What causes SOL to drop more than 60%?

The crypto market has not performed well over the past few months. The sector’s total market cap has fallen 50% from its Nov. 10 peak of $2.87 trillion to currently $1.83 trillion. The SOL plunge is even more brutal and is now trading at $102 after a 61% correction from its all-time high of $260.

Attributing the poor performance to just the recent network outage is too easy and doesn’t explain the coin’s accelerated decoupling from the market over the past week, so let’s see if there are other causes.

SOL/USDT (in blue) and Total crypto cap (orange) | Source: TradingView

Solana Network experienced 4 crashes in just a few months.

According to the project’s developers, the increase in the number of computing transactions has caused network congestion and paralyzed the system.

Interestingly, the network is struggling with congestion as developers tout a capacity of 50,000 transactions per second (TPS). The most recent incident on 1.7. has been attributed to a distributed DDoS attack, but the data tells us that cyberattacks are less involved than using DApps (decentralized applications).

Cyber ​​Capital’s Chief Investment Officer Justin Bons has criticize Network security, mentioning that DDoS can be used to “temporarily gain proportional control over the network by attacking other stakeholders”.

EXMO UK exchange operator Sergey Zhdanov also said that DDoS attacks and similar outages “do not really affect the reliability of the network” and should not be a cause for concern. Zhdanov sees this as a similar difficulty to the Ethereum network, which has an additional $50 fee but isn’t significant enough to make investors abandon it in search of a better platform.

Solana’s main index of decentralized applications began to falter in early November after the network’s total value (TVL – a measure of the amount deposited into smart contracts) began to fluctuate around $15 billion.

Overall value bag imprison to enter Solana network (U.S. dollar) | Source: Defillama

Note that Solana’s DApp deposits are down 44% in 3 months as the index hit its lowest level since September 8th. For comparison, Fantom’s TVL is now $9.5 billion, up 79% in 3 months. Another viable DApp scaling competitor is Terra (LUNA), whose TVL is up 60% to $16 billion.

Even the $10 million that Solana raised through decentralized finance app Hubble Protocol in early January wasn’t enough to restore investor confidence. Three Arrows, Digital Currency Group, Delphi Digital, and Crypto.com Capital are crypto heavyweights that have backed the launch of this crypto-based stablecoin and interest-free lending platform.

TVL and number of active addresses reduced

The locked total is no longer a key indicator of strong fundamentals, meaning the 66% correction was influenced by factors other than just the falling TVL. To confirm whether DApp usage has declined, investors should also analyze the number of active addresses in the ecosystem.

Data in the chain 30 days DApp Solana | Source: DappRadar

As data from DappRadar shows, the number of Solana network addresses interacting with most decentralized applications fell 18% to 32% on Jan. 28, excluding Magic Eden’s non-fungible token market.

Lower interest in the Solana DApp is also reflected in Open Interest (OI) futures, which peaked at $2 billion on Nov. 6 but recently faced a sharp correction.

BILLIONSolana Futures OI Synthesis | Source: coin jar

The chart above shows that derivative trader interest in Solana has fallen by 75% in less than 3 months. This is of particular concern as a reduced number of futures contracts could reduce the activity of arbitrage desks and market makers. For example, participants often self-limit their exposure to 20% of the volume of assets or open interest.

Derived data can be an effect but not a cause

It may be impossible to establish a causal link between the falling SOL price, lower DApp usage and waning interest from derivatives traders. However, there are no signs that the price will recover any time soon.

Based on the data, Solana holders should worry less about temporary outages and focus on leveraging the ecosystem instead of competing chains. As long as the ecosystem remains healthy, investors have no reason to lose confidence due to a temporary grid outage.

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