FTX’s Implosion Is Crushing The Solana NFT Ecosystem

What Happened

In response to the FTX insolvency, the crypto markets have been in a risk-off mood, with asset prices falling precipitously for all crypto tokens, fungible and nonfungible.

The aggregate market cap of all crypto currencies fell 23% to $786 billion from $1.02 trillion within four days. Nansen’s NFT-500 index indicates prices of nonfungible tokens (NFTs) on the popular Ethereum prices blockchain fell 14% over the same period. Solana NFTs were hit even harder, with SolanaFloor indicating their aggregate floor value dropped 68% from $424 million to $135 million over the last few days.

Among some of the top Ethereum blue-chip collections, the Bored Ape Yacht Club floor price fell 43% to $60,000, CryptoPunks was off 37% to $69,000 and MoonBirds dropped 51% to $6,800. On Solana, the DeGods floor price fell 66% to $2,700, Solana Monkey Business 68% to $2,000 and y00ts 70% to $840.

Part of the underperformance of Solana NFT collections is due to FTX’s advocacy of the Solana layer-one blockchain. As the exchange’s implosion was taking place, the price of the solana token tanked 68% to $12. Along with the slide in nonfungible tokens, which represent collections of things like artworks that can differ from one another, FTX’s fungible exchange token known as FTT and FTX’s Solana-based decentralized exchange (DEX) Serum are down 89% and 53%, respectively, in recent days.

The saga of FTX’s insolvency is unfolding, but the picture is starting to become clearer. It appears the exchange lent out customer deposits to its sister company Alameda Research, which was a hedge fund that made poor discretionary bets with the assets. Alameda’s collapse triggered FTX’s insolvency, creating a balance sheet hole to the tune of $10 billion and leading FTX to file for bankruptcy-court protection on Friday, Nov. 11.

Broader Context

FTX emerged as a major NFT player. The exchange made strategic investments in leading NFT projects, partnered to support new issuances, and launched its own marketplace.

FTX’s $2 billion venture capital arm, FTX Ventures, invested in notable NFT projects including Yuga Labs, the creator of the Bored Ape Yacht Club. FTX Ventures also participated in Doodles’ recent series A fundraising round in which the maker of pastel profile picture avatars raised $54 million at a $704 million valuation.

Additionally, FTX has been active with primary issuances of new NFT collections. FTX partnered with music festivals Coachella and Tomorrowland to issue NFTs offering unique benefits and experiences for concert-goers. It also allied with notable brands and franchises including the Golden State Warriors, the Washington Wizards and Capitals, Dolphin Entertainment and Mercedes F1to support their collections.

Despite these high-profile partnerships, FTX’s NFT platform was never able to gain traction. Interestingly, since FTX’s solvency came into question in recent days, NFT volume spiked to $13 million. It is possible that this increase was caused by users bypassing FTX’s suspension of fungible token withdrawals by purchasing NFTs and then withdrawing those assets as a way to recapture value from the exchange.

Key Players

FTX – International off-shore crypto exchange with its U.S. arm, FTX.US. FTX is one of the largest global exchanges by trading volume, serving institutional and retail clients

Alameda Research – Hedge fund that conducted trading and market making activity on the FTX exchange

Sam Bankman-Fried (SBF) – Founder and former CEO of FTX and Alameda Research

Key Quote

“As an industry leader, FTX’s reputation holds significant weight in the perception of cryptocurrency among retail users and investors. The FTX collapse has impacted the average consumer who is less embedded in the crypto industry more than any other collapse, since FTX was globally renowned and trusted. The NFT industry will see an increase in intimidation and skepticism among mainstream users in the short term.

The NFT and crypto industry must regain the trust of the world again, which while challenging, will be done through the continued development of NFTs with real-world utility that can solve problems. Given the growing fear of the perceived financial risk of entering the cryptocurrency and NFT space, solutions that provide streams of revenue for creators and companies will be particularly beneficial for moving the industry forward from this crisis.”

• Gökçe Güven, Founder and CEO of Kalder

Key Statistic

Denominated in the solana cryptocurrency, Solana-based marketplaces Magic Eden, OpenSea and Solanart have seen significant increases in NFT trading volume, more than tripling to over 250,000 solana traded daily from about 80,000 just a week ago. As NFT prices slid, this increase in volume suggests holders were rushing for the exits and offloading their NFTs due to the FTX incident.

Outlook and Implications

The fallout may fundamentally alter the value proposition for solana and related projects, especially now that its biggest advocate can no longer support the ecosystem.

FTX and Alameda Research have been intrinsically linked to the solana blockchain since the protocol’s inception in 2020. They have been instrumental in helping solana gain traction and visibility. The solana token is also Alameda’s second-largest holding, representing about 10% of the crypto’s market cap.

The brief threat of a takeover by Binance this week stoked fears among solana investors that Binance CEO Changpeng Zhao, might dump the assets to support his competing blockchain token, BNB, exacerbating the solana sell-off. Ultimately, CZ, as he is known, scrapped the potential acquisition, but solana still appears to be suffering from its association to FTX and Alameda.

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As evidenced by the sell-off, some investors have lost confidence in solana. This may dissuade founders and creators from building new applications and NFT collections on solana, potentially stunting the development of the solana ecosystem.

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Decision Points

We do not yet know the full extent of the damage and the amount of contagion resulting from FTX’s implosion. Investors are encouraged to take custody of their digital assets, including NFTs, withdrawing them from exchanges and other centralized platforms until the dust settles.

The market has entered another risk-off period, and it may take time for the confidence to come back. NFTs are a riskier high beta play on the rest of the crypto market, meaning they magnify the returns to the upside and downside, compared with the major crypto assets such as bitcoin and ether. Thus, investors who are more risk averse may want to avoid purchasing NFTs until the situation is resolved.

Investors seeking to make long-term bets may choose to support other leading layer-one protocols and their burgeoning NFT ecosystems such as ethereum, binance smart chain, polkadot, and avalanche. Due to the uncertainty over solana and solana-based projects, these alternatives may outperform.