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The fallout from the insolvency of the crypto exchange FTX keeps growing as investors wonder which project will be the next to go under amid ricocheting margin calls and decimated DeFi portfolios. With FTX’s founder, Sam Bankman-Fried (SBF), playing such a pivotal role in the launch of Solana, it is hardly surprising that the blockchain’s native SOL coin is getting utterly eviscerated today.
At the time of writing, Solana’s SOL token is down 43 percent over the past 24 hours as opposed to Bitcoin’s 16 percent loss in the same timeframe.
Great hread on FTX, with me highlighting 2 killer tweets. Impressive Ponzi 2.0, with not only incoming new vintage money paying outgoing older vintage money, but also by replacing 'real' money with fake '$FTT' money. Charles Ponzi would have approved.https://t.co/ARLXo9AFYj pic.twitter.com/x1iUGjCRWN
— One Bubble to Rule Them All (@shortl2021) November 9, 2022
Before delving into the specifics of Solana’s price crash, let’s try to disassemble the crux of the problem that is FTX. As we noted yesterday, FTX incentivized its users to hold the FTT token by offering attractive discounts on trading fees along with a host of other rewards. The exchange maintained FTT’s value by using a third of its trading commissions to buy back FTT coins, which were then burnt. In early November, a report disclosed that Alameda Research, a crypto trading firm owned by FTX’s founder Sam Bankman-Fried (SBF), maintained outsized exposure to the FTT token on its balance sheet. Essentially, as explained in the tweet above, Alameda was able to acquire lots of FTT coins at very low prices. FTX then used trading fees to prop up the FTT coin’s value. Alameda was then able to use its inflated holdings of FTT tokens as collateral to borrow from FTX’s customer deposits. This was essentially a Ponzi scheme where FTX did not ring-fence the deposits of its customers, allowing Alameda access to plentiful liquidity on the basis of artificial/synthetic collateral.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
The founder of Binance, Zhao “CZ” Changpeng, cited Alameda’s outsized exposure to FTT over the weekend to announce that his crypto exchange firm will liquidate “any remaining FTT on our books.” Bear in mind that Binance had FTT coins worth $2.1 billion on its books at that time. For its part, FTX did try to privately purchase Binance’s FTT stake but was rebuffed. What followed was a literal bank run as customers tried to evacuate their deposits out of FTX and sold the toxic FTT tokens, decimating their value in the process.
🔥 Shocked. Not. Always pay attention to the finer details. There was a reason he put “non-binding” in there.
— The Hound 🐺 (@TheFudHound) November 9, 2022
This brings us to the crux of the matter. Binance and FTX had reached a “non-binding” agreement yesterday under which the troubled exchange would be acquired by Binance after examining its books. However, CoinDesk is now reporting that the deal is very likely to fall apart. Given that FTX was an early investor in Solana, the exchange’s insolvency is raising fears of contagion in the Solana ecosystem.
Yet, there is more. Solana will exit its current 370th epoch at 08:30 a.m. UTC on the 10th of November. An epoch is essentially a 2-day window in which Solana validators secure their stake in the network. They also receive the option to unlock (withdraw) their stake at the end of each epoch. As per the tabulations of Solana Compass, 54.45 million (54,453,952) SOL coins will be unlocked tomorrow. This is equivalent to 15.38 percent of the total SOL supply, which can be freely sold starting tomorrow. Hence, there are growing fears of a veritable supply overhang.
As a refresher, Solana (SOL) is a decentralized blockchain platform that promises very fast transaction throughputs.
❗️*US PROBES FTX EMPIRE OVER HANDLING OF CLIENT FUNDS AND LENDING
— Cable FX Macro (@cablefxmacro) November 9, 2022
Solana’s 370th epoch could not have come at a worse time. Meanwhile, the FTX drama continues, with the US administration now jumping in to investigate the exchange’s improper handling of client funds.
#Bitcoin 3-Day MACD hasn't even crossed bearish yet
Whenever it crosses and confirms it results in a lot of further downside; pain might just be getting started🩸 pic.twitter.com/3AZdfJ4W2c
— Matthew Hyland (@MatthewHyland_) November 9, 2022
The selling across the crypto sphere is just getting started.
Update: Binance Has Officially Walked Away From FTX, and Solana is in the Mealstrom
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
Binance has just published a statement, citing ongoing investigations as well "mishandled customer funds" as the reason for walking away from the deal to acquire FTX. Solana is currently at session lows. Game over!
Update 2: Some of the SOL Coins Have Been Re-Staked
Half of the stake being withdrawn (56m SOL) was coming from the Solana Foundation. That withdrawal has now been restaked.
— G 🎒 (@Crypt0xG) November 9, 2022
We mentioned earlier in the post that around 54 million SOL coins were scheduled to become "unstaked" on Thursday. However, after a huge public backlash, the Solana Foundation has re-staked around half of this incoming supply.