Step Data Insights: Special Edition - FTX Bust & the Future of Solana DeFi
Evaluation of the FTX and Alameda Research bankruptcy on Solana DeFi
Advisory
This article is not financial advice and is meant to be treated as an informative piece. Always do your own research before investing or trading any cryptocurrencies.
Introduction
On the 9th of November last year, just after Solana Summer, the total value locked (TVL) in Solana DeFi platforms had peaked at $10.17 billion, putting it among the top three across all blockchains. Behind this success were the growing interest of venture funds and retail investors, Solana's Ignition hackathon, the popularization of the Solana NFT ecosystem, and the rise of multiple DeFi platforms on the blockchain.
However, it didn't take long to realize that the TVL indicators on Solana were somehow inflated by some specific actors in the ecosystem. There is no denying that the downtrend which followed the crypto market peak in November 2021 has reduced the activity and TVL on every blockchain. The Solana DeFi ecosystem surely had its share of this downtrend. However, the TVL on the blockchain took another blow after the declared bankruptcy of FTX.
Although, users within the DeFi community often argue that dollar-denominated TVL is a less accurate measurement of overall DeFi health than when measuring with the chain’s native token, in this case, SOL.
In SOL terms, TVL within the ecosystem actually peaked in June 2022, and has since taken a hit with the recent catastrophes in the markets. This more accurately represents the health of the ecosystem, as it is taking into account the drawdown in asset prices felt across all markets and the use of SOL within DeFi protocols.
The collapse of FTX and Alameda Research was not the first instance of damage inflicted on Solana DeFi, even beyond the consistent dips in the crypto market which have had rippling effects throughout the entire industry. Nonetheless, there were other factors affecting the TVL exclusive to the Solana blockchain rather than the entire crypto ecosystem. For those who do not know, we will briefly refer to them in this volume of Step Data Insights.
Previous factors affecting Solana DeFi
Last summer, it was revealed that the founders of Saber Protocol, one of the former major DeFi platforms on Solana, created fake developer activity to manipulate the TVL on the chain. This was particularly important as the locked value on the Saber ecosystem had temporarily inflated the TVL on the chain by billions of dollars. The Macalinao brothers, who were behind this underplot, created a counterfeit ecosystem on Solana by building DeFi platforms on top of each other and by using multiple fake accounts to mimic themselves as a group of developers. The reason why the Macalinao brothers built platforms that stack on top of each other was to enable each asset locked in the platforms to be counted several times. The whole situation began to unfold when a hacker exploited Cashio’s unaudited smart contracts, which is one of the linked DeFi platforms the brothers built. On March 23, 2022, $52 million was stolen from Cashio. The hacking incident led to these fraudulent schemes being revealed and panic selling in SOL and other relevant tokens, which eventually had an effect on Solana’s TVL.
Another incident that led to another significant drop in the TVL was the recent exploit of Mango Markets, previously the top derivatives trading platform built on Solana. On October 11th this year, $114 million was drained from the platform via an oracle price manipulation. The next day, Mango team temporarily froze the program instructions to prevent any users from further interacting with the Mango protocol and losing their funds. However, this could not hinder the protocol's native token, MNGO, from falling by more than 50% in a day. This incident caused panic among all Solana DeFi users, not just Mango users, causing the TVL on the chain to drop drastically. TVL on Solana fell from $1.26 billion to $865 million that week.
Nonetheless, among all those incidents, Solana DeFi took the biggest hit from the sudden fall of FTX which was one of Solana's prominent backers. With the events that started on November 7, the TVL on the chain dropped from $1 billion to $322 million within a week. In this issue of Step Data Insights, we'll talk about why and how the bust of FTX and Alameda Research suddenly swept 68% of TVL on the Solana blockchain.
Ties between Solana and FTX/Alameda
It all started when CoinDesk released a document containing Alameda Research's balance sheet that shows how they were overleveraged with FTT, the issued token from FTX. Although the CEO of FTX, SBF, claimed that everything was fine with their exchange, it did not take long to realize that the customer funds in FTX were used to close the hole in the balance sheet as the value of FTT fell. This event created an atmosphere of panic throughout the whole crypto industry. FTX users tried to withdraw their money they held on the exchange, but withdrawals from FTX were halted.
FTX was one of the largest crypto exchanges in existence, and its collapse affected the entire crypto market. Because of this event alone, TVL on all blockchains has dropped by more than $10 billion in less than a week. However, the crypto community is curious about the effects of this event particularly on the Solana ecosystem since FTX and its sister firm, Alameda Research, were one of Solana's earliest backers.
The financial ties of Solana to FTX and Alameda Research date back to August 2020. Six months before Mainnet Beta launch of the blockchain. The total financial transactions between the two parties involved 58,086,686 SOL, which is roughly 11% of Solana's total supply. While the majority of the SOL the foundation sold to the bankrupted parties is not in circulation, it is not yet clear how the unlocked SOL will be distributed following the Chapter 11 bankruptcy proceedings that FTX and Alameda announced on November 11.
