Will Solana Collapse? Contagion from FTX Debacle Spreads

The shocking collapse of FTX and Alameda Research has led to a major selloff of crypto assets in the past 48 hours. While the entire industry has been hit hard, anything directly tied to SBF is in fire-sale mode. The next victim may be Solana. 

There is an estimated $8 billion gap that the SBF empire owes to investors and customers–Alameda’s early investment in Solana will surely be liquidated to fill part of that gap. Thus, investors are panicking and selling SOL swiftly. Even more selling pressure is on the way. At the time that this article’s publishing, a massive unstaking of 29,246,989 SOL will leave the project’s Proof of Stake (PoS) consensus mechanism and head for the open market. The price of Solana could dip below yesterday’s lows around $11.38. Just last Saturday, the humbled Ethereum-killer topped $38. While a dip in price would be a bitter pill to swallow, the mass unstaking of SOL could actually lead to a network collapse.

If too many coins are unstaked from the network, Solana could face security vulnerabilities. Network transactions are approved by validators in a PoS protocol. Validators are trusted to act honestly because they put up a collateral of coins to do their job–this is their “stake.” If validators do their job, they are rewarded with transaction fees. If validators act dishonestly and steal coins, they will lose their stake. Individuals can stake their coins too. They’ll pool their coins with validators to get an increased chance at rewards. Essentially, the more people that stake their coins, the better incentives validators have to stay honest. With such a massive amount of SOL leaving the network, the incentives for Solana validators to do their job honestly has vastly diminished. Solana would likely not survive another serious setback.

Amidst all this fear, the Solana Foundation is putting up a valiant PR fight. They responded to fears about network vulnerabilities by pointing out that unstaking events like today’s have happened in the past. In addition, the Foundation has been showering all social media platforms with positive buidling posts. There’s shoutouts to Solana’s diverse ecosystem, pics of a well-attended developer conference from last weekend, retweets of supportive posts from Polygon’s Sandeep Naiwal and even Vitalik Buterin showed Solana love.  

One major difference between Solana and the doomed SBF companies is culpability. Solana did NOTHING wrong. They are simply caught in a shockwave caused by a major investor’s historic self-destruction. It is true that, in recent months, many crypto-enthusiasts had grown weary of Solana’s frequent network interruptions and technical problems. This SBF panic adds to an already uncertain climate around the project. However, it would be unwise to ignore the ambitious code and human capital invested into Solana. There are many impressive dapps and smart devs working on Solana. Nothing about the project’s code, and it’s promise of speed, scalability and affordability has changed from yesterday to today. Its price action may look bad over the next few epochs. But if the network can keep pumping out valid transactions, this could be the "$80 Eth moment" that shows the strength of a project and its community.