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Quick description of Solana
Solana, launched in March 2020, is a fast-growing blockchain with impressive similarities to Ethereum. It has grown rapidly to become the 9th most valuable blockchain project based on the market capitalization of its native token SOL according to data compiled by CoinMarketCap.
However, the events of November 2022 concerning FTX have hit the Solana system hard and here in this article, there is an explanation of what happened.
Source: coinchapter.com
What happened to FTX?
The crypto industry was shaken by the collapse of FTX, which caused a $1 trillion loss in the value of the global cryptocurrency market and resulted in hundreds of millions of dollars in losses for traders.
The issues began in July 2021 when Binance, one of FTX’s earliest investors, sold its stake in the exchange for $2.1 billion in Tlt, a token launched by FTX. However, the full extent of the problems only came to light in November 2022 when an article revealed the presence of billions of dollars in TLT on the balance sheet of Alameda Research, FTX’s subsidiary.
This discovery raised concerns about the financial exposure of both FTX and Alameda, given the lack of immediate convertibility of TLT into cash. FTX, led by Sam Bankman-Fried, was considered to be in excellent condition until this news broke. In January 2022, the company had secured significant investments, including $400 million from Softbank, and was valued at $32 billion. Rumours of ambitious takeover plans were even circulating in October 2022.
On 7 November, Bankman-Fried denied insolvency rumours, stating that the company was being attacked with false claims. The next day, FTX suspended customer withdrawals, which is a very common and negative sign of an impending collapse in the cryptocurrency industry. Binance CEO Changpeng Zhao, also known as Cz, announced on Twitter that FTX had asked for help from Binance and that an agreement had been reached to rescue the company.
However, on 9 November, Binance announced that the deal was off, citing the results of the company’s due diligence and reports of mismanagement of client funds by FTX: this announcement caused the price of bitcoin and ether to fall by over 10 per cent, wiping out $60 billion from the market.
The collapse of FTX is leading to questions about what actions should be taken to protect cryptocurrency owners in the future. The effect of this collapse is also being felt by projects that have little to do with the news, including Solana (SOL), highlighting the importance of analysing the correlation between the collapse of SOL cryptocurrency and the FTX liquidity crisis.
Effect of FTX crisis on Solana
Solana has been facing a difficult time in the market after these events. The token’s price reached a weekly high of $38.55 before the FTX collapse, but, right after, it was trading at just over $14. This represents a much greater loss compared to other Tier 1 cryptocurrencies such as Cardano, Tron, and Polkadot, which have only lost 10% during the same period.
Despite being a promising project with many big announcements and positive news, Solana’s troubles are largely due to its close relationship with FTX, in fact, the founder of FTX and Alameda Research, Sam Bankman-Fried, was one of the first investors in Solana. This close connection has raised concerns among investors that Alameda may sell its $1 billion stake in SOL in an attempt to raise funds during FTX’s liquidity crisis. This, in turn, caused a massive sell-off in SOL and sent its price plummeting.
According to DefiLlama, Solana’s Total Value Locked (TVL) dropped to $423.68 million, a decrease of 32.4% in the first hours after the collapse. This is far from its all-time high of $10.17 billion recorded in November 2021.
Source: defiLlama.com
The TVL is a measure of the total value of assets locked in DeFi protocols and a declining TVL indicates that investors are withdrawing their funds from the ecosystem. Marinade Finance, a liquid staking protocol on Solana, and other major protocols on Solana including Raydium, Lido, and Solend, registered the highest losses ever.
Source: coingecko.com
In addition to the FTX news, Solana has faced further pressure as validators prepare to unlock 49.6 million SOLs, worth approximately $900 million, which represents 13% of the total coin supply; this news, along with the fear of Alameda flooding the market with its $1 billion SOL stake, has driven prices down even further.
Despite these challenges, the co-founder of Solana Labs, Anatoly Yakovenko, remains bullish on the network. The impact of FTX’s liquidity crisis and the release of a large amount of SOL supply will likely play a significant role in determining Solana’s future in the market.
