Cryptocurrency Opinion & Analysis

Solana Wiped out $47 Billion in Market Cap Last Year: Is the Hype Over?


From a potential “Ethereum killer,” Solana became one of the worst-performing assets in 2022. Although the network’s SOL cryptocurrency lost 92% of its value, that is not the only measure of an ecosystem. Once deleveraged from SBF’s fraudulent schemes, does Solana stand a chance in 2023?

Solana’s Current Standing

One year ago, Solana’s market cap was at $52.6 billion. It has since collapsed by 11x to present $4.7 billion. For comparison, Ethereum’s market cap shrunk by only 3x in the same period, which means that Solana’s market cap is now just 3.1% of Ethereum’s $148 billion.

Not only does that rank Solana 15th by market cap, just ahead of meme coin Shiba Inu, but Solana’s new market positioning means that Ethereum’s scalability solutions have more capital. For example, Polygon (MATIC) holds a $6.8 billion market cap. Even Ethereum’s single dApp, decentralized exchange Uniswap, is inching to top Solana, at a $4 billion market cap.

With that said, the Federal Reserve’s interest rate hikes had a suppressive effect on all markets in 2022. In turn, such uncertainty generates refuge in the most significant coins by market cap. For this reason, we can see that Ethereum (ETH) resisted devaluation the most in the category of proof-of-stake dApp ecosystems.

Other DeFi networks, such as Avalanche (AVAX) and Cardano (ADA), have experienced similar fate as Solana in 2022.

Soland/USD, ETH/USD, ADA/USD, AVAX/USD Daily Chart

Still, unlike Avalanche’s 7.6x market cap decrease, Solana is still leading in the downturn by 11x. To see if this is a permanent setback, what exactly were the headwinds hitting Solana during 2022?

Perception of Centralization

In July, Solana was hit with a class-action lawsuit in a California federal court, claiming that the platform benefits insiders at the expense of investors. Specifically, Solana Labs generates value by issuing an unregistered security – the SOL token.

In his complaint, Mark Young noted that how SOL tokens were distributed meets the securities criteria under the Howey Test. In other words, Solana’s insiders and promoters hold the bulk of SOL tokens, issued by Solana Labs and Solana Foundation, with the expectation of profits.

Indeed, according to Messari’s Tom Tunguz, Solana has been one of the most centralized blockchains.

By January 2022, nearly half of SOL tokens were in the insiders’ wallets, while Ethereum is on the opposite side of the centralization spectrum.

Crypto Ownership at Launch

As an alternative DeFi infrastructure, Solana’s centralization also manifests through validator nodes, mainly concentrated on the Hetzner (HTZ) cloud service provider, responsible for ~40% of validators which account for 20% of Solana’s stake. Together with Amazon (NASDAQ:AMZN) Web Services (AWS) and Equinix (NASDAQ:EQIX), just three infrastructure providers hosting Solana validators make up 65% of Solana’s stake, according to Sam Padilla’s API scraper.

Consequently, Solana’s very performance depends on the health and attitude of cloud providers. This is why German Hetzner was able to take out over 1,000 Solana validators offline on November 2nd when the company decided to ban all Solana activity. This brings us to another persistent Solana headwind.

Solana’s Chronic Outage Problem

Solana’s claim to fame is centered around enterprise-grade performance. Far outcompeting Ethereum, Solana boasts 4,000 tps vs. Ethereum’s 14 tps. Unlike Ethereum’s post-Merge proof-of-stake (PoS), Solana uses a modified consensus algorithm called proof-of-history (PoH), allowing transactions to be parallelly processed instead of waiting in a sequential lineup.

Solana network also achieves its speed through the “gossip network,” a data structure that propagates transactions faster to reach consensus. Lastly, developers have been pleased with Solana’s optimization and ease with which they can create smart contracts for dApps.

Yet, this seemingly superior technology struggles to be online 24/7. Barely into 2022, Solana was out for a day on January 21st. The first major downtime dropped SOL by 33%, from $141 to $94. This foreshadowed subsequent degraded performance and instability for all months during the year except for February, July, September, and August.

Each downtime dropped the SOL price further, with 14 outages in total during 2022, accounting for four days and 12 hours of downtime.

Turning into a chronic issue, Solana founder Anatoly Yakovenko ended up hiring Jump Crypto (Web3 infrastructure company) to develop Firedancer, a secondary Solana client, as a long-term solution. In October, Yakovenko assured the community that even network degradation doesn’t place users’ funds at risk.

Anatoly Yakovenko, Solana co-founder, on GM podcast.

Since that statement, Solana’s validator count has decreased to 1,789. While technical issues are yet to be resolved, it turns out that exposure to fraud was the ultimate headwind for Solana in 2022.

Solana as the Biggest Victim of Sam Bankman-Fried

To date, Solana has received $315.8 million in funding across nine investment rounds. One of the investors was Alameda Research, now known as a slush fund for Sam Bankman-Fried (SBF), into which he allegedly poured users’ funds without their permission.

According to Solana Compass, now-defunct Alameda’s locked stake is 48.1 million SOL, with 13.9 million SOL pending withdrawal. SBF and Solana had a tight relationship even before Solana was touted as an “Ethereum killer.” In January 2021, he had offered to buy all SOL tokens from a Solana bearish user for $3 a piece.

Sam Bankman-Fried Tweet

Consequently, when the Binance-FTX bailout deal was still in the cards on November 9th, 2022, Solana dropped immediately by nearly -40%. This turned into a 55% plunge by the end of the day, going from $30 to $13.49.

With Alameda’s SOL tokens purportedly in the custody of bankruptcy managers, this represents the biggest selling pressure in Solana’s short history since its first genesis block was created on March 16th, 2020. To make things worse, with SOL tokens, SBF also invested and heavily promoted Solana’s answer to Ethereum’s Uniswap – Serum (SRM) decentralized exchange.

Sam Bankman-Fried Tweet

Serum (SRM) has dropped 96% during 2022, dealing a heavy blow to Solana’s ecosystem and liquidity. In the meantime, on-chain data shows that Alameda wallets activated again at the end of the year, trying to swap various tokens for ETH, stablecoins, and Bitcoin.

Can Solana Recover?

For 2023, both BlackRock (NYSE:BLK) and IMF have already announced a recession. This is not good for on-risk assets in trouble. In addition to macro headwinds, the Solana ecosystem faces further selloff pressures as the FTX/Alameda situation is resolved.

Even if that exposure had never existed, Solana is still facing network outage problems as new blockchains enter the DeFi arena or existing ones gain ground. To boost confidence for 2023, Yakovenko said this at November’s annual Breakpoint conference:

In addition to the previously mentioned Firedancer, which can theoretically run up to 600k tps, Solana developers will focus on increased security for smart contracts. To prevent more costly exploits, such as hot wallet attacks, Yakovenko suggested automated code audits would be needed.

Likewise, Solana could become even more developer friendly. For instance, the recently released Seahorse compiler allows developers to write Solana’s smart contracts within Solana’s Anchor framework using the popular Python programming language.



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