Solana Ecosystem Facts Related To Major Exchange Bankruptcy

Following the Chapter 11 voluntary bankruptcy proceedings initiated by a major cryptocurrency exchange and its affiliated entities in November 2022, the Solana ecosystem experienced significant scrutiny and uncertainty. This comprehensive analysis examines the factual impacts on Solana's network, foundation operations, and the broader ecosystem.

The Solana Network

The Solana network demonstrated resilience during the major exchange collapse. Throughout the events of the bankruptcy announcement and subsequent developments, the Solana network experienced no notable performance or uptime issues. The network continued to operate at its baseline capacity without degradation in service quality. Additionally, the security infrastructure of the Solana network remained unaffected by the collapse of the exchange or the subsequent movements in SOL asset prices. This stability reassured users and developers that the underlying blockchain infrastructure remained robust and independent of external market pressures.

Solana Foundation Balance Sheet Exposure to the Exchange/Affiliated Entities

The Solana Foundation's direct cash exposure to the exchange was limited and manageable. As of November 6, 2022, when the exchange ceased processing withdrawals, the Solana Foundation held approximately $1 million in cash or cash equivalents on the exchange platform. This amount represented less than 1% of Solana Foundation's total cash reserves, making the impact on foundation operations negligible. Importantly, the Solana Foundation maintained no SOL tokens custodied on the exchange platform, preserving critical native assets from potential compromise.

Solana Foundation Asset Exposure to the Exchange/Affiliated Entities

Beyond cash holdings, the Solana Foundation held several digital assets in connection with its transactions with the exchange and affiliated entities. As of November 14, 2022, these assets remained on exchange accounts from the withdrawal freeze date of November 6, 2022. The foundation's asset exposure included approximately 3.24 million shares of the exchange's common stock, approximately 3.43 million tokens from the exchange's native token, and approximately 134.54 million SRM tokens. While the foundation lacked visibility into the exchange's current balance sheets, these holdings represented potential losses given the bankruptcy proceedings and the uncertain future value of these assets.

Solana Foundation Transactions with the Exchange/Affiliated Entities

The Solana Foundation's engagement with the exchange and affiliated entities began in August 2020, six months after Solana's Mainnet Beta launch. The foundation conducted three major SOL sales to affiliated research entities and the exchange between August 2020 and January 2021. The first transaction occurred on August 31, 2020, involving the sale of 4 million SOL with immediate availability. The second transaction on September 11, 2020, involved 12 million SOL with a linear monthly unlock schedule from September 2021 to September 2027, allowing for gradual token release over a six-year period. The third and largest transaction on January 7, 2021, comprised 34,524,833 SOL sold to affiliated entities, with linear monthly unlocks scheduled from January 2022 to January 2028. These staggered unlock schedules were designed to align incentives and prevent market flooding with tokens.

Solana Labs, Inc.'s Transactions with the Exchange/Affiliated Entities

Solana Labs, Inc., the development company behind Solana, also engaged in separate transactions with the exchange and affiliated entities. On February 17, 2021, Solana Labs sold 7.5 million SOL to an affiliated investment entity with full balance unlocking scheduled for March 1, 2025. Subsequently, on May 17, 2021, the company sold an additional 61,853 SOL to the affiliated entity, with full balance unlocking on May 17, 2025. The May transaction remained unsettled at the time of the bankruptcy announcement. Given the November 11, 2022 bankruptcy proceedings, the settlement and recovery of these transactions remained uncertain pending the outcome of Chapter 11 proceedings.

Locked Tokens on Solana

Locked tokens represent a security mechanism within the Solana ecosystem. These tokens are deposited into locked stake accounts and cannot be transferred on-chain until their lock expiration dates are reached. This locking mechanism prevents immediate market sales and provides time-bound constraints on token mobility. While locked tokens cannot be transferred on-chain, they retain flexibility: holders can stake locked tokens to validators or break them into smaller stake accounts to optimize staking returns. However, the underlying tokens within stake accounts remain subject to the original lock restrictions, ensuring the integrity of unlock schedules regardless of staking activity.

Wrapped Assets on Solana Affected by Custodial Bridge Solutions

Custodial bridge solutions that enable wrapped asset transfers to Solana contained potential vulnerabilities exposed by the exchange collapse. As of November 10, 2022, the total exposure to wrapped assets in circulation on Solana through custodial bridges was valued at approximately $40 million. The status of the underlying assets backing these wrapped tokens remained unknown due to the bankruptcy proceedings affecting bridge operations. In contrast, USDC and USDT on Solana were not wrapped assets but rather minted as native SPL tokens by Circle and Tether respectively, providing direct representations without custodial intermediaries.

