Chaos, anger, and hope: how Solana is weathering the FTX crash
Solana was a key part of the FTX empire, but the FTX crash hit the Solana team hard.
Solana was a key part of the FTX empire, but the FTX crash hit the Solana team hard. However, after the rain comes the sun. Solana seems to be coming out stronger from the storm.
Sam Bankman-Fried and Solana – once the crypto industry's dream team. Two ambitious newcomers who together took over the crypto market. Sam Bankman-Fried - shortened to SBF - built FTX from his hedge fund Alameda Research into the world’s second-largest crypto exchange in just three years. Solana shot into the top 10 blockchains in no time in 2020, thanks to billions from his fund. His hedge fund owns nearly thirteen percent of the tokens, promotes many projects, FTX lists the tokens on the exchange, and lands many sponsorships. "FTX and Alameda were training wheels for Solana," explains Maximilian Schneider of Mango Markets, a popular blockchain DeFi platform.
The sky is the limit for this trio. Until the crash of November 6, 2022. Faked balances, liquidity crunches, insolvency – a possible fraud scandal. Everything is made public. The FTX empire, linked to 135 other companies, collapses like a house of cards. The crash deals a huge blow to Solana.
A hard hit for Solana
"It's like switching to the highest difficulty level in the middle of a video game," Schneider explains. He oversees one of the three Solana projects and is talking about the crash’s consequences. About 25 percent of teams are hit directly, according to a Messari study. But for some projects millions of US dollars in funding vanished. They got funding from Alameda or held a portion of their reserves on FTX. Some projects die off, or migrate to other blockchains. "We can’t gloss over what happened," says Mark Hull of Solana lending protocol Hubble. "We’ve lost confidence. Capital has flowed out, from the ecosystem and from all protocols."
Difficult weeks loom for his lending platform after the crash. "We had to act right away." FTT and some other tokens become almost worthless in one fell swoop, just like Solana-based Ethereum and Bitcoin derivatives that FTX issues. Platform prices no longer reflect reality. That means collateral is missing. Positions are liquidated at the same time. A dangerous situation. "It was chaotic. We had to pause lending for a few weeks to clean things up." Despite all this, the platform survived.
Most of the cash is gone
For Serum, Sam Bankman-Fried's prestige project, founded personally in 2020, it’s even worse. The team worked out of the Bahamas offices in the FTX complex. Their goal: to build the fastest and most user-friendly decentralized exchange. At its peak, the project reached a market cap of $1 billion.
"People were laid off left and right," says Maximilian Schneider, who knew the team well. "Most of them were fresh graduates. This was their first gig. They came from all over to this island and gave it their all, like they were running a marathon. Twelve-hour days, even Saturdays. They didn’t even shop for themselves. There was a Google Doc where they listed what they wanted to eat." There was plenty of money, was the prevailing feeling.
And then it all ends, most of their cash gone. More than 59 percent of their salary was paid in FTX shares. On weekends, they had to leave the Bahamas. "They wrote to me they didn’t even know if they’d be released. They’re really down. Some are back to studying, others are back with family for now."
Hippies and money-makers
The shock of how badly FTX and Alameda bungled it runs deep for some Solana developers. "I was a huge fanboy," Mark Hull recalls. "I recommended FTX to all my not-so-experienced friends."
Maximilian Schneider even went to the FTX offices in the Bahamas in person. "My take was: these are young people who work hard. A college vibe. FTX were more the hippies and Alameda the money-makers. But they seemed like good friends. They shared flats or lived in the same apartments." A inside job? He couldn’t imagine it. "And even if something was stolen there, my impression was they’re doing it right."
That FTX was a fraud case, as U.S. authorities say, he doesn’t rule out. "But I don’t want to say that to them out loud." Mark Hull sees it differently: "You can’t just call that incompetence on that scale. It was fraud. I hope the victims are made whole."
Solana’s technical picture looks positive
At the end of the FTX meltdown, there’s sunshine for Solana—the storm has passed. "I think Solana will rebound in a better position than before," says Peter Grosskopf. "Critical dependencies will be unraveled." The tech outlook is positive. Solana is catching up to Ethereum in NFT share in the NFT space. The blockchain is fast, and despite the mass stress test, there was no network outage.
"The technology is solid," counters Maximilian Schneider. "But the way we work will change a lot." Without FTX and Alameda money, he says, you’ve got to think more sustainably and let teams stand out. In the end, he says, this is only good: "The wheat is separating from the chaff."
The Solana community looks ahead
Mark Hull agrees: "Now the question is: who are the developers and credible teams involved? They’ll have to prove Solana can thrive without FTX." His firm is now focused on making DeFi attractive to institutional investors. "We want to move away from the idea that these protocols are run by anonymous people with monkey pictures."
Maximilian Schneider, with a few developers, has revived the failed FTX Baby Serum as a community project. Now it’s a community project. Everyone is volunteering. "It’s the same program. People can use it again," he says. In hard times, the Solana community grows together and focuses on what matters. Or, in Peter Grosskopf’s words: "Now we just build."
