The last eighty days have been moderately bearish for cryptocurrencies, with the market capitalization of altcoins down 16%. The downward movement can be explained in part by the quantitative tightening of the US Federal Reserve, the rise in interest rates and the interruption of asset purchases. Although its aim is to curb inflationary pressure, this policy also increases borrowing costs for consumers and businesses.
Solana’s (SOL) drop has been even more brutal, with the altcoin facing a 29% correction since August. The smart contract network focuses on low fees and speed, but frequent outages highlight a centralization issue.
The latest mishap occurred on September 30 after a misconfigured validator stopped transactions on the blockchain network. A duplicate node instance caused the network to fork, as the remaining nodes could not agree on the correct version of the chain.
Solana co-founder Anatoly Yakovenko recently took a chance on Firedancer, a scaling solution developed by Jump Crypto in collaboration with the Solana Foundation. Dubbed as the long-term solution to the problem of network crashes, the mechanism should be ready for testing in the coming months.
On October 11, the Solana-based platform Mango Markets suffered an attack worth more than $115 million. The attacker successfully manipulated the value of native MNGO tokens, taking out “mass loans” from Mango’s treasury.
Solana’s TVL and the number of active addresses decreased
Solana’s main decentralized apps metric started showing weakness in early November of last year. The network’s total value locked (TVL), which measures the number of tokens deposited in its smart contracts, broke to its lowest level since September 2021 at 30.4 million SOL.
There are other factors influencing Solana’s price and TVL decline. To confirm whether the use of DApps has indeed decreased, investors should also look at the number of active addresses within the ecosystem.
Data from October 19 from DappRadar shows that the number of Solana network addresses interacting with decentralized applications decreased in 13 of the top 20 DApps. The lower interest was also reflected in the SOL futures markets.
Fixed-month contracts typically trade at a slight premium to spot markets because investors demand more money to retain settlement. When this indicator fades or turns negative, it is a bearish warning signal indicating a situation known as backwardation.
The chart above shows how Solana futures have been trading at a 7% discount to the current spot price. This data is worrying, as it indicates a lack of interest on the part of leverage buyers.
SOL will continue to underperform until these metrics improve
It’s hard to pinpoint the exact reason for Solana’s price drop, but it’s clear that centralization issues, declining use of network DApps, and fading interest from derivatives traders certainly played a role.
Should sentiment change, there should be an influx of deposits, increasing Solana’s TVL and the number of active addresses. Consequently, the above data suggests that Solana holders should not expect a short-term price rebound as network health metrics remain under pressure.
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