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Decentralized finance (DeFi) has been one of the sectors that has grown stratospherically during the 2021 bull market by offering a myriad of borrowing and lending apps that deliver double and sometimes, for a short period of time, triple-digit annual returns. Has the fall of the second largest platform in terms of trading volume, FTX, shaken and wiped out this facet of the cryptosphere?
As a preamble, I want to clarify the term “Total Value Locked (TVL)” which is going to be mentioned several times in this article.
Total Value Locked (TVL) = Global value of assets (in dollars) deposited and locked (for a certain period of time) in DeFi protocols through smart contracts. An increase in TVL means an increase in the liquidity and popularity of the protocols. Conversely, a decreasing TVL implies deteriorating liquidity and lower returns on the products offered.
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DeFi is no exception to the rule of fear
TVL in DeFi platforms has fallen by more than 20%, from $83 billion to $65 billion, since November 1. Knowing that the report from media outlet CoinDesk mentioning that FTX might be insolvent was published on November 2. In other words, the speculations that gravitated around Sam Bankman-Fried’s obscure actions started on that date. The next ten days brought FTX into bankruptcy.
Ethereum, the leading blockchain in terms of TVL, fell from $51 billion on November 1 to $41 billion on November 13, down 20%. Binance Smart Chain’s TVL is also down 14% to $7.3 billion. Tron’s TVL fell from $6.1 billion to $4.6 billion, down 25.05%. On the same trend, Avalanche, Polygon, and Arbitrum saw their TVL decrease by 25%, 8%, and 10%, respectively. In other words, overall decentralized finance has suffered the wrath of the cryptosphere. But one blockchain has suffered more than the others.
Solana: the worst performer
Blockchain Solana lost the biggest TVL. From $1.65 billion, it hit $585 million two days after the bankruptcy, translating into a 64% drop in dollars.
But its fall continued to accelerate, reflecting users’ distrust of the protocol. It was cut in half again between the day FTX announced its bankruptcy on November 11 and today. While its TVL peaked at more than $10 billion in November 2021, it is 97.25% lower today, around $285 million. This is a testament to the significant exodus of users and their funds.
Among DeFi’s top protocols on Solana, lending platform Solend has lost 92% of its TVL in the past two weeks and currently has about $23 million locked up in the protocol, down from $280 million on November 1.
Marinade Finance, one of the major DeFi protocols, has lost 66% of its TVL and currently has $80 million, becoming the leading DeFi protocol on Solana. Decentralized protocols Raydium, Serum, and Orca have lost 58%, 99%, and 33% of their TVL, respectively, in the past two weeks.
Serum’s drop was a major sign of user distrust as it is a cornerstone of Solana’s DeFi infrastructure. In fact it is the main central limit order book in the blockchain trading ecosystem. It is a more efficient alternative to the “automatic market maker” setup that prevails on DeFi’s protocols. It has managed over $32 billion in volume this year, with the help of major market makers such as Jump and Alameda.
As a reminder, Alameda is the trading company owned by Sam Bankman-Fried, the former boss of FTX. Naturally, Serum is suffering from the collateral damage caused by the fall of Alameda and FTX.
For its part, Solana’s native cryptocurrency, SOL, was one of the main assets to stall severely in the wake of FTX. It has lost 63% of its value since November 1. After trading around $260 a year ago, it is now 95% lower at around $11 per unit.
Trading volumes on the Solana blockchain are only being driven by Magic Edgen, an NFT exchange platform.
Over the past year, Solana has raised funding from the FTX exchange and its former CEO Sam Bankman-Fried’s trading firm Alameda Research.
Alameda Research was an early investor in Solana and contributed to its private token sale (ICO) in 2021, when the blockchain raised $300 million from various private investors. That round was led by investment fund Andreessen Horowitz.
Since then, Bankman-Fried companies have continued to work with the Solana blockchain. In March 2022, FTX collaborated with CoinShares, an investment firm, to provide an exchange-traded product (ETP) based on Solana. This new product shared Solana’s staking rewards with investors. FTX was also a significant investor in the SOL cryptocurrency. Its balance sheet included SOL worth over $1.1 billion.
In fact, the large financial contribution of FTX, Alameda, and Sam Bankman-Fried himself in the various Solana protocols naturally spooked users. As evidenced by the exodus of funds in recent days and reflected in the collapse of the SOL price. And in addition, before this disastrous episode, Solana has experienced numerous breakdowns on its network, revealing many technical problems on it. In the meantime, developers continue to build decentralized applications (Dapps) on the blockchain and users rely on its technology in particular to exchange on Magic Eden, the marketplace of NFT. On the other hand, it will take time to regain the trust of users and prove that it can develop without being on a drip with FTX.
From a more global point of view, the collapse of FTX has impacted the entire cryptosphere. No sector has been spared. Not even the digital currency of the Bitcoin network, even though its fundamentals remained unchanged despite this episode of crisis. Naturally, it will take time for trust to be reinstated throughout the crypto ecosystem. On the other hand, we don’t yet know how far the shockwave from the FTX explosion will spread.