‘Ethereum Killer’ Solana Falls Prey to Binance-FTX Deal Turmoil

Muyao Shen and Sidhartha Shukla, Bloomberg News

Signage at the Solana Space retail store at Hudson Yards in New York, US, on Monday, Aug. 8, 2022. Mikkel Morch, executive director at Digital Asset Investment Fund ARK36, said that he sees the recent efforts with Solanas mobile phone and the Solana Spaces store as emblematic of "Solana's grand ambitions to become the pioneer of mainstream adoption of web3." , Bloomberg

(Bloomberg) -- It was championed as the “Ethereum killer,” the blockchain that would revolutionize crypto with lower transaction costs and faster speeds.

Instead, two-and-a-half-year-old Solana has become a casualty of the chaotic -- and uncertain -- marriage between two of the industry’s biggest players, Binance Holdings Ltd. and FTX.com. Its native token, SOL, tumbled as much as 46% on Wednesday and has lost more than half of its value this week alone. Only FTT, the native coin of FTX, has suffered a steeper drop.

The reason: Solana is backed by Alameda Research, the crypto trading house which like FTX is run by Sam Bankman-Fried. It was reports questioning Alameda’s balance sheet health that set in motion the chain of events that led to Binance’s hastily agreed takeover of FTX.com, announced over Twitter on Tuesday. FTX’s venture capital arm has invested in several Solana-based projects.

SOL, seen by some traders as almost a proxy for FTX, quickly became a juicy target for short sellers. Its market value has fallen from a peak of almost $80 billion last November to just over $6 billion, according to data from CoinGecko. The Solana blockchain has also been plagued by a series of outages that have been a continuing sore spot over the past year.

“I do worry about the impact this will have, given Alameda had large holdings in SOL that could get liquidated,” said Tristan Frizza, founder of Zeta Markets, a derivative exchange built on the Solana blockchain.

SOL’s pummeling has reverberated throughout the Solana ecosystem. It has spilled over into Solend, the decentralized-finance lending protocol built on Solana, which has suffered a spike in liquidations -- leading to a roughly $3.5 million pile-up of bad debts on the platform. One large position backed by 2.63 million SOL token was being partially liquidated on Wednesday, data from Solend shows.

Representatives for Solana and Solend didn’t immediately respond to requests for comment.

Now, Solana’s case for challenging Ethereum as the pre-eminent blockchain for DeFi applications looks to be in doubt. The total value locked on applications built on Solana has fallen by roughly half since Sunday -- when a tweet from Binance founder Changpeng “CZ” Zhao set in motion FTX’s unraveling -- to about $500 million, data from DefiLlama shows.

More pressure on SOL may be brewing. About 50 million SOL, worth more than $940 million, will stop being staked on Solana in the next 24 hours, data from Solana Compass shows. That means they can then be sold on markets, creating an overhang for the token. Staking is the process where holders of a cryptocurrency let their tokens be used to help order transactions on the blockchain, or digital ledger, that is used by that coin, often in exchange for additional units of the token.

“Large net unstaking typically represents a loss in confidence in the ecosystem or a need to free up capital,” said Martin Lee, a data journalist at blockchain researcher Nansen.

--With assistance from Dave Liedtka.