Solana Faces a Rough Week: Can an 80% Inflation Cut Reverse the Decline?

The past week has been difficult for Solana (SOL), with a number of serious setbacks affecting its market performance.

Although there was strong initial optimism about the blockchain’s potential, it has faced a number of challenges lately. From rapidly falling token prices to sharply declining transaction volumes, the past week’s data have shown a very disturbing trend for Solana. It has also had a 4.1% drop in market cap, now valued at $3.9 billion. Overall, the past week’s events have some questioning the solidity of the Solana blockchain.

In February, Solana witnessed an astonishing $485 million in outflows, which signaled that investors were losing confidence in the protocol. Compounding these issues, the volume on decentralized exchanges (DEXs) fell by a huge 26%. Consequently, Solana’s market cap sank to $63.16 billion, and its total value locked (TVL) dropped to $6.63 billion, which was its lowest since November 2022. Finally, the number of active addresses on the network was reduced; it now sits at just 3.8 million.

Considering these disturbing statistics, the Solana ecosystem must now seriously examine its long-term viability. When you look at Solana’s performance this week and compare it to the performance of major competitor blockchains like Ethereum (ETH), what you see is a closely correlated decline. Yet the prevalence of this downturn across the blockchain space only raises sharper concerns about Solana’s alleged ability to be a long-term growth story.

Yet get this: The present inflation rate of 8% could be slashed to 2%—or 80% off the top—if Solana’s team and community voted to accept the proposal on the table. Could such a move serve as a recover key for Solana’s struggling ecosystem? If we accept the prevailing narrative of what ails the Solana ecosystem as our starting point, we have to take the narrative seriously enough to unpack it. Consider this: What if the inflation reduction plan could work? What if it did something moderate and reasonable?

A Brutal Week: Solana’s Declining Metrics

This week, even the most promising blockchain networks can strike volatility. Solana’s markethattan of promising blockchain networks can strike volatility. This week was a stark reminder of that. The price of its native token, SOL, plummeted 8% and brought its value down to $124. The drop was sharper for its market capitalization, which fell close to $63.16 billion. We also saw a hit on Solana’s TIVL. And guys, TIVL is no joke. It’s a serious metric because it is directly tied to the use case of that blockchain. And it reflects the total value of assets locked within its ecosystem. And TIVL took a big hit. It now stands at just about $6.63 billion.

Along with the decreases in price and TVL, Solana’s user activity has plunged. The number of active addresses on the network has fallen to 3.8 million, which is down 12% from Q2 2023. This is demonstrably a lack of engagement with the Solana ecosystem. Furthermore, trading volume on Solana-based DEXs dropped by 26%, falling to $14 billion. This is a reduction that hits right at the Solana ecosystem’s center with Solana-based DEXs taking right at 17% share of the total Solana user activity in Q2 2023.

Cross-Chain Performance: Solana’s Struggles in Context

Even though Solana has not performed well this week, we must acknowledge that it, along with other large blockchains, has not been doing well. Ethereum (ETH) had a comparable 9% drop; Binance Coin (BNB) fared a little better with a 3% loss. However, our pal Solana managed to outshine Bitcoin, which not even the intense spotlight from the White House could save from dropping below 77K before recovering to just above 81K.

Despite the lackluster performance lately, Solana’s application revenue over the last 24 hours still beat Ethereum and TRON combined. This implies that the technology and use cases underpinning Solana remain alluring, even if its token price and other overarching metrics have taken a hit. On Solana, revenue from decentralized applications is healthy. In fact, the platform allows a click-based way of getting to application revenue, suggesting that whatever decentralized applications are doing on Solana, they’re doing vis-à-vis revenue.

Ecosystem Health and Validator Developments

The market downturn has also impacted Solana’s ecosystem, with the ecosystem’s market cap down 5.5% and trading volume off 10%. Noteworthy, some projects within Solana’s ecosystem have taken major hits. For instance, GRASS is down 41%, AI16Z is down 40%, and VIRTUAL is down 34%. These aren’t just random losses, either—they point to some serious market problems for the Solana ecosystem, which is seeing its decentralized exchanges (DEXs) suffer from similar steep volume declines.

Even with these problems, Solana is hard at work finding remedies for its ecosystem that are stabilizing and that will lead to future growth. To find a way to address the inflation and get to a more financially stable network, the validators voted to decrease inflation by as much as 80 percent. This cut, by anyone’s accounting, is significant.

Moreover, a leading Solana validator, Sol Strategies, is gaining three more validators in an operation to further decentralize the network. The plan calls for staking 1.5 million SOL to build even more decentralization (which, as a byproduct, should make the network even more secure and long-term sustainable). Recall that we pointed out in the last newsletter that we didn’t think the network was very secure because the decentralization is still a work in progress, and now we see a clear action under way to improve that.

Will the 80% Inflation Cut Be Enough?

Solana’s proposed inflation cut is a necessary, bold step in the right direction because it tackles head-on one of the key concerns that investors have about the token’s long-term value. Inflation going down, or the prospect of it going down, is something that always creates upward price pressure on an asset because it makes the asset more scarce over time. And that price pressure could become significant if inflation cuts become a trend in the crypto world.

An inflation cut alone may not suffice to reverse the incipient downtrend. Solana must show that it can maintain and grow its ecosystem amid much wider market turmoil. A reduction in inflation could lead to some nice price action, but the real test for Solana will be whether it can reinvigorate its user base and attract new projects that keep healthy on-chain activity.

Conclusion: Navigating Through Tough Times

Solana’s week has been hard, with declines in its token price, TVL, and active user base. The inflation cut proposal is a step in the right direction, but the network has to solve its more general problems if it wants to keep growing in the long term. So, what is Solana doing about all this? Its validators have been working on measures to boost both the security and decentralization of the network, with the aim of making it more resilient to potential future attacks and inflationary pressures.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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