform and a liquidity provider for the emerging Solana DeFi ecosystem. Its order book was crucial to Solana's DeFi, integrating almost all of the largest DeFi projects on the network, such as Jupiter and Raydium.

But its private keys were stored within FTX—this sounded ominous.

After FTX was clearly hacked on November 11, the same day the company filed for bankruptcy, DeFi projects on Solana urgently severed ties with Serum, fearing that the private keys used to update the program were also compromised. Solana DeFi hit the emergency "off" switch.

Since then, Solana developers, investors, and other stakeholders have been scrambling to restart it by advancing a fork of Serum—a basically independent copy of the code that has no ties to Bankman-Fried or FTX.

The successor to Serum is OpenBook. After joining DeFi Llama last week, OpenBook reached a total locked value of $2.7 million, and now the community has to face some tricky symbolic issues.

Solana co-founder Anatoly Yakovenko told Decrypt, "The transition from Serum to OpenBook is very noteworthy. This time, the community mobilized quickly to make decisions beneficial to the community, redeploying Serum in public to allow it to continue to develop safely. One could say that OpenBook is a great demonstration of decentralized action."

The Story's End

Serum promised to make DeFi trading faster and cheaper—at a time when the Ethereum network had not yet merged and was using a POW model, with fees that were prohibitively high, this self-promotion garnered widespread attention, while Serum promised to "remain completely trustless and transparent."

In the DeFi financial community, decentralization has become a common saying that solves the problems posed by centralized giants like FTX. Its supporters believe that DeFi does not hand over the fate of the entire protocol to one person.

But it indeed does.

"The key for updating Serum's program is not controlled by the SRM DAO but by a private key linked to FTX," wrote the pseudonymous developer Mango Max on Twitter on November 12, stating that he had contacted FTX's new CEO John Ray. "Now no one knows who controls this key, updated the Serum program, and deployed malicious code."

The leak of Serum's private keys was bad enough. Worse, a centralized exchange, rather than the Serum community, unilaterally obtained the private keys, which is shocking. It would be like the Ethereum DeFi community discovering that Coinbase controlled the private keys for Maker or Uniswap.

According to data from DeFi Llama, DeFi trading volume on Solana has fallen below $20 million in the past month, a drop of 75%. However, there is still $293 million in total value locked in DeFi on the network, and developers, such as former Coinbase engineer Mert Mumtaz, are trying to rally people to keep the ecosystem vibrant.

On Monday afternoon, he tweeted, "Although Solana DeFi has been hit, it will develop stronger than ever." He stated that as the CEO and co-founder of the development platform Helius, he would provide free subscriptions for Solana developers.

But this free assistance has its limits; OpenBook still needs a sustainable way to compensate developers working on the project.

One of Serum's features was its utility token SRM, which allowed token holders to receive a 50% discount on trading fees and participate in governance. Now, court documents from the FTX bankruptcy proceedings show that the company that helped create Serum has $5.4 billion worth of SRM tokens in its reserves. These tokens held by FTX will almost certainly be liquidated to satisfy creditor claims, accounting for 97% of the token supply.

The community boldly decided to exclude SRM from OpenBook's system. "The goal of OpenBook is to break free from SRM," wrote Soju, the business development lead for Solana lending platform Solend, in the project's Discord last week.

Soju hosted a community call for the project on Monday morning, during which there was extensive debate about whether OpenBook needed a token. Several people loudly asked on the call whether they could rely on funding from the Solana Foundation to keep developers working on the project.

"The foundation is very keen to fund the development of OpenBook, at least for the foreseeable future. OpenBook is a core liquidity infrastructure for DeFi, but our funding is also limited," said Ben Sparango, the business development lead at Solana Labs, during the call. "Each of these grants will be evaluated on a case-by-case basis. So we cannot provide unlimited funding in the long term."

He pointed out that the upcoming Solana Foundation hackathon in January will focus on DeFi development and encourage OpenBook to submit proposals to involve hackathon participants as well.

However, grants and hackathons do not lead to sustainable DeFi projects. As the pseudonymous developer Jimthereaper said on the call, "Grants don't work."

