Solana's Market Value Plummets by $50 Billion in 2022

Solana was promoted as a cryptocurrency that could rival ether with its environmentally-friendly approach, quicker transaction times, and more consistent fees.

Those who invested in the token had a difficult year. The market capitalization of the token dropped drastically from a high of over $55 billion in January to a low of just over $3 billion by the end of the year.

In late 2022, Solana was faced with a major issue due to its close ties to Sam Bankman-Fried, the founder of FTX. Bankman-Fried was recently charged with eight counts of criminal fraud after his crypto exchange went bankrupt. He had been a vocal supporter of Solana, promoting the benefits of blockchain technology and investing a large sum of money into Solana tokens.

In January 2021, Bankman-Fried had a response for a skeptic: "Go ahead and try to sell me, but then please leave me alone."

In June, documents reviewed by CoinDesk revealed that Bankman-Fried's companies had a portfolio of nearly $1.2 billion worth of the token and associated assets.

When FTX experienced a breakdown, investors pulled out of Solana to the extent of approximately $8 billion. However, in the past few days, while the rest of the crypto market has been relatively tranquil and prices have been steady, Solana has dropped even more.

On Christmas Day, two of the most prominent non-fungible token (NFT) projects that were built on Solana declared their move away from the platform. This news had already been made public prior to the recent decline in Solana's value, leaving the cause of the drop a mystery.

In the past seven days, Solana has seen a significant decrease of more than 30%. Ether has remained relatively stable, losing only 1.7%, while bitcoin has only dropped 1.2%. Out of the top twenty cryptocurrencies tracked by CoinMarketCap, Dogecoin has experienced the second-largest decline, with a decrease of 9%.

On Thursday, Solana experienced a 5.8% drop in just one hour of trading, taking it to its lowest point since the beginning of 2021 when Bankman-Fried began to publicly express his backing for the project.

Since its low point, Solana's market capitalization has risen to more than $3.5 billion. Additionally, its 24-hour trading volume has increased by a factor of two compared to its previous levels.

In 2021, when the crypto market was at its peak, Bankman-Fried was not the only one who was optimistic about its future.

Programmers were enthusiastic about Solana's ability to handle smart contracts, which are pieces of code that can carry out predetermined instructions, as well as its pioneering proof-of-history consensus system.

Consensus mechanisms are the way blockchain platforms evaluate the accuracy of a completed transaction, monitoring who owns what and how efficiently the system is running based on an agreement between multiple computers that keep records, known as nodes.

Bitcoin utilizes a proof-of-work system, while Ethereum and Solana use proof-of-stake. Rather than requiring energy-intensive mining, proof-of-stake systems require large users to provide collateral, or stake, to become "validators." Instead of solving for a cryptographic hash, as with bitcoin, proof-of-work validators check transaction activity and keep the blockchain's "records," in exchange for a portion of transaction fees.

Solana was attempting to stand out from the crowd by combining proof-of-stake with proof-of-history, which would enable them to verify that a transaction had taken place at a specific time.

Solana had a remarkable 2021, with one of its tokens increasing by 12,000% and reaching a value of $250 by November. However, even before the fall of FTX, Solana had to face a number of public issues that questioned the protocol's assertion that it was a superior technology.

Solana's success was largely due to the increasing attention to Non-Fungible Tokens (NFTs). Bankman-Fried's Serum exchange was built on the Solana platform. However, as the year 2022 began, the platform's limitations began to become more evident.

At the start of the year, Solana experienced a network outage that lasted more than a day, causing its token to drop from $141 to around $94. In May, the network was down for seven hours due to an influx of NFT minting that overwhelmed validators and caused a crash.

CoinTelegraph reported that a massive four million transactions per second caused Solana's token price to drop 7%, furthering its decline during the start of the crypto winter. This number of transactions was a record-breaking amount.

In June, a 12% decrease was seen after an outage occurred. This outage was caused by validators ceasing to process blocks, which disabled Solana's acclaimed consensus mechanism and necessitated a reboot of the network.

The outages were a cause for concern for Solana, a protocol that was attempting to challenge ether's supremacy and establish itself as a reliable and speedy platform. The project was created in 2020, making it a younger protocol than ether, which was launched in 2015. These issues were occurring in public, indicating that Solana was still going through a period of development.

Solana was expecting to face technological difficulties, but something else was happening in the Bahamas.

The Securities and Exchange Commission (SEC) labeled the actions of Bankman-Fried as "brazen" fraud. He had used customer funds from FTX to finance his hedge fund, Alameda Research, as well as his luxurious lifestyle in the Caribbean, which caused a stir in the cryptocurrency markets. Last week, Bankman-Fried was released on a $250 million bond while he awaits trial for fraud and other criminal charges in the Southern District of New York.

In the weeks after FTX declared bankruptcy in November, Solana saw a drastic decrease in its total value, with a drop of more than 70%. Investors were quick to distance themselves from anything related to Bankman-Fried, resulting in a sharp decline in the prices of FTT (FTX's native token), Solana, and Serum.

Anatoly Yakovenko, the founder of Solana, recently told Bloomberg that instead of concentrating on the price of the asset, people should be concentrating on creating something great and decentralized.

CNBC reached out to Yakovenko for comment, but he did not provide an immediate response.

FTT has experienced the most significant losses, dropping almost all of its value. Meanwhile, Solana has seen a steady decline in recent days, likely due to worries about the potential spread of FTX's issues and doubts about the sustainability of its own protocol.

Retaining developers is a major issue. Solana was created to address the scalability issues of Bitcoin and Ethereum, which are limited to 15 transactions per second globally, as stated in the developer documentation. However, Token Terminal reports that the number of active developers on the platform has decreased from 159 in October 2021 to 67.

Despite the recent issues with FTX, Multicoin Capital, a cryptocurrency investment firm, has remained positive about Solana. They have kept a bullish outlook on the blockchain, even in the face of adversity.

Multicoin acknowledged that SOL was likely to experience a dip in performance due to its ties with SBFand FTX; however, they have chosen to maintain the position since the crisis began, for a variety of reasons, as stated in a message to partners obtained by CNBC.

Crypto experts such as Multicoin have suggested that the consequences of FTX demonstrate the need for the crypto industry to move away from large centralized exchanges and towards decentralized finance (DeFi) and self-custody solutions.

A noticeable increase in daily activity at the unparalleled Binance could indicate that many crypto fans have not yet heeded that advice.

Yakovenko's faith in Solana is not unexpected. Even Vitalik Buterin, the creator of ethereum, expressed his backing for Solana on Thursday. He tweeted, "It's difficult for me to judge from the outside, but I hope the community is given a fair opportunity to flourish."

On December 29th, Chris Burniske, a partner at the Web3 venture capital firm Placeholder, expressed his admiration for Solana in a Twitter thread, saying he was "still longing" for it.

Cryptocurrency saw a surge in popularity due to the efforts of centralized platforms such as FTX, Crypto.com, and Binance. FTX invested a large sum of money in stadium deals and naming rights. Crypto.com put a lot of resources into their advertising campaigns. Binance even announced a partnership with the Grammys.

2023 could be a pivotal year for decentralized finance, as investors who are interested in cryptocurrency search for more secure methods of obtaining returns and safeguarding their assets. Bitcoin was created in response to the 2008 financial crisis. Now, the crypto industry is facing its own challenge.

Multicoin reassured investors that the collapse of Lehman Brothers did not spell the end of the banking industry, nor did the downfall of Enron mean the end of the energy industry. They also stated that FTX's failure would not be the end of the crypto industry.