Solana’s close ties to FTX cause financial and structural damage

The fallout from the implosion of FTX is being felt across the crypto industry, with firms supposedly rescued by the exchange now being dragged under along with their erstwhile ‘savior,’ Sam Bankman-Fried.

Whilst many of those hit hardest are centralized entities such as custodial exchanges and lending platforms, an entire blockchain ecosystem also looks to be in bad shape based on its close ties to FTX and Alameda.

Since it became clear that both FTX and Alameda were struggling, the price of SOL has dropped over 50%, where it’s remained for the last few days. The drop is far greater than other network tokens, such as ETH, MATIC, AVAX, or BNB, which are down between ~25% and ~15% over the same period.

Further sell-pressure will likely follow as FTX and Alameda’s assets are liquidated. According to the leaked balance sheet which precipitated the run on FTX (with some help from Binance’s CZ), Alameda held $292 million of unlocked SOL, $863 million of locked SOL, and $41 million of SOL collateral.

The damage hasn’t only been financial, but also structural. As FTX’s collapse triggered major volatility across the crypto markets, the underlying Solana blockchain reportedly experienced degraded performance, interfering with liquidations on DeFi lending protocol Solend:

Solana Whale (3oSE9CtGMQeAdtkm2U3ENhEpkFMfvrckJMA8QwVsuRbE) is in liquidation and currently has 2,450,418.5 SOL (worth over $51 million) in collateral and 44,871,609.6 USDC in debt. However, Solana is currently facing congestion due to the update of the oracle. pic.twitter.com/qJKMViJeQK

— Wu Blockchain (@WuBlockchain) November 9, 2022

In the wider Solana ecosystem, FTX and Alameda’s close support of teams building on what was once considered a potential ETH-killer led to many of the project’s tokens being referred to as ‘Sam coins.’

While it’s true that FTX Ventures and Alameda had investments in a staggering number of crypto funding rounds (255 according to The Block), some of Solana’s flagship projects were more dependent on SBF’s empire than elsewhere.

Sollet-wrapped assets de-pegged on the news they were issued by FTX/Alameda, with soBTC currently valued at just $1,315 on CoinGecko, accompanied by the warning that “soBTC tokens are wrapped BTC tokens issued by FTX or Alameda. Both these entities have filed for Chapter 11 bankruptcy and the BTC tokens are no longer redeemable.”

Following the $477 million hack of FTX, there were worries that the private keys to Solana-based decentralized exchange Serum had been compromised. Rather than being controlled by the exchange’s DAO, the keys were held by FTX, leading to a hasty redeployment of a fork of the protocol, now controlled by “a multi-sig controlled by a team of trusted developers”.

The serum program update key was not controlled by the SRM DAO, but by a private key connected to FTX. At this moment no one can confirm, who controls this key and hence has the power to update the serum program, possibly deploying malicious code. (2)

— Mango Max ?️?‍??? (@m_schneider) November 13, 2022

Read more: Jump Crypto ties to FTX and Solana put Robinhood users at risk

As the bloodbath in crypto markets continues, there will surely be more failure and bankruptcy announcements to come.

But a statement by the Solana Foundation details its exposure to recent events, reassuring that “less than 1% of Solana Foundation’s cash or cash equivalents” were kept on FTX and that “the impact on Solana Foundation operations is negligible.”

While Solana looks to be facing tough times in the short to medium term, the foundation seems confident there’s plenty of runway ahead.

The crypto community has a short memory, though, and even after all the scandals exposed over the last week, we may not have seen the end of SBF yet.

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