A Vitals Check on Solana and Layer 1 Ecosystem since the FTX Debacle

Translated by Rhea

Introduction: FTX Bankruptcy Hits Solana Straight Up

The entire crypto market is undergoing an extensive adjustment stemming from the fall of FTX. Among the many affected, Solana stands out as the L1 blockchain that had been hit the hardest, with its token price dropping over 60% since November 7, when the rumor of FTX bankruptcy was becoming more full-blown. The future of Solana is growing ever bleak, with some even claiming that Solana will take a nosedive along with FTX. This article explores the specific impact the bankruptcy of FTX will have on Solana and forecast Solana’s future from there on.

Price May Fall Again When FTX and Alameda Research Sell Their SOL

On November 12, FTX filed for Chapter 11. According to the bankruptcy petition FTX has submitted, its debt ranges from at least USD 10 billion up to USD 50 billion (about KRW 66 trillion). Chapter 11 of the United States Bankruptcy Code allows a company to rehabilitate itself through a reorganization proceeding under the oversight of the U.S. federal bankruptcy court. This is similar to the court receivership in the Korean legal system. Likewise, Chapter 11 is quite different from Chapter 7 bankruptcy which calls for immediate liquidation of a company with no prospects for rehabilitation. A company that filed for Chapter 11 would have to submit to the court a plan for its reorganization and get the opportunity to rehabilitate with government support and debt restructuring, all the while continuing to operate its business. However, such a company under Chapter 11 is not allowed to make any major decisions on its operation or financial activities without the court’s approval, and the bankruptcy court intervenes in the company’s debt restructuring and fulfillment of obligations. In other words, the bankruptcy court would be selling $SOL and other Solana-based tokens held by FTX and Alameda Research in order to fulfill their obligations, which will most definitely cause yet another drop in these token prices. However, it is not likely that FTX would sell all the liquid assets it holds at once as per the rules of Chapter 11.

Over the course of five rounds of SOL distributions, FTX and Alameda Research received $SOL 58.1 million, which accounts for about 10% of the total supply, from the Solana Foundation and Solana Labs. (Please refer to the figure below.) According to CoinDesk, as of 2Q 2022, the total value of $SOL held by FTX is about USD 1.2 billion, and a substantial portion of the USD 3.4 billion worth of unidentified crypto assets in its possession are other Solana-based tokens, such as $OXY, $MAPS, and $SRM. (FTX currently holds about USD 2.2 billion worth of $SRM; Source: Bitcoin Magazine). It is estimated that FTX and Alameda Research have already sold off a considerable amount of the tokens they had in possession as of 2Q 2022. According to Solana Compass, the remaining $SOL held by Alameda Research as of November 11 was 18.6 million, which equals to about USD 310 million in value.

As if all this mayhem was not enough, FTX was hit with a hack on November 13 that cleaned out a total of USD 477 million crypto assets (including USD 278 million in ETH, USD 106 million in SOL, USD 89 million in BSC, and USD 4 million in AVAX) from the exchange’s wallet. Over USD 220 million of the tokens taken are reported to have already been swapped for stablecoins on decentralized exchanges. If more of these tokens were to be swapped, the $SOL price would inevitably plummet for the short term.

Direct Damages Expected for Those with Funds on FTX

Direct damages can be expected for those who have their funds tied up in FTX. Since FTX had been exerting a dominant influence in the Solana ecosystem, many a Solana-based project had flocked to use FTX as their exchange of choice. One such project is Sollet, a DeFi project. Sollet is a project offering wrapped asset services. It had issued about USD 40 million $soBTC and $soETH on the Solana network. However, as the collateral assets it held on FTX are presumed to have evaporated, the value of the tokens Sollet had in operation also plunged. As of November 14, $soBTC and $soETH are traded at a 91.7% and 36.1% discounted price against BTC and ETH, respectively.

One of the most highly anticipated Solana games, Star Atlas, also had 50% of its total treasury on FTX, with its runway having been halved now.  While direct damages to Solana Foundation are estimated to be around USD 1 million, it has been reported that the Foundation also had 3.24 million of FTX Trading LTD common stocks, 3.43 million $FTT, and 134.54 million $SRM. Fortunately, most of the DeFi projects and Solana Labs had not been affected by these events. (Anatoly Yakovenko announced that Solana Labs has about a 30-month cash runway.)

Another group presumed to have taken a massive blow is the VCs and other institutions that had invested in FTX, which includes BlackRock, Ontario Teachers’ Pension Plan, Sequoia, Paradigm, Tiger Global, SoftBank, Circle, Ribbit Capital, Alan Howard, Multicoin Capital, and VanEck Temasek. Other institutions that had their assets held on FTX, such as Genesis, Galois Capital, and Ikigai Fund, also have been known to be badly hurt. 

With Such a Powerful Aid to Solana Bankrupted, the Ecosystem Is Not Likely to Avoid Depression

FTX and Alameda Research, its affiliate, were powerful facilitators and supporters of the Solana ecosystem. They have participated in multiple rounds of investment into Solana as well as actively investing in other Solana-based projects. The 255 companies and projects that form their investment portfolio include numerous Solana projects, such as STEPN (an M2E project), Solend (a lending project), Solscan (an explorer), UXD (a stablecoin protocol), Katana (a DeFi project), and Burnt Finance (an NFT marketplace). Moreover, FTX contributed tremendously toward the growth of the Solana ecosystem, both directly and indirectly, as the exchange most active and eager to list Solana-based tokens and the direct operator of Serum, the major Solana DeFi project and a CLOB (Central Limit Orderbook) exchange. FTX and its role and influence in the ecosystem have served as one of the main reasons many projects opted for Solana. Now, with FTX gone, it would become more difficult for Solana projects to win new investments and listings on major CEXs, and it is uncertain whether new projects would actively seek to get onboard on the Solana network.

