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The recent meltdown of Solana reveals a lot about the interconnectedness of the other cryptocurrencies. Many other cryptocurrencies saw the impact of a corporation going bankrupt, including Solana (SOL), which was impacted by this tragedy. Solana dropped more than 20% in a single day. Here is a thorough explanation of why Solana (SOL) is crashing right now.
What Is Solana (SOL)?
Solana is a blockchain designed to boost the scalability of blockchain networks while utilising decentralised apps (dApps) and smart contracts. Applications include non-fungible tokens, music streaming, and DeFi (NFTs).
To verify millions of microtransactions, blockchains integrate micropayments with the Proof of History (PoH) and Proof of Stake (PoS) consensus models. With the help of the native utility token SOL, users can carry out transactions and collect incentives.
Approximately 300 million Solana tokens are currently in use. The supply will continue to rise dramatically during the ensuing years because it still has a rather high inflation rate of 7.2%. The annual rate of inflation will drop until it reaches 1.5% in 2031; however, it is now still quite high.
Transaction validation in Solana currently combines PoS and PoH, consensus models. PoS locks down blockchain investments by using validators who own SOL. Then, you may check the transaction’s validity and get paid for it. The chain penalises those who incorrectly validate it because it owns the token as collateral.
Solana employs the relatively new idea of PoH in conjunction with his PoS framework. It only works quite effectively on Solana, one of the few blockchains that implement it. Every transaction on the Solana chain is timestamped, and the verification process is divided using a verifiable delay function (VDF). The transactional timetable for PoS is unclear.
Solana can expeditiously and effectively process transactions by combining the two consensus approaches.
How Is FTX Connected To Solana?
Many people were unaware of the relationship between Solana and FTX until it was too late because it isn’t fully direct. But the primary factor in Solana’s crash was connectivity.
Sam Bankman-Fried, the CEO of FTX, runs a hedge fund named Alameda Research (which also collapsed during the crisis). The investment fund made significant bets on Solana (SOL) and his FTX Token (FTT). Alameda Research put more than $1.2 billion in its SOL prior to the crisis, or around 10% of the market cap at the time. Solana has also been promoted by Bankman-Fried, Alameda, and FTX, greatly enhancing its visibility and elevating SOL to the position of one of Ethereum’s most well-liked rivals.
What’s Going On With FTX?
FTX is a well-known crypto trading platform that became more well-known in 2019. Recent financial information revealed that the majority of Alameda Research’s capital is invested in his FTT. Furthermore, it was claimed that Bankman-Fried transferred $4 billion, including some customer deposits, from his FTX to Alameda. Finally, there has been a long-running rumour that Binance may be purchasing FTX. Many people decide to retire when all three of these reasons are present because they are concerned about losing money. Withdrawal requests from FTX often total less than $100 million per day. However, he received more than $6 billion in enquiries in just 72 hours.
Bankman-Fried thought FTX had sufficient liquidity to handle a large number of withdrawals, but his bank statements were mislabeled, and he was unable to confirm this. Barely 80% of the required liquidity was available.
Due to these bankruptcy concerns, FTX got in touch with Binance and agreed to sell FTX to them. Although a non-binding contract was signed, the transaction ultimately failed to materialise. FTX, in the words of Bankman-Fried, “lives to fight another day.”
What Causes Solana To crash?
Some people think the Alameda Research investment could be utilised to pay off debt, given the recent drop in FTX. This procedure might be the most sensible way to pay off the debt without selling the business (as it’s unlikely that a buyer would want to take on such a large debt). But in order to do that, some of the assets—if not all—must be sold. It is not very useful to sell the FTT token, which was the largest holding, because it has decreased so much. On the other hand, despite the crash, Solana is still rather valued.
Many people sell their SOL positions in case Alameda sells in large quantities because doing so could result in a catastrophic price collapse and undermine the token’s future.
This was the main cause of Solana’s crash; however, since Google’s cooperation was announced, the token has somewhat recovered and now seems to be stable.
Are Cryptocurrency Exchanges Still Dependable?
To claim that this event has not damaged investor confidence in cryptocurrency exchanges is quite ludicrous. Two conclusions, though, may be made from this circumstance. Since the incident is unique, it is doubtful that other exchangers would experience a similar issue. On the other hand, it is very likely that other cryptocurrency exchanges will experience financial difficulties and apply FTX’s flaws to them. Regardless of your opinion about cryptocurrency exchanges, using a personal wallet is always safer.
Is This The Time To Buy Solana?
Regarding the future of Solana, there are a number of possible situations that are worth mentioning. First, FTX’s bankruptcy problems could get worse, which would cause SOL’s position to be liquidated. The cost might be further discounted in this situation. On the other hand, a partnership with Google might promote expansion and address FTX’s historical issues. It’s possible that the mass selling was a mistake. There are no guarantees in either direction, but how you view these two possible outcomes may give you some insight into how you decide to invest in SOL.
No investment advice should be taken from this information. Because the market for cryptocurrencies is so unstable, only invest money that you can afford to lose.