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Solana’s accelerating, yearlong slide wipes out over $50 billion

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Solana logo displayed on a phone screen and representation of cryptocurrencies are seen on this illustration photo taken in Krakow, Poland on August 21, 2021.

Jakub Porzycki | NurPhoto | Getty Images

Solana was touted because the cryptocurrency that might challenge ether with an eco-friendlier approach, faster transaction speeds and more consistent costs.

Investors who made that bet had a miserable 12 months. The token’s market cap collapsed from over $55 billion in January to barely above $3 billion at year-end.

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Amongst Solana’s biggest problems in late 2022 was its close relationship to FTX founder Sam Bankman-Fried, who faces eight criminal fraud charges after his crypto exchange went bankrupt last month. The disgraced former crypto billionaire was considered one of Solana’s most public boosters, touting some great benefits of the blockchain technology and investing over a half-billion dollars in Solana tokens.

“Sell me all you wish,” Bankman-Fried told one skeptic in January 2021. “Then go f— off.”

Bankman-Fried’s corporations held nearly $1.2 billion price of the token and associated assets in June, in line with documents reviewed by CoinDesk.

When FTX fell apart, investors bailed on Solana to the tune of about $8 billion. But in recent days, as the remaining of the crypto world has been relatively quiet and costs stable, Solana has plummeted further.

Solana soars, and Bahamian regulator says it seized $3.5 billion of FTX assets: CNBC Crypto World

Two of the most important non-fungible token (NFT) projects built on Solana announced their migration off of Solana’s platform on Christmas Day. However the recent slides got here after that news had already broken, making Solana’s recent slide something of a mystery.

Within the last week, Solana has declined over 30%. Ether has held regular, shedding 1.7% in the identical time period, while bitcoin has only dropped 1.2%. Among the many 20 most-valuable cryptocurrencies tracked by CoinMarketCap, the following biggest loser over that stretch is Dogecoin, which has fallen 9%.

In only one hour of trading on Thursday, Solana slid 5.8%, bringing it to the bottom since early 2021, across the time that Bankman-Fried began to vocally offer his support for the project.

Solana has since come off the lows, with a market cap now crossing $3.5 billion. Its 24-hour trading volume is up over 200% on a relative basis.

Through the crypto market’s heyday in 2021, Bankman-Fried was hardly alone in his bullishness.

Developers raved about Solana’s support for smart contracts, pieces of code that execute pre-programmed directives, in addition to an progressive proof-of-history consensus mechanism.

Consensus mechanisms are how blockchain platforms assess the validity of an executed transaction, tracking who owns what and the way well the system is working based on a consensus between multiple record-keeping computers called nodes.

Bitcoin uses a proof-of-work mechanism. Ethereum and rival Solana use proof-of-stake. Slightly than counting on energy-intensive mining, proof-of-stake systems ask big users to supply up collateral, or stake, to turn out to be “validators.” As an alternative of solving for a cryptographic hash, as with bitcoin, proof-of-work validators confirm transaction activity and maintain the blockchain’s “books,” in exchange for a proportional cut of transaction fees.

Solana’s supposed differentiating factor was augmenting proof-of-stake with proof-of-history — the power to prove that a transaction happened at a selected moment.

Solana soared over the course of 2021, with a single token gaining 12,000% for the 12 months and reaching $250 by November. Yet even before the collapse of FTX, Solana faced a series of public struggles, which challenged the protocol’s claim that it was a superior technology.

Much of Solana’s popularity was built around growing interest in NFTs. Serum, one other exchange backed by Bankman-Fried, was built on Solana. When the calendar turned to 2022, Solana’s limitations began to turn out to be apparent.

Barely a month into the 12 months, a network outage took Solana down for over 24 hours. Solana’s token fell from $141 to a low of somewhat over $94. In May, Solana experienced a seven-hour-long outage after NFT minting flooded validators and crashed the network.

A “record-breaking 4 million transactions [per second]” took out Solana and caused the value of its token to drop 7%, CoinTelegraph reported on the time, pushing it further into the red through the bruising onset of crypto winter.