Status of Serum, an Order Book DeFi Project Built on Solana

Serum, a significant order book decentralized finance project built on Solana, faced challenges requiring community intervention. Following the exchange/affiliated entities collapse, which had substantial influence over Serum governance, the Serum community mobilized to deploy a new verified build of the Serum protocol with a new program ID. This action decentralized protocol control away from potentially compromised entities. The community continued efforts to stabilize and restore confidence in the platform, with the Solana Foundation closely monitoring developments and supporting ecosystem recovery initiatives.

Status of the DeFi Ecosystem on Solana

The broader DeFi ecosystem on Solana demonstrated resilience through limited exchange exposure among major protocols. Based on assessment by the Solana Foundation, most of the largest DeFi projects on Solana had limited or no exposure to the exchange, mitigating systemic risk. However, certain smaller or specialized projects did maintain connections to the exchange, and these projects actively worked to navigate the bankruptcy and chart their paths forward. While outcomes for exposed projects remained uncertain, the 2022-2023 DeFi environment had proven challenging across the industry. Despite headwinds, the Solana ecosystem continued to evolve and innovate, with projects demonstrating commitment to building sustainable protocols.

The Current State of Liquidity Support and Market Making on Solana

Market liquidity on Solana remained supported through diversified market makers. Multiple independent market making firms provided liquidity services for DeFi applications across the Solana ecosystem, ensuring trading functionality despite the exchange collapse. This market maker diversity proved crucial in maintaining operational continuity, as no single entity's failure could eliminate liquidity provision across the platform.

Unstaking of SOL as of Epoch 370

Token staking mechanics on Solana demonstrated the network's established governance and security structures. Token holders retain flexibility in staking or unstaking SOL to validators at every epoch boundary, which occurs approximately every two to three days. At Epoch 370, which concluded on Thursday, November 10, 2022, approximately 29 million SOL from roughly 250 accounts was scheduled for unstaking, representing approximately 5.4% of total SOL supply. Historical precedent demonstrated the network's capacity to handle such volumes: Epoch 140 had witnessed over 44 million SOL unstaked, and Epoch 72 had seen over 30 million SOL unstaked without operational issues.

Initially, a total of 63 million SOL had been scheduled for unstaking at Epoch 370's conclusion. This included 28.5 million SOL from the Solana Foundation Delegation Program, which resulted from a change in data center provider terms of service. The Solana Foundation postponed this unstaking action and planned to effectuate it in the near future. Importantly, all tokens in the Solana Foundation Delegation Program remain owned by the Solana Foundation as treasury assets. No external entity possesses the capability to stake or unstake tokens without controlling the corresponding cryptographic keys, ensuring preservation of foundation control over its delegated assets.

Conclusion

The major exchange bankruptcy represented a significant event for the cryptocurrency ecosystem but had limited direct operational impact on Solana's core infrastructure. The Solana network continued operating without performance degradation, the foundation's cash exposure was minimal relative to total reserves, and most major DeFi projects maintained independence from the exchange entities. While the ecosystem faced challenges related to specific assets, locked stakes, and protocol governance, these issues did not threaten Solana's fundamental security or functionality. The incident underscored the importance of decentralization, independent market making, and limiting systemic exposure to single entities. As the bankruptcy proceedings unfolded and the community implemented recovery measures, the Solana ecosystem demonstrated resilience and commitment to building more robust, decentralized infrastructure.

FAQ

Does FTX still hold Solana?

Yes, FTX's estate still holds significant Solana holdings, approximately 5.29 million SOL tokens. These assets remain part of the bankruptcy proceedings and estate liquidation process.

What is the relationship between FTX and Solana?

FTX holds significant Solana tokens acquired from the Solana Foundation. This relationship has negatively impacted Solana's reputation and price due to concerns about future token liquidations flooding the market.

How much Solana did FTX own?

FTX owned approximately 3.24 million Solana Foundation stocks. The Solana Foundation held around 1 million in cash equivalents on FTX.com, along with 3.43 million FTT tokens and 134.54 million SRM tokens.

Can Solana reach $10,000 dollars?

Yes, Solana could potentially reach $10,000 with increased adoption, strong developer ecosystem growth, and positive market sentiment. Rising demand for SOL tokens and expanding decentralized applications on the network could drive significant price appreciation over time.