The onchain data shows that Solana’s TVL declined to about USD 340 million (-66% WoW) since the fall of FTX, placing Solana in the 9th ranking among the Layer 1 blockchains. Considering that Solana’s TVL was about USD 10 billion last November, it is clear that the loss Solana took from this blow cost them their past glory. On top of everything, Solana’s TVL may drop even further depending on the magnitude of Sollet’s damages.

In terms of network security, the number of validator nodes grew slightly from 3Q 2022 (from 2,210 to 2,332) but the SOL staking rate went down (from 73.9% to 70.0%). Though it is not a significant enough change to hinder the network security as of now, it could adversely affect the security of the network if the unstaking rate increases further and the number of validators starts to decline due to profit deteriorating from the falling SOL price.

Solana to Stand on Its Own: The Network Fundamental Is the Key

Despite this series of misfortunes, Solana does have the potential to rise from the ashes. For one thing, the projects not showing any signs of an exodus, as they did in the case of Terra. Some of the renowned projects, such as Helium and Degenerate Ape Academy (DAA), have even made announcements declaring their stay on the Solana network. The Xangle Research team analyzed the following to be the potential reasons behind such a phenomenon.

Strong Developer Community

Solana has a strong and firm developer community. What used to be a group of only 2,400 developers in August 2021 has rapidly grown 761% in a matter of one year to become an army of 20,717 by November 2022. Solana has the largest group of developers among Layer 1 blockchains, next to Ethereum right now. Such popularity is evident in the fact that the Solana Hacker House has risen to become one of the most sought-after blockchain events (with a total of about 64,000 participating in Solana conferences in 2022).

Remarkable Achievements in NFT Market

Solana achieved a remarkable performance in the NFT sector. Solana’s NFT market share is currently at the number two position among Layer 1 blockchains by transaction amount, having produced many of the highly recognized NFT projects, such as DeGods, y00ts, Okay Bears, Solana Monkey Business, and Degenerate Ape Academy (DAA). With Instagram recently announcing that it would support Solana NFTs, anticipation is rising for Solana to continue its growth in the NFT market in the future. 

Other Notable Milestones

• Accumulated NFT Sales Count: USD 3.6 billion (Primary Sales: USD 1.1 billion; Secondary Sales: USD 2.5 billion)
• Number of NFTs Minted: 21.9 million
• Number of NFT Holding Wallets: 7.2 million
• Number of NFT Creators: 150,000

Technology and Usability Improvements

It is also encouraging that Solana continues to make improvements in its technology and usability. For example, Solana recently successfully adopted QUIC (Quick UDP Internet Connection) and QoS (Stake Weighted Quality of Service) from the three ways to stabilize its network (QUIC, QoS, and local fee market) as announced in 1Q this year, and Solana’s smartphone, Saga, is well on its track for the launch in 1Q 2023. After Saga is launched, Solana is likely to overcome the limitations of having to offer Web3 services under the existing hardware and operating system and be able to offer a mobile-friendly Web3 environment. Furthermore, the partnership Solana recently forged with Google Could on the blockchain node engine development will enable anyone to participate as a Solana node without having to go through all the complicated hoops and hurdles.

Washing Away the Stigma of a “VC Chain”

In its initial funding round, Solana distributed almost 50% of its token volume to its team and investors. This caused Solana to be jeered at as a “VC Chain” in the crypto world, a mockery which continues even now, after two and a half years since its mainnet launch. As such, when the fall of FTX causes not only FTX and Alameda Research but also other institutions that invested in Solana to sell off their $SOL as a part of their risk management process, it is believed to lead to a meaningful improvement in terms of token distribution and decentralization.

Fortunately, the Spillover to Other Layer 1 Is Expected to Be Limited

It seems no Layer 1 blockchain other than Solana would be too damaged by a direct hit from this FTX debacle. Although not all the Layer 1 projects have made official statements, the circumstance makes us believe that most of the L1s did not store their treasury fund on FTX, and NEAR Protocol, Aptos, and Theta have announced that they do not have any treasury fund tied up in FTX. XPLA, a Korean project listed on FTX, also has limited exposure as the $XPLA banned from withdrawal only accounts for 1.6% of its total supply, and the project does not store its fund on FTX. XPLA plans to take the same amount of $XPLA as how much is stuck on FTX from its reserves and distribute the tokens to its existing holders.

Conclusion: Though the Future Got Grim Quickly, a Hope for Recovery Persists

FTX’s bankruptcy has quickly dimmed the future of Solana. As their relationship was closely knit, it would not be easy to recover from the damages. If the $SOL price were to continue to fall, Solana may very well fall into a vicious cycle where its ecosystem and network security also collapse to make a serious impact on the network’s fundamentals as well. However, it would not be impossible for Solana to overcome such a crisis since Solana 1) continues to improve its technology and usability, 2) has a strong developer community, and 3) is making remarkable achievements in the NFT sector. Nevertheless, it would be advisable for prospective $SOL investors to take their time and patiently wait out this turmoil to see how things unfold.