Looking at the financial transactions between the two parties from the other side, Solana Foundation disclosed that they were holding approximately $1 million in cash or cash equivalents on FTX, which is quite trivial as it is equivalent to less than one percent of the foundation's reserves.
The facts about the Solana ecosystem related to the bankruptcy of FTX can also be found in the Solana Foundation's fact sheet which was released last week.
To date, Alameda Research maintained a remarkable amount of the liquidity providing and market making activities on some of the major DeFi protocols on Solana. As seen below, their primary farming wallet held hundreds of millions ($) in token balances and yield generating positions.
Along with the latest developments, large outflows began to occur from Alameda’s wallets as the rumours of insolvency started becoming the face of reality. We took to the chain to track their primary wallets.
Alameda’s Recent DeFi Activities
In the past 24 days, Alameda withdrew considerable amounts of liquidity they were providing within DeFi protocols along with other forms of collateral held within them. Among those collaterals, there was 1M USDC, 500k USDH, and 99k FTT withdrawn from Solend at the end of October.
This raises the question of whether these transactions were made in line with incoming the liquidity crisis Alameda was about to experience, or just coincidental movement of funds.
On November 13th, days after the initial 90% drop in FTT value, almost all of the tokens held in Alameda's original wallet were sent to a new wallet after withdrawing nearly all of their DeFi liquidity (~96%).
The transaction history of Alameda's main (known) wallet which is used for yield farming was monitored using Step's Transaction History.
Some of the most notable, large single tx token transfers we found were:
1.3M FTT
3M USDC
224 BTC
876k DAI
This wallet, which once held $500M+ in tokens and DeFi liquidity, now contains ~$13M worth of tokens and staked SOL.
For those looking to do some of their own sleuthing, this Alameda wallet address is: Bz6zbmbZn2ERVsLq4gUCgqLJCTdWYS1iN59EdSbNoPZv.
One theory as to why they moved all their funds to a new wallet, is due to the ‘Scam Alert’ flagging by SolanaFM of their original and well known farming wallet. Another (unlikely) theory is the new wallet is controlled by the Bahamian government.
This new wallet Alameda has sent all liquid funds to is currently holding ~$67M worth of assets, mostly held as spot tokens. The new wallet can be publicly viewed through Step Finance’s dashboard here.
More Possible Contagion Effects
With the collapse of FTX and Alameda, another key issue that took place on Solana is the wrapped assets. There was a considerable amount of Solana-wrapped assets that were backed by FTX and Alameda. Wrapped bitcoin on Sollet (soBTC), which were issued by FTX, depegged significantly, as it was unclear whether the tokens would be redeemable after the incident. At the time of writing, the price of soBTC is 90.4% lower than the price of Bitcoin. This massive drop has also greatly reduced the overall value of locked Sollet-based wrapped assets on Solana, thus eventually becoming one of the reasons behind the decrease in the chain’s TVL.
FTX’s security breach on November 12 is another main event that closely interests the DeFi protocols on Solana. The program update key of Serum, which provides the liquidity infrastructure to most of Solana DeFi protocols, cannot be controlled by the community. The authority to update the contract in Serum DEX is in a private key which is connected to FTX. To prevent this private key from being compromised by the FTX hacker and deploying malevolent code, core developers behind the protocol are working on building a community-led fork to ensure the security of the decentralized liquidity infrastructure. Meanwhile, most of the liquidity providers stopped Serum as a liquidity source due to the security concerns about the update authorities.
Different DeFi protocols on Solana coming up together with security concerns to produce solutions has shown that the solidarity between teams, protocols and the community is still stronger than ever.
What awaits Solana next?
An important fact that stands out between the lines is that the Solana network did not experience any kind of remarkable performance or uptime issues through all this FTX/Alameda turmoil. Aside from any disruption in the network, the network itself and many leading DeFi protocols have passed a challenging stress test last week.
Solana DeFi users did not experience any issues preventing them from completing their transactions. In fact, most of the leading DeFi platforms have multiplied their volumes as they go through this process. Jupiter Exchange, a leading DEX aggregator on Solana, tripled its trading volume during the week that FTX declared bankruptcy. The demand for DeFi always seems to remain, almost in a two steps forward, one step back type of pattern.
It wasn't just users who turned to DeFi in times of crisis. The fact that the developers in the Solana DeFi ecosystem came together and are rushing to save Serum from FTX’s unknown keys shows that the developers concentrate on DeFi instead of moving away. The quick reaction of Solana developers to revolutionize Serum and provide alternative liquidity to decentralized exchanges also demonstrates the abundance of competent developers in the ecosystem.
Many crypto enthusiasts believe the collapse of closed-book CeFi entities like FTX will only accelerate the need for DeFi adoption. Although we have seen a large decrease in TVL on Solana over the past year, the developments are actually in a direction that will increase Solana DeFi's chances of success in the long run. As a single entity's domain in decentralized protocols on a blockchain increases, we see that the features that distinguish DeFi from CeFi fade away. All of the events that led to a decrease in the TVL on Solana mentioned in this episode of Step Data Insights will further contribute to the decentralization of the DeFi on the chain and interconnectedness of the community.
Author: @levvercetti
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