Why Anatoly Yakovenko left traditional tech to co-found Solana

In June, one other outage prompted a 12% drop. The hours of downtime got here after validators stopped processing blocks, immobilizing Solana’s touted consensus mechanism and forcing a restart of the network.

The outages were concerning enough for a protocol that sought to upend ether’s dominance and assert itself as a stable, rapid platform. Solana was experiencing growing pains in public. The project was first in-built 2020 and is a younger protocol than ether, which went live in 2015.

Technology challenges are to be expected. Unfortunately for Solana, something else was brewing within the Bahamas.

The SEC called it “brazen” fraud. Bankman-Fried’s use of customer money at FTX to fund all the pieces from trading and lending at his hedge fund, Alameda Research, to his lavish lifestyle within the Caribbean roiled the crypto markets. Bankman-Fried was released on a $250 million bond last week while he awaits trial for fraud and other criminal charges within the Southern District of Latest York.

Solana since November 2022, the month that FTX failed and filed for bankruptcy protection.

Solana lost greater than 70% in total value within the weeks following FTX’s November bankruptcy filing. Investors fled from anything related to Bankman-Fried, with prices for FTT (FTX’s native token), Solana, and Serum plunging dramatically.

Solana founder Anatoly Yakovenko told Bloomberg that reasonably than specializing in price motion, the general public should remain focused on “having people construct something awesome that is decentralized.”

Yakovenko didn’t immediately reply to CNBC’s request for comment.

FTT has fared the worst, losing practically all its value. But Solana has seen a continued flight in recent days, reflecting ongoing concerns about FTX contagion and skepticism concerning the long-term viability of its own protocol.

Developer flight is essentially the most pressing concern. Solana’s raison d’etre was to resolve bitcoin and ether’s struggle “to scale beyond 15 transactions per second worldwide,” in line with developer documentation. But energetic developers on the platform have dropped to 67 from an October 2021 high of 159, in line with Token Terminal.

Multicoin Capital, a cryptocurrency investment firm, has maintained a bullish stance on Solana. Even after the implosion of FTX, Multicoin continued to strike an optimistic tone concerning the suddenly beleaguered blockchain.

“We recognized that SOL was more likely to underperform within the near term given the affiliation with SBF
and FTX; nonetheless, for the reason that crisis began we have decided to carry the position based on quite a lot of aspects,” Multicoin wrote in a message to partners obtained by CNBC.

Multicoin, and other distinguished crypto voices, maintain that the fallout from FTX underscores the necessity for a return to basics for the crypto industry: A transition away from juggernaut centralized exchanges in favor of decentralized finance (DeFi) and self-custody.

What is DeFi, and could it upend finance as we know it?

An uptick in each day activity at now peerless Binance might suggest that many crypto enthusiasts have yet to take that missive to heart.

It’s unsurprising that Yakovenko continues to consider in Solana. Yet even Vitalik Buterin, the person behind ethereum, voiced his support for Solana on Thursday. “Hard for me to inform from outside, but I hope the community gets its fair probability to thrive,” Buterin wrote on Twitter.

Chris Burniske, a partner at a Web3 enterprise capital firm Placeholder, said he was “still longing” Solana in a Dec. 29 Twitter thread.

Crypto saw mass adoption due to centralized platforms like FTX, Crypto.com, and Binance. FTX splashed thousands and thousands of dollars on stadium deals and naming rights. Crypto.com invested heavily in distinguished ad campaigns. Even Binance announced a sponsorship tie-in with the Grammys.

2023 may prove a seminal 12 months for defi, as crypto-curious investors search for safer ways to garner returns and custody their assets. Bitcoin was born out of the 2008 financial crisis. Now the cryptocurrency industry faces a test of its own.

“Lehman was not the tip of the banking industry. Enron was not the tip of the energy industry.
And FTX won’t be the tip of the crypto industry,” Multicoin told investors.

– CNBC’s Ari Levy and MacKenzie Sigalos contributed to this report.

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