SOL lost? Ongoing challenges continue to impact the Solana price

The last thirty days have been an extremely bearish period for cryptocurrencies. The sector’s aggregate market cap plunged 33% to $1.31 trillion, and Solana’s (SOL) decline was even more brutal. Currently, SOL has seen a 50% correction and is trading at $51.

Solana/USD price at Coinbase (blue) vs altcoin cap (orange). Source: TradingView

The network aims to overcome the Ethereum blockchain’s scalability problem by integrating a Proof-of-History (PoH) mechanism into a Proof-of-Stake (PoS) blockchain. With PoH, Solana delegates a central node to determine a transaction time that the entire network can agree on.

The Solana network’s low fees have lured developers and users alike, but the frequent network outages continue to cast doubt on the centralization issue and have likely turned off some investors.

Attributing the underperformance solely to 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 problem was caused by bots initiating numerous transactions on Metaplex, a non-fungible token (NFT) marketplace built on Solana.

Transaction volume exceeded six million per second during its peak, congesting individual nodes and as a result running out of data store validators, leading to a loss of consensus and a network disruption.

To mitigate the problem, the developers introduced three steps: a data transfer protocol change, usage-weighted transaction processing, and “fee-based execution priority.”

TVL and the number of active addresses decreased

Solana’s key metric for decentralized applications showed weakness in early November after the network’s Total Value Locked (TVL), which measures the amount deposited into its smart contracts, repeatedly failed to sustain levels above 60 million SOL.

Solana Network Total Value Locked, SOL. Source: Defi Llama

However, the 50% price correction has other factors than just a reduced TVL. To confirm whether DApp usage has effectively declined, investors should also analyze the number of active addresses within the ecosystem.

Solana dApps 7-day on-chain data. Source: DappRadar

Data from DappRadar as of May 18 shows that the number of Solana network addresses interacting with the top 7 decentralized applications has fallen, with the exception of DEX exchange Orca. Reduced interest in Solana DApps was also reflected in SOL’s futures markets.

Solana futures aggregate open interest. Source: coin jar

The chart above shows how Solana futures open interest is down 22% over the past month to its current $510 million. This is of particular concern as a reduced number of futures contracts could reduce the activity of arbitrage desks and market makers.

SOL will likely experience more pain

It’s probably impossible to pinpoint the exact reason behind Solana’s price drop, but centralization issues following multiple network outages, a drop in network DApps usage, and waning interest from derivatives traders are three factors contributing to the decline.

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

Should sentiment start to improve, deposits should start flowing in, increasing Solana’s TVL and number of active addresses. As long as these indicators continue to deteriorate, there is no way to predict a price bottom for SOL.

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