Solana and SBF: (very) dangerous liaisons

The days go by and the number of collateral victims of FTX's fall continues to climb.

Yesterday, it was lending company Genesis, despite being recapitalised a week ago, that got down on one knee and said it had frozen its operations. But until then, the problems had only affected companies and not... blockchains.

Or, the situation could perhaps tip over in the coming days or weeks, as the 30-year-old former billionaire (he lost everything) had also invested in several projects like Solana, which he actively supported. "Solana is one of the main victims" of FTX's collapse, Stefan Rust, founder of Laguna Labs, which develops DeFi projects, explained a few days ago.

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Crazy growth

The Solana blockchain and its associated token (the SOL) have been among the big stars of recent years. By 2021, its price had risen from $1 to $259, an increase of 25,800% 🚀.

This surge has made Solana a credible alternative to Ethereum, a protocol that is also used to develop decentralised applications, such as NFTs or banks without intermediaries.

But since the fall of FTX, SOL has been going through a real storm. Its share price has collapsed by just over 60% to less than... $15. A huge drop that has not been seen for other cryptos such as Bitcoin (-20%) and Ethereum (-23%).

This loss of confidence in the markets can be explained by the particularly close links between Solana and Sam Bankman-Fried's empire ("SBF"). FTX and Alameda Research, SBF's investment fund, were among "Solana's main backers and financiers", recalls Stanislas Barthélémi, crypto expert for auditing firm KPMG.

"Everyone focused on FTX's cryptocurrency, FTT, because it was the number one position in Alameda's portfolio, but we mustn't forget that SOL was in second place", he insists.

According to the Solana Foundation, which manages the interests of this ecosystem, Alameda currently holds 50 million SOL tokens ($700 million), equivalent to 14% of Solana's capitalisation.

Inversely, the foundation was also very close to FTX as it holds the equivalent of one million dollars on FTX (which are blocked), 3.24 million FTX shares (which are now worth nothing 😯 ), as well as tokens whose value has plunged in recent days.

The real issue for Solana are the 50 million SOL tokens still held by Alameda Research, which should be sold fairly quickly as part of bankruptcy proceedings in the US. With such high volumes, the price of tokens could plummet even further. By how much? It's hard to know.

The entire Solana ecosystem is shaking

Meanwhile, SOL is not the only crypto affected.

"SBF was involved in a lot of the Solana projects he was funding," confides a good connoisseur of the ecosystem. "This was the case for the decentralised exchange platform Serum, whose SRM token had been massively purchased by FTX. SBF had used this token, the value of which has continued to fall, to inflate FTX's balance sheet; the company explained that it held $2.2 billion worth of SRM, when in fact its total capitalisation was worth less than... $300 million. Today it is worth less than $100 million.

The SRM share price has fallen by 66% since the beginning of November, and FTX's 'hack' last weekend exacerbated this fall even further because the SBF company had access to Serum's infrastructure.

"Serum's update key was not controlled by Serum, but by a private key connected to FTX," worried Mango Max, a Solana developer, in a tweet.

"At present, no one can confirm who controls this key and its holder has the power to update Serum, possibly by deploying malicious code," he added.

To guard against this, Serum's designers were forced to "fork" its protocol, i.e. migrate it to another system. "Between Solana, Serum and the fall in prices, this produces an explosive cocktail for the entire ecosystem," insists Stanislas Barthélémi.

Another problem identified: the synthetic versions of bitcoin and ether circulating on the Solana blockchain have lost their anchorage with the underlying assets. The soBTC is now trading at just $1,300, while a bitcoin is currently worth $17,000.

The soETH, meanwhile, is trading at $200, while an ether is worth $1,200... The reason for this mismatch? These special tokens are issued by FTX. In bankruptcy, the exchange platform is naturally no longer able to guarantee that it actually holds the corresponding bitcoins and ethers.

"Virtually all the decentralised finance platforms in the Solana ecosystem have soBTC as loan collateral because they have long been accepted as the equivalent of bitcoin in the Solana space," analyses Meow, an (anonymous) founder of Jupiter, an application that belongs to the Solana universe. A cascade of liquidations is therefore to be feared, and these have already begun.

The total fixed value (TVL) in SOL in Solana's decentralised finance applications has fallen by 30% since the beginning of November. If we measure the fall in dollars, we are talking about a 70% drop and Solana is now only the 12th blockchain in this activity with $300 million in TVL, far behind Ethereum ($25 billion).

"The case of Solend, the equivalent of Aave on Solana, is significant because we can no longer do anything on it due to the dizzying fall in SOL," notes Stanislas Barthélémi.

FTX, Solana's "central bank"

The relationship between Solana and SBF went so far that most of the major projects developed on Solana received funding from FTX and Alameda. With one important detail: projects were encouraged to store their cash on... FTX ☠️.

Although the situation is still unclear, it is likely that many projects will no longer have access to their funds.

Solana co-founder Anatoly Yakovenko tweeted that development company Solana Labs held no assets on FTX and had enough financial headroom for around 30 months. Another co-founder, Raj Gokal, meanwhile, said it was a "watershed moment" for the ecosystem, adding, "What doesn't kill us, makes us stronger".

"Nevertheless, we have to ask ourselves whether the projects in the ecosystem really have the funds they claim to have", asks one person familiar with the matter.

In the background, the collapse of the Solana ecosystem and its SOL token represent a threat to the very security of the protocol. As this is based on proof of stake (a technique that involves immobilising cryptos in software), its robustness is inextricably dependent on the price of the token. The cheaper SOL trades, the cheaper it is to mobilise a large number of them to take control of its blockchain.

"Solana is clearly caught in a negative spiral, but does that mean the project will disappear? No, because blockchains never die completely," stresses Stanislas Barthélémi. It remains to be seen in what state Solana will continue to live.