The past week has brought Solana ($SOL) a series of unfortunate events that have taken a toll on its standing in the crypto world, not to mention the health of its ecosystem.
And while it might seem like Solana has a target on its back, its problems appear to be the result of a perfect storm of events. From the shocking LIBRA crypto scam to the top-of-the-charts performance from Binance Coin (BNB), one area of Solana’s life isn’t making up for the lack in any other area. For the first time in quite a while, Solana finds itself outside the top five by market cap. Let’s break down the series of events that have made for some chaotic times for the Solana team.
The LIBRA Scandal and Its Fallout
Solana suffered its worst setback with the exposure of the LIBRA con job, which knocked an astonishing $4 billion off its market cap. This new DeFi platform, ostensibly a legitimate project, was instead an inside job that purloined $107 million from unsuspecting investors. The entire crypto space was rocked by this scandal, but the ecosystem Solana has built took it especially hard. It was then revealed that a major liquidity provider on the Solana blockchain, Jupiter Exchange, is alleged to have known about LIBRA—a supposed legit project—well ahead of time and to have failed to warn investors. This inside knowledge has sparked allegations of foul play and left the Solana community reeling. The scandal became fodder for political cartoons and news reports as figures on both sides of the argument began publicly characterizing the project and its backers.
Solana’s Struggles in the Market
After the LIBRA scandal, Solana’s price took a serious hit, falling 17% to $169, which was enough to drop it from the top five cryptocurrencies by market cap. With a market cap below $170 billion, Solana has been overtaken by the Binance Coin (BNB), which has seen a surge in fees and user activity this week. While Binance has been riding high in this market, Solana’s problems have mounted: it has seen decreased active user engagement, and its decentralized exchange (DEX) activity has nearly collapsed.
The past week saw a decline in Solana’s ecosystem, with the Total Value Locked (TVL) reduced to $8.32 billion—down 40% to 45% from the previous week. The number of active addresses on Solana (as defined by 0.1 SOL or more in an address) dropped by 20%, now sitting at 4.6 million. Annualized revenue projected from on-chain activity (traded via decentralized exchanges, or DEXs) fell from $144 million to less than $12 million, indicating a nearly 90% decrease in whereabouts and signaling a dramatic drop in “real-world” network usage.
The Ripple Effect on Solana’s Ecosystem
The Solana ecosystem itself seems to be feeling the strain. Most of those tokenized assets now look to be taking significant hits, with Raydium (RAY) down 21%, VIRTUAL down 19%, and Helium (HNT) off 15%. On the other hand, it’s not all bad news. The 14% increase in Lido (LDO) makes that token one of the few assets in the ecosystem showing an uptick right now. And Lido is a significant player not just in Solana but across multiple blockchains.
Decentralized exchanges have had mixed results in terms of volatility. Raydium, one of the leading decentralized exchanges in the Solana ecosystem, experienced a shocking 47% decrease in trading volume. Conversely, Sanctum, another decentralized exchange, saw an unanticipated increase in activity of 99%, which might indicate a sign of life for this corner of the market. Nonetheless, even with these mixed-to-good signals coming from decentralized exchanges, Solana’s place in the NFT market appears to be under threat. Polygon, in particular, seems to be capturing a lot of the market share.
March 1st Unlock and Increased Short Interest
Solana has another upcoming obstacle on the horizon: the March 1 unlock of 11.2 million SOL tokens, valued at about $2 billion. The nearly doubled supply of SOL hitting the market could very well exacerbate the price decline that Solana has been unfortunately subjected to. Why is this particularly problematic? Well, for one, there has been a huge increase in short selling, with market makers essentially betting against Solana and Memecoin Saga Coliseum NFTs.
At the same time, other blockchain ecosystems—like Avalanche—are starting to take advantage of Solana’s overt weakness. As Solana’s problems go on, some investors are starting to lean on potential competitors as safe havens for their capital. Avalanche, in particular, is making headway as a Solana alternative, especially given recent concerns about the reliability of Solana’s network.
Jupiter’s Response and Buyback Plans
While the difficulties persist, the Solana ecosystem shows signs of optimism. Jupiter, a leading liquidity aggregator within the space, has announced a bold $100 million buyback program for its JUP token. The purpose of this plan is to provide the kind of ecosystem confidence and even wayfinder stability that has been lacking of late. Jupiter’s buyback initiative is a part of a larger Solana ecosystem effort to put the narrative of the Solana ecosystem being a “dungeon” to rest and serve as a reassurance to participants of all kinds that Solana—a layer one blockchain in the same class as Ethereum and Avalanche—will persist and even thrive, with real use cases, for the long haul.
Despite the robust competition that Solana faces, along with a dwindling user base and the ongoing fallout from the LIBRA scandal, can such initiatives really prevent the further erosion of the blockchain’s market position?
Conclusion
The position that Solana once held as a leading blockchain seems seriously threatened now and perhaps by a perfect storm of circumstances. These include the past events associated with the LIBRA scandal, a not-so-great drop in overall market performance, a decline in user activity that seems to be heading downward and, last but not least, competition from all quarters, not just from the cryptocurrency space. Rebuilding downward-trending user and investor confidence may take all of these efforts combined, and Solana may have to rely on trust-building, too, to get going again.
Disclosure: This is not trading or investment advice. Always do your research before buying any Metaverse crypto coins.