Solana (CCC:SOL-USD) crypto has emerged as a viable alternative to Ethereum (CCC:ETH-USD), or so it seemed. The price of the cryptocurrency skyrocketed from July 31 at $34.25 per token to a peak of $191.04 as of September 7. Since then SOL-USD has drifted down to $144.06 as of September 17.
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Three days ago on September 14, the whole blockchain came crashing down. News seeped out that the Solana blockchain had been down for hours due to “resource exhaustion,” according to Decrypt.
The online magazine received an explanation from Solana Labs’ CEO, the private company that develops the Solana crypto blockchain. He said that the downtime was due to a “flood of transactions from bots on DeFi protocol Raydium.”
Why The System Was Down
The CEO later explained on Twitter (NASDAQ:TWTR) that the downtime was due to a new token offering called an IDO (Initial Decentralized Offering). This is similar to an ICO (Initial Coin Offering) in that it is a public token sale. But the difference is that “it happens on a decentralized, peer-to-peer exchange, rather than a centralized platform.”
The IDO that caused the crash was Raydium (CCC:RAY-USD), which is a Solana-based crypto ranked #106 by Coinmarketcap.com. Decrypt says that Raydium’s decentralized exchange is “akin to decentralized exchanges like Uniswap (CCC:UNI-USD) on Ethereum.”
These two exchanges are smaller market cap cryptos. For example, Raydium now has a market value of $7.11 billion as of Sept. 16, according to Coinmarketcap.com. In addition, Uniswap now has a market cap of $26 billion. Solana has a $42.6 billion market cap.
According to a tweet from Solana Labs CEO Anatoly Yakovenko, they were working on fixing the bugs to allow these kinds of IDOs to happen in the future.
According to BusinessInsider.com Solana was up and running a day later after the crash. The blockchain was apparently running approximately 400,000 transactions a second before it crashed. That is a huge volume and highlights the growing pains that Solana is experiencing.
The Effect of The Crash
This could have a detrimental effect on the cryptocurrency’s reputation to say the least, especially for institutional investors. If they were considering writing blockchain smart contracts in Solana they might not have the same qualms.
The problem is that Solana now has a $42.6 billion market value. Nothing like this has occurred before with such a large cryptocurrency. As Cryptoslate magazine pointed out this “caused a stir in the crypto market, with many worrying about the implications of having a $47 billion market cap network stop working for hours.”
The online crypto magazine quoted one observer as saying there was a high chance for large price deviations. “This could lead to a significant reduction in the overall liquidity on the network.”
However, the author of the article indicated that many arbitrage opportunities that occurred by buying Solana in other crypto exchanges were likely cleared by the end of the day.
Where This Leaves Solana Crypto
Investors might want to tread cautiously with this cryptocurrency, despite its huge popularity. If another crash occurs, investors may abandon ship.
For example, the Financial Times recently wrote about the Pyth network, a new data project built on the Solana blockchain. It is backed by a number of institutional investors and is considered a “potential game-changer” for institutional stock trading.
However, the main reason that Pyth was built on the Solana blockchain software platform was that Solana is supposed to be able to handle 50,000 transactions per second. This puts it on par with the VISA network and the NASDAQ stock exchange.
So, you can see that the crash on September 14 might have had a crippling effect on the establishment of these kinds of Defi (decentralized finance) programs on Solana. After all, Solana is trying to become the new Ethereum with its faster speeds and lower costs as I wrote about in June.
So, hopefully, this was a one-time event that will not be repeated. Investors might want to tread cautiously with Solana for the time being until it is clear that Solana can handle huge bursts of activity. On the other hand, it could be a good entry point for enterprising investors willing to take on extra risk.
On the date of publication, Mark R. Hake held a long position in Ethereum but not in any other security (directly or indirectly) mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.