FTX’s implosion shatters the Solana NFT ecosystem

What happened

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

The combined market capitalization of all cryptocurrencies fell 23% to $786 billion from $1.02 trillion within four days. Nansen’s NFT-500 index indicates that the prices of non-fungible tokens (NFTs) on the popular Ethereum blockchain fell by 14% during the same period. Solana NFTs were hit even harder, with SolanaFloor stating that their combined floor value fell 68% from $424 million to $135 million in the past few days.

Among some of the top Ethereum blue-chip collections, Bored Ape Yacht Club’s floor price fell 43% to $60,000, CryptoPunks was down 37% to $69,000, and MoonBirds was down 51% to $6,800. On Solana, DeGod’s 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. When the exchange implosion took place, the price of the solana token dropped 68% to $12. Along with the slide of non-fungible tokens, which represent collections of things like works of art that can differ from each other, FTX’s fungible exchange tokens, known as FTT and FTX’s Solana-based decentralized exchange (DEX), have declined by 89% and 53%, respectively, in recent times.

The saga of FTX’s insolvency is unfolding, but the picture is becoming clearer. It appears that the exchange lent customer deposits to its sister company Alameda Research, which was a hedge fund that made bad discretionary bets with the assets. Alameda’s collapse triggered FTX’s insolvency, creating a $10 billion balance sheet hole and prompting 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, collaborated to support new issues and launched its own marketplace.

FTX’s $2 billion venture capital arm, FTX Ventures, invested in notable NFT projects including Yuga Labs, creator of Bored Ape Yacht Club. FTX Ventures also participated in Doodle’s 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 releases of new NFT collections. FTX partnered with music festivals Coachella and Tomorrowland to issue NFTs that offer unique perks and experiences for concertgoers. It also allied with notable brands and franchises including the Golden State Warriors, Washington Wizards and Capitals, Dolphin Entertainment and Mercedes F1 to support their collections.

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

Key player

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

Alameda Research – Hedge fund that engaged in 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 carries a lot of weight in the perception of cryptocurrency among retail users and investors. The FTX collapse has affected the average consumer who is less embedded in the crypto industry more than any other collapse, as FTX was globally known and trusted. The NFT industry will see an increase in threat and skepticism among mainstream users in the short term.

The NFT and crypto industry needs to regain the world’s trust again, which although challenging, will happen through the continued development of NFTs with real tools that can solve problems. Given the growing fear of the perceived financial risk of entering the cryptocurrency and NFT space, solutions that provide revenue streams for creators and businesses will be particularly beneficial in moving the industry forward from this crisis.”

• Gökçe Güven, founder and CEO of Kalder

Key statistics

The Solana-based marketplaces Magic Eden, OpenSea and Solanart, denominated in the cryptocurrency solana, have seen significant increases in NFT trading volume, more than tripling to over 250,000 solanas traded daily from around 80,000 just a week ago. As NFT prices fell, this increase in volume suggests that holders rushed for the exits and unloaded their NFTs due to the FTX incident.

Outlook and consequences

The fallout could fundamentally change the value proposition of solar and related projects, especially now that its biggest proponents 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 around 10% of the crypto’s market cap.

The brief threat of a Binance takeover this week raised fears among solana investors that Binance CEO Changpeng Zhao could dump the assets to support his rival blockchain token, BNB, further exacerbating solana sales. In the end, CZ, as he is known, scrapped the potential acquisition, but Solana still seems to suffer from its connection to FTX and Alameda.

As evidenced by the sale, some investors have lost confidence in solana. This may discourage founders and creators from building new applications and NFT collections on solana, potentially inhibiting the development of the solana ecosystem.

Decision points

We do not yet know the full extent of the damage and amount of contagion as a result of FTX’s implosion. Investors are encouraged to take care of their digital assets, including NFTs, and withdraw 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 confidence to return. NFTs are a riskier beta play in the rest of the crypto market, meaning they magnify returns to the upside and downside, compared to the major crypto assets like bitcoin and ether. Thus, investors who are more risk averse may want to avoid buying NFTs until the situation is resolved.

Investors looking to make long-term bets can choose to support other leading layer-one protocols and their growing NFT ecosystems such as ethereum, binance smart chain, polkadot and avalanche. Because of the uncertainty surrounding solana and solana-based projects, these options may outperform.