Ongoing Challenges Continue to Impact Solana Price

Ongoing Challenges Continue to Impact Solana Price

The past thirty days have been extremely bearish for cryptocurrencies. The industry’s total market capitalization fell 33% to $1.31 trillion, with Solana (SOL) seeing an even steeper drop. Currently, SOL has corrected 50% and is trading at $51.

Solana/USD price on Coinbase (blue) versus altcoin capitals (orange). Source: TradingView

The network aims to overcome the scalability issues of the Ethereum blockchain by integrating the Proof of History (PoH) mechanism into the Proof of Stake (PoS) blockchain. With PoH, Solana delegates a central node to determine when the entire network can negotiate transactions.

The low fees offered by the Solana network have attracted developers and users, but frequent network outages continue to cast doubt on centralization issues and may spook some investors.

Blaming the poor performance solely on the 7-hour network outage on April 30 seems oversimplified and doesn’t explain why the decoupling started a month earlier. According to Solana Labs, the issue was caused by a flood of transactions initiated by bots on Metaplex, a Solana-based marketplace for non-fungible tokens (NFTs).

Transaction volumes exceeded 6 million transactions per second at peak, causing a single node to overflow, and as a result validators ran out of data memory, causing consensus loss and network outages.

To alleviate this problem, the developers introduced three steps: changing the data transfer protocol, sharing weighted transaction processing, and “fee-based execution prioritization.”

TVL and discarded active addresses

Solana’s top dapp metrics started showing weakness in early November, as the network’s total value locked (TVL), which measures the amount of deposits in its smart contracts, has repeatedly failed to stay above 60 million sols.

The total amount blocked on the Solana network in SOL. Source: Defi Llama

However, the 50% price adjustment has other factors besides lower TVL. To confirm that DApp usage has actually dropped, investors should also look at the number of active addresses in the ecosystem.

7-day on-chain data from Solana dApps.Source: Dapp Radar

Data from DappRadar as of May 18 shows that, with the exception of DEX exchange Orca, the number of Solana network addresses interacting with the top 7 decentralized applications has declined. Declining interest in Solana DApps is also reflected in the SOL futures market.

Aggregate open interest in Solana futures. Source: Coinglass

The chart above shows how open interest in Solana futures fell 22% last month to a current level of $510 million. This is especially worrying because fewer futures contracts reduce the activity of arbitrage tables and market makers.

SOL may feel more painful

It may not be possible to pinpoint the exact reason for Solana’s price drop, but centralization issues following multiple network outages, reduced DApp usage on the network, and waning interest from derivatives traders are three factors that contributed to the price drop.

The data reviewed in this article suggests that Solana holders should not expect prices to rise anytime soon as network health metrics remain under pressure. There is no doubt that Solana Labs has been working to reduce its reliance on network validators, but at the same time, investors want to avoid centralized projects.

If sentiment starts to improve, there should be an inflow of deposits, increasing Solana’s TVL and the number of active addresses. As long as these indicators continue to deteriorate, a price bottom for SOL cannot be predicted.

The views and opinions expressed here are solely those of author Does not necessarily reflect Cointelegraph’s views. Every investment and trading action involves risk. You should do your own research when making a decision.

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