Why Solana Was Decimated by Bankman-Fried’s Downfall

The blockchain heavily tied to the disgraced founder of FTX has been badly wounded by his unmasking. Here are the headwinds facing the formerly hot project and its SOL token.

Solana, a layer 1 smart-contract blockchain, has faced increasing skepticism and challenges in recent times. Despite being a popular project during the 2020-2021 bull market, Solana has encountered several headwinds, including the departure of major projects to other chains and a significant drop in total value.

Among the key concerns raised by doubters are Solana's lingering technological challenges, which could limit its ability to compete with faster and lower-cost transactions offered by Ethereum layer 2s. However, the biggest factor casting a shadow over Solana is the downfall of Sam Bankman-Fried, the founder of FTX exchange and Alameda Research hedge fund.

Bankman-Fried was a prominent backer of Solana, and skeptics argue that the price appreciation of SOL and related assets during 2020-2021 was influenced by Bankman-Fried's market interventions and advocacy.

The skepticism toward Solana has had drastic consequences, evident in the steep decline of the SOL token price. From a peak of $258.78 on Nov. 6, 2021, SOL has dropped to around $10 at the time of writing—a decline of over 96%.

This drop is significantly steeper than the drawdowns experienced by BTC (-74.5%) and ETH (-74.6%) from their respective peaks. It's also steeper than the decline of dogecoin (DOGE), which is down 76% from its October 2021 local high (though still 87% down from its May 2021 all-time high).

Solana's SOL token, which was once ranked fifth in early November, has now fallen to 19th place among the most valuable crypto tokens, according to CoinGecko.

Furthermore, the total value of tokens staked in decentralized-finance (DeFi) protocols on Solana has declined dramatically, from nearly $10.2 billion on Nov. 9, 2021, to less than $210 million at press time — a decline of nearly 98%.

Solana now ranks only 12th among DeFi chains in terms of total value locked (TVL), trailing not only Ethereum layer 2s like Polygon and Optimism but also lesser-known projects like Cronos and DefiChain.

The steepest single-period percentage drop in Solana's metrics occurred in early November following the collapse of FTX and mounting evidence of fraud by Bankman-Fried.

It now appears increasingly likely that some of Bankman-Fried's extensive support for Solana was funded via FTX's wholesale theft of customer funds.

Moreover, former Alameda executives, including CEO Caroline Ellison, have claimed in recent statements to the U.S. Securities and Exchange Commission that Bankman-Fried encouraged market manipulation of FTX's FTT token.

Given this, it seems improbable that Bankman-Fried was not also manipulating the price of Solana-based projects he helped launch, controlled large stakes in and used in the accounting and loan fraud that formed the core of the FTX swindle.

These related projects, including the Serum decentralized exchange and the self-described DeFi brokerage Oxygen, are sometimes derisively referred to as “Samcoins.” They have seen catastrophic declines in their own token prices, and Serum was rendered “defunct” by the collapse of FTX, necessitating a community fork.

Market manipulation via Alameda would have effectively been funded by the clandestine redirection of FTX customer funds from other assets, such as bitcoin and ether, toward the trading of SOL or other ecosystem tokens.

Alameda's market-making and trading activities as a whole appear in retrospect to have been wildly unprofitable. Some critics have argued that their SOL activity would have amounted to propping up the value of Solana, while artificially holding down the price of blue chips like ETH and BTC.

This chaos has led to hints of something like a death spiral as developers and projects depart the struggling chain. Most dramatically, the DeGods and Y00ts NFT (non-fungible token) projects were confirmed to be leaving Solana for Ethereum and Polygon, respectively.

In November, stablecoin issuer Tether swapped $1 billion of USDT from Solana to Ethereum.

All of this comes on top of concerns that predated the collapse of FTX. Solana has experienced repeated chain halts since its inception, often caused by “botting” or other forms of spam overwhelming the network.

This is linked to Solana's core value proposition as a faster, cheaper layer 1 than Ethereum: For a blockchain, lower transaction costs and higher speed often come as a trade-off for security and stability.

Moreover, that value proposition may itself be less compelling than it was when Solana launched in March 2020. The years since have seen significant growth in “layer 2” products on Ethereum that offer faster and less expensive transactions, but gain the benefit of Ethereum's