SOL has soared 4 times this year. Why is the ecosystem not as brilliant as SOL's price?

Solana (SOL) has surged in the past few weeks, putting many investors in a serious state of FOMO. If this doesn’t mark a local top, I don’t know what does (and judging by recent price action, it certainly does).

Regardless, SOL has had an amazing year-to-date performance. As of the time of writing, the price has risen from $10 to $40, trading as high as $47 for a short period of time.

Now, you would think that with SOL’s price soaring, its ecosystem would flourish, right?

Solana TVL and price. Source: DefiLlama

For most of Solana’s history, you’re right. The price of SOL has been in a nearly 1:1 ratio with the Total Value Locked (TVL) on Solana.

However, in the last run, Solana’s TVL only doubled, while its token increased 4x. Here’s a zoomed-in version of the chart, so you can see how much the ecosystem ’s growth lags behind the growth of the SOL price.

Zoomed-in view of Solana TVL and price since the FTX crash. Source: DefiLlama

What gives? Why isn’t the Solana ecosystem alive and kicking in 2023?

The answer is actually pretty simple. It’s not all doom and gloom for the network. A wave of new projects are already injecting new liquidity into the ecosystem and could solve the problems that are holding Solana back.

New achievements of Solana

While Solana hasn’t seen much growth this year, it’s encouraging to see that much of the growth has been driven by new protocols rather than established ones. Of the top ten companies with the highest TVL gainers in the past month, seven were launched in the last year.

The 10 Solana projects with the largest positive changes in TVL month-on-month. Source: DefiLlama

Based on the above categories, it’s clear that these projects are helping to create a diverse ecosystem on Solana, rather than all projects trying to do the same thing.

The most successful by TVL is Jito, a liquid staking provider that offers Maximum Extractable Value (MEV) rewards in addition to staking yields (for a more in-depth explanation of MEV and how Jito earns these rewards, see the Jito documentation here).

Marginfi offers another liquidity staking token (LST) based on jitoSOL (Jito’s LST), as well as lending services focused on risk management.

If you look beyond the top 10 fastest growing protocols, you’ll find many quality projects that excel in their respective fields, such as Phoenix and Jupiter, two decentralized exchanges.

Phoenix (a project from Ellipsis Labs) is a fully on-chain limit order book that appears to be filling the gap left by Serum and acting as a liquidity hub for the entire Solana ecosystem. Jupiter is an exchange and bridge aggregator that just launched a perpetual protocol on top of it.

There are many other types of projects out there. Tensor is Solana’s answer to Blur, a marketplace for NFT traders. Finally, Squads is the multi-signature protocol used by most Solana projects, with over $500 million in funding.

Do you know what these agreements have in common?

No one has a token. At least not yet.

This is why Solana’s TVL has been lagging despite its token price surging. Previously, most of the tokens locked on Solana were either SOL or altcoins related to it. Despite the success of these protocols this year, they have limited the growth of the ecosystem because they are reluctant to launch their own tokens.

Why is this happening?

Let's look back at the past.

Why is Solana so shunning tokens?

In 2021, SBF remains the prodigy that can do no wrong, while FTX is on its way to becoming a crypto super app.

The blockchain chosen by SBF was none other than Solana, where he deployed a large amount of (misappropriated) funds.

Solana was pretty barren before SBF got interested, whereas FTX/Alameda supported many projects in the ecosystem, especially in the early days.

However, their support comes at a price. Not only do they provide a fairly high token supply for themselves and other insiders, but they also determine the token economics of each project. They all have the same blueprint.

This blueprint and its predatory nature has been discussed in detail and can be viewed here.

In short, these projects will launch with a low initial circulation (aka a small number of tradable tokens). Since the circulation is low, these tokens are mainly traded on FTX, so it is easy for Alameda to manipulate them and keep the price high…

…if all tokens were unlocked, the price would have a very high valuation — but that’s not the case. Most of the token supply for these projects is locked up for years.

For example, compare the circulating supply (tokens that are now tradable) to the total supply of one of the earliest “Sam coins,” Bonfida (FIDA). That token is three years old and only 10% of the total supply has been unlocked.

Source: CoinMarketCap

Of course, this hasn’t stopped FTX/Alameda from evaluating these projects as if all tokens were unlocked.

FTX/Alameda would then use the tokens they controlled (which, surprisingly, always went to insiders) as collateral. They would stuff unsuspecting lenders with overpriced tokens that were effectively worthless and receive USD in return.

When FTX went bankrupt, the whole thing came to an end. These tokens are now trading at a fraction of what they were before.

In May and October 2021, Serum was trading at $120 billion on a fully diluted value (FDV), which is what the project would be worth if all of its tokens were in circulation. Now, it’s trading at $40 million, a 99.97% drop.

Fully diluted valuation (FDV) of Serum (SRM), Bonfida (FIDA), Maps.me (MAPS), and Oxygen (OXY). Data source: Coingecko

But it wasn’t just SAM that suffered. When FTX/Alameda went bust, the entire Solana ecosystem was severely hurt, and the prices of most tokens barely recovered.

Fully diluted valuations (FDV) of Star Atlas (ATLAS), Raydium (RAY), Orca (ORCA), and Marinade (MNDE). Data source: Coingecko

This all left a bad taste in the mouth of Solana developers, who are now shying away from the token altogether.

But here’s the thing: tokens are not the bad guys.

Make Tokens Great Again

If done correctly, tokens can be extremely useful and enrich founders, investors, and users. They can also drive growth for the entire ecosystem.

Just look at Ethereum and ETH, which started the entire token economy and funded the development of the Ethereum ecosystem.

The incentives are clear. Most of the Solana projects I mentioned above will launch tokens. This is good for Solana as a whole.

In fact, I’ve lied about this before. One of these projects, Jupiter, just announced a token last week at the Solana Breakpoint conference in Amsterdam. Another project, Pyth (the main oracle on Solana), also recently announced that it would launch a token.

Guess what? They are all conducting airdrops and allocating a large portion of their tokens to past users.

Yes, if you’ve been using these protocols, you might find a bunch of tokens waiting for you one day. If not, it might be time to dust off your old Solana wallet and try these protocols. Organically, of course, and from just one wallet.

But let’s not forget the lessons of the past. The goal of protocols should be to launch sustainable tokens, not just any tokens.

Sustainable token design will involve fair distribution, reasonable supply, and clear use cases. It’s not just about creating a token; it’s about creating a token that adds value to the ecosystem.

The blueprint for good token design has yet to be created, but we do know a thing or two. First, forget the high FDV, low float scam blueprint from FTX.

If you don’t want to share revenue with token holders because of (reasonable) fears of being labeled a security, try to find other ways that the token can be useful in the protocol economy. But try to leave the door open to being able to return revenue to token holders in the future, and we’ll likely get regulatory clarity sooner rather than later, as the winds of change are blowing.

So to all of the Solana protocol: let’s make tokens great again. Let’s create tokens that are not just about getting quick cash, but contribute to the growth and sustainability of the ecosystem.