Why has SOL increased fourfold in a year, but the Solana ecosystem is still lagging behind?

Original Title: SOL Is Having a Great Year, But Solana Is Still Struggling

Original Author: Kodi

Original Compilation: 深潮 TechFlow

Solana (SOL) has surged in the past few weeks, causing many investors to feel strong FOMO. Even Arthur Hayes and Raoul Pal have joined in. If this doesn't mark a local peak, then I don't know what else could (based on recent price movements, it indeed marks a local peak).

Anyway, as of now, SOL's performance this year has been remarkable. It has risen from $10 to $40, and even peaked at $47 for a short time.

Bear market? Never heard of it.

So, you might think that with SOL's price skyrocketing, its ecosystem would be thriving, right? Well, you would be wrong.

For most of Solana's history, the price of SOL has almost corresponded 1:1 with the total value locked (TVL) on Solana.

However, during this recent surge, Solana's TVL has only doubled, while its token has increased fourfold. Here’s an enlarged version of the chart so you can appreciate how far behind the ecosystem's growth is compared to SOL's price.

What’s the reason? Why hasn’t Solana's ecosystem become active in 2023?

The answer is quite simple. It’s not all doom and gloom for the network. A new batch of projects is injecting fresh liquidity into the ecosystem and can address the issues hindering Solana's growth.

New Achievements of Solana

While Solana's growth this year has been modest, it is encouraging that most of the growth comes from new protocols rather than established ones. In the past month, seven of the top ten TVL gainers were launched within the last year.

According to the classification above, it is clear that these projects help create a diverse ecosystem on Solana rather than all trying to do the same thing.

Based on TVL, the most successful project is Jito, which is a liquid staking provider offering liquid staking and MEV rewards.

Marginfi provides another liquid staking token (LST) based on jitoSOL (Jito's LST), along with a lending service focused on risk management.

Among the projects that are not in the top ten, there are also several high performers.

Phoenix (a project from Ellipsis Labs) is a fully on-chain limit order book that seems to want to fill the gap left by Serum, becoming the liquidity hub for the entire Solana ecosystem. Jupiter is a swap and cross-chain bridge aggregator that just launched a perpetual protocol on its platform (I don’t want to brag too much about Jupiter, but at least for now, it’s my only choice when swapping on Solana. The product is excellent).

There are many other types of projects as well. Tensor is Solana's response to Blur, a marketplace for NFT traders. Finally, Squads is a multi-signature protocol that most Solana projects are using, protecting over $500 million in funds.

Do you know what these protocols have in common?

They all don’t have tokens yet. At least not for now.

This is why, despite the soaring price of the SOL token, Solana's TVL remains lagging. Before this, most of the tokens locked on Solana were either SOL or related altcoins. But despite the success of these protocols this year, their reluctance to launch their own tokens has limited the ecosystem's growth.

Why is that?

Let’s take a look back at the past.

Why Is Solana So Cautious About Tokens?

It’s now 2021, and SBF is still the genius who can do no wrong, while FTX is becoming the super app of crypto.

The blockchain SBF chose was Solana, where he deployed a significant amount of capital.

Before SBF took an interest, Solana was quite desolate, and FTX/Alameda supported many projects in the ecosystem, especially in the early days.

However, their support came at a cost. They not only allocated a significant token supply for themselves and other insiders but also dictated the tokenomics rules for each project. And they all followed the same blueprint.

This blueprint and its predatory nature have been widely discussed. In short, these projects would launch with low initial circulation (i.e., a small number of tradable tokens). Due to the low circulation, these tokens primarily traded on FTX, making them easy for Alameda to manipulate and keep their prices high…

…If all tokens were unlocked, these tokens would command very high valuations—but they weren’t unlocked. The majority of the token supply for these projects would be locked for years.

For example, comparing the circulating supply of Bonfida (FIDA) (i.e., the tokens currently tradable) with its total supply, it is one of the earliest "Sam tokens." It has been three years since the token was released, and only 10% of the total supply has been unlocked.

Of course, this didn’t stop FTX/Alameda from treating these projects as if they had much higher valuations, as if all tokens were unlocked.

FTX/Alameda subsequently used the tokens they controlled (surprisingly, most tokens were always distributed to insiders) as collateral. They would shove high-value tokens to unsuspecting borrowers, which were essentially worthless, and then obtain dollars.

After FTX's bankruptcy, the entire scheme collapsed. The trading price of these tokens is now just a fraction of what it once was.

In May 2021 and October 2021, Serum's fully diluted valuation (FDV) traded at $120 billion, which was the project's value if all tokens were in circulation. Now, its market cap is $40 million. Even by cryptocurrency standards, this is an impressive decline.

But it wasn’t just the "Sam tokens" that were hit hard. When FTX/Alameda collapsed, the prices of most tokens in the Solana ecosystem barely recovered.

All of this left Solana's developers disillusioned with tokens.

But the fact is: tokens are not the bad guys.

Make Tokens Great Again

If used properly, tokens can be very useful; they can provide profits for founders, investors, and users, and also facilitate the growth of the entire ecosystem.

Just look at Ethereum and ETH, which have launched an entire token economy that funds the development of the Ethereum ecosystem.

The incentives are clear. Most of the Solana projects I mentioned above will launch tokens. This will be beneficial for the entire Solana ecosystem.

In fact, I may have lied a bit earlier. One of the projects, Jupiter, just announced a token at last week’s Solana Breakpoint conference. Another project, Pyth (the main oracle on Solana), also recently announced it will launch a token.

Guess what? They are both conducting airdrops and allocating most of the tokens to past users.

Yes, if you have been using these protocols, one day you might find a bunch of tokens waiting for you. If not, then it might be time to reactivate your Solana wallet and try out these protocols. Of course, everything should happen naturally, using just one wallet.

But let’s not forget the lessons of the past. Protocols should strive to launch sustainable tokens, not just any tokens.

A sustainable token design should include fair distribution, reasonable supply, and clear use cases. It’s not just about creating tokens, but creating tokens that are valuable to the ecosystem.

The blueprint for good token design has yet to be written, but we know some things. First, forget the FTX high FDV, low circulation scam.

If you are reluctant to share profits with token holders due to (justifiable) concerns, try to find other useful ways for tokens within the protocol economy. But leave a pathway open for potential regulatory clarity in the future.

So, for all Solana protocols: make tokens great again. Let’s create more tokens that contribute to the growth and sustainability of the ecosystem, rather than just quick cash grabs.