Layer by Layer: Solana Ecosystem Contends with FTX Fallout

The crypto industry is reeling after the shocking collapse of FTX, one of the largest and most trusted exchanges in the space, up until rumors of its insolvency and impropriety with customer funds became substantiated throughout the week beginning November 7th. Anxiety soon turned to panic as countless users, including institutional funds, were suddenly unable to withdraw their capital after FTX withdrawals were paused on November 8th. Market volatility continued to spike in the ensuing days as news spread of Binance’s renouncement of a verbal agreement to acquire FTX just one day prior and FTX’s eventual declaration of bankruptcy on November 11th. 

Aside from the scores of depositors directly impacted by the complete loss of their funds on FTX, one of the largest victims of the FTX fallout was the Solana ecosystem, along with its many stakeholders, users, developers, and enterprises. Crypto trading firm Alameda Research’s early involvement in funding the development of Solana and a host of projects built upon the Layer 1 (L1) network led to heightened concerns over second-order effects on liquidity, asset-backing, and the overall health of the ecosystem long term. Alameda’s prolific market-making and borrowing/lending activities throughout DeFi protocols on Solana contributed to these perceived risks, and the situation was only made worse by new revelations confirming what some in the industry had long suspected - that FTX had been lending user deposits to Alameda to cover liabilities.