Developer Mango Max pointed out that due to Alameda's involvement in the Serum project, DeFi projects around Solana have been under suspicion. "When there are large stakeholders like Alameda in the ecosystem, some people think, 'This has nothing to do with me.' In terms of liquidity, many traders are cautious about using Solana because they think, 'It's like trading on FTX.' At the same time, some are cautious about launching the order book because that is Alameda's territory." He said on the call, "It's clear that people are starting to research things, and they want to make efforts as community members."

In some ways, the Solana DeFi ecosystem always seems crowded, with Bankman-Fried's Serum being a core part of the infrastructure, and Alameda Research heavily relying on yield farming—providing liquidity to automated market makers in exchange for token rewards. The former FTX CEO was notoriously obsessed with this strategy, famously describing yield farming as a "box" on Bloomberg's Odd Lots podcast, saying investors put money into DeFi protocols and then take profits out.

This statement drew a lot of criticism for sounding like a Ponzi scheme. A Ponzi scheme is a scam that entices new investors, and as long as the promoter can keep the scheme going, they pay profits to early investors with their own money.

According to compliance firm Argus, Alameda Research accumulated assets through at least 18 different tokens to earn yields. These assets skyrocketed in price after FTX went live, prompting Alameda to immediately sell its holdings on the market.

But now, the original Serum protocol has stagnated. Although OpenBook has a long way to go, it has successfully integrated with Jupiter, Raydium, and Prism since its launch, achieving a trading volume of $1.8 million in the past day.

Solana's "Moment of Agony"

In the third quarter, there were signs that Solana's DeFi ecosystem was beginning to mature and stabilize—even as the bear market situation looked grim in dollar terms, wrote Messari analyst James Trautman in a recent Solana status report.

In fact, it was the distribution of total locked value—a DeFi metric commonly abbreviated as TVL—that helped projects buffer against and reduce the risk of a complete collapse.

Trautman wrote, "By TVL, the TVL of individual applications accessed by some top networks ranges from 50-60% of the ecosystem." In contrast, no Solana application is "too big to fail," with Solana's largest DeFi protocol, Solend, only accounting for 14% of TVL at the end of the third quarter.

As of Wednesday, the DeFi trading volume on Solana in the past day was $27 million, less than 2% of the total DeFi ecosystem trading volume, according to data from DeFi Llama, which tracks different activities across 78 blockchains.

Solana DeFi's trading volume hit a historical high of $568 million on November 9, the day when $800 million worth of SOL tokens held by validators were set to be unlocked. If these tokens suddenly entered the market, it could further drive down the already lagging price of SOL. To avoid disaster, the Solana Foundation halved the number of unlocked tokens and readjusted its supply, meaning it would re-submit a large portion of SOL tokens back to the network to prevent them from entering the market.

Earlier that day, Solana co-founder Raj Gokal described the events leading to all this as the network's "moment of agony."

However, the future development direction of OpenBook may ultimately benefit SOL as it further distances itself from FTX's shadow. There are even calls for SOL tokens to be used to provide discounts and pay developers working on OpenBook. Last week, a tweet from the NFT collector pseudonymously known as R89Capital gained some attention, as Solana co-founder Yakovenko, Mango Max, and Helius's Mumtaz were all involved.

Yakovenko expressed his opposition to the idea, stating that OpenBook had "not done any prior preparation and thought about what would happen" when launching a brand new token. Mumtaz seemed interested but did not express a stance. Mango Max stated last week and reiterated during the Monday morning call that he hoped OpenBook would not introduce a token.

John Kramer, co-founder of Dual Finance, expressed concern during the Monday call that the introduction of a token was inevitable, and that the Solana DeFi community should take advantage of the existing opportunity to create some guidelines around how to proceed with these events following the Serum fork and the launch of OpenBook.

"I think a token is inevitable, so it would be better to spend some time figuring out what it might look like. We don't need to implement anything, but if we want to get community support, we should at least be able to describe what it looks like," he said. "Driven by human nature, this will definitely happen. People will want to be incentivized to work."