Solana Looks to Bounce Back After Dreadful January

Solana (CCC:SOL-USD) has been one of the most fascinating projects in crypto over the past year. Let me preface that by noting that so much of the cryptocurrency space serves little financial utility.

Macro shot of a physical coin from the cryptocurrency Solana (SOL-USD)
Source: Rcc_Btn / Shutterstock.com

There are meme tokens that don’t have much purpose beyond the pleasure traders get from engaging with the community’s playful content. And a number of more serious crypto projects have struggled to deliver on the development goals laid out in their whitepapers.

Solana, by contrast, is a crypto project that has far exceeded most analysts’ expectations. SOL’s price was still under $2 per coin as recently as the start of 2021. That low price wouldn’t last long, however.

In 2021, Solana blew everyone away with its stunningly fast transaction speeds at rock bottom prices. This allowed Solana to become one of the leading decentralized finance (DeFi) and non-fungible token (NFT)ecosystems in the crypto world virtually overnight. Solana surged thousands of percent and rose to being one of the top ten coins by market capitalization.

More Money, More Problems

Solana has now become something of a victim of its own success. Its network grew so rapidly that it has struggled to keep up. A series of increasingly disruptive network outages have demonstrated this.

Solana had some network outages in late 2021, but programmers were able to clear them up relatively quickly and user funds were safe. The network’s reliability issues are growing, however, as 2021’s outages ended up being a sign of things to come.

In late January, the Solana network failed to operate normally for at least 30 hours in a row. This led to absolute chaos in the Solana community, as users panicked about the safety of their crypto assets. Making matters worse, this occurred during the big crypto crash that brought Bitcoin (CCC:BTC-USD) under $40,000 and Ethereum (CCC:ETH-USD) to less than $2,500.

Freeloaders Are Crippling Solana

This was, in fact, a big part of the problem. Solana’s backers explained that the network failed in large part because of the crypto market volatility.

Traders and computer bots were sending far higher levels of activity and price quotations through the network to engage in price arbitrage.

Because prices were moving so quickly, there were numerous opportunities to pick up bits of “free money” buying assets at one price in one market and immediately reselling them for more on another service.

However, since Solana has such low transaction fees, there was no natural way to limit this sort of opportunistic arbitrage activity. As a result, Solana’s whole network backed up royally, leading the lightning-fast ecosystem to come to a complete and painful halt.

Once again, user funds were safe, but by the time Solana started working again, many crypto assets had fallen in value 10%, 25%, or even more.

It’s fantastic to have speedy transactions at minimal fees. But if the network will crash precisely when the market is most volatile and full of opportunities, traders will struggle to trust it for the most vital transactions.

The Bottom Line

Despite the damage to Solana’s reputation from this latest outage, SOL’s price has held in there. The coin has recently rebounded to around $113, cutting its year-to-date losses significantly.

Sure, some of that comes from the fact that crypto market as a whole is picking back up. The tech sector of the stock market is starting to stabilize a bit after January’s bloodbath. Those positive vibes appear to be spreading to the crypto world as well, which isn’t surprising given the high degree of correlation among those two asset classes lately.

So, it’s possible Solana is just riding that sector-wide recovery. We’ll see what happens to Solana specifically when crypto has another correction.

Still, the broader question remains around network stability. Solana’s team has built something incredible in terms of the utility and transaction speed available on its platform. But can Solana make the system reliable enough to work when traders need it most?

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2022/02/solana-looks-to-bounce-back-after-dreadful-january/.

©2022 InvestorPlace Media, LLC