Solana needs to change – hack just the latest hit to ecosystem

I got a message from my colleague this afternoon which I thought summed up quite how torrid a time it has been for Solana recently.

I have lost faith in it personally, I’m sure gains can be made, but I’m thinking it’s just been p*ss poor for too long now

Michael Charalambous, Invezz

This week brought the latest hit to the ecosystem, with news that over 7000 wallets on the Solana ecosystem had been exploited. NFT marketplace Magic Eden noted that there “seems to be a widespread SOL exploit at play”, and at the time of writing the number of wallets and customers affected still seems to be growing.

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While it is too early to know what the total amount of assets lost will be, or the root cause, the Solana price continues to tumble. At the time of writing SOL is trading around the $40 mark, down over 85% from the all-time highs of last November. In short, 2022 has been brutal.

Of course, the macro climate has been abhorrent during this period and markets are down across the board, but Solana’s crash has gone beyond what most coins have seen. This was a crypto that previously nestled comfortably in the #3 spot in terms of market cap, supposedly a legitimate challenger to the DeFi throne occupied so dominantly by Ethereum.

However, problems have besieged the Layer 1 this year and now Solana is barely clinging to a top 10 spot.

Outages

Solana suffered six outages lasting longer than eight hours in January alone. The downtime continued through 2022 – a particularly notable one on July 1^st – and again the network even went down during this hack exploit over the last 24 hours.

It’s obvious, but just for the avoidance of doubt, a blockchain is not a viable alternative to anything if it is prone to shutting down for half a day. What would you say if your bank suddenly turned off your access to cash? Most worryingly, these outages often happen amid times of high volatility, meaning customers can be forced into holding their funds.

While the developers made some technical adjustments to address this – the success of which is still too early to judge – this kicked off a wave of bad sentiment against Solana, and the outages just…kept on coming.

Hack

The hack is a different genre altogether. And it is concerning because it is not linked to one wallet. While it’s currently unclear what has caused this – it will become evident in time – the fact this is across the ecosystem is worrisome. It appears from looking on-chain that the hacker has now made off with over $5.2 million in funds. This is spread across the Solana token itself, a variety of NFTs and a whole bunch of Solana-based tokens (now over 300).

The wallets targeted were hot wallets, meaning wallets connected to the Internet, essentially – as always, offline wallets are not susceptible. But like I said, it’s both rare and jarring that this is across a variety of wallets – there are reports of Phantom, Trust Wallet, Slope and other hot wallets being exploited.

Way Forward

I expect to write more on this once additional information becomes clear. But what is already not up for debate is how damaging a year this has been for Solana, as analysed above. It is difficult to say where it goes from here.

I believe there is a good product here and the network effects are significant. However, if the move to fee-based transaction priority does not prevent outages from occurring, Solana will be little more than a fun game to play around with on the side. As for hacks, these simply cannot occur – while the money is not a lot by some of the other standards, a Layer 1 blockchain cannot be associated with security breaches if it expects to progress and gain the trust of users, who are meant to (ironically) be pursuing self-sovereignty with their finances.

Solana needs a massive re-think. While it may turn out that certain wallets were to blame here – although the fact is multiple appears unlikely – Solana can’t keep taking hits in the court of public opinion.

Even the co-founder, Anatoly Yakovenko, did not appear overly confident while offering his theory.

Another quirk here is the silence of staunch Solana advocate and FTX leader Sam Bankman-Fried, who has yet to comment on the hack.

Notoriously active on Twitter, he has waded into such matters in the past. Perhaps this is a by-product of the fact there is still so much uncertainty around what has actually caused this hack, but I nonetheless thought it was worth mentioning.

Conclusion

The bull market hysteria is gone. Bear markets cause two things historically in crypto land. Firstly, they crush flawed projects, cash grabs and protocols without a clear roadmap. Secondly, they are the time to build, with many of the current top protocols amassing strong infrastructure during the last bear market – before the macro climate facilitated large run-ups, capital injections and immense growth.

Solana needs to get its head down if it still intends to be in the latter category, otherwise more and more people will feel like my colleague above.

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