Solana Faces Challenges as TVL Drops and Memecoin Interest Declines

Solana Faces Challenges as TVL Drops and Memecoin Interest Declines

Summary: Solana's native cryptocurrency, SOL, has struggled to maintain price levels above $145 for a month, largely due to a decrease in network activity and a fading demand for decentralized applications. The total value locked (TVL) on Solana has dropped significantly from its September peak, reflecting a broader trend of declining interest in the Solana ecosystem and decentralized exchanges.

Key Takeaways:

SOL funding rates indicate a lack of bullish sentiment after a 46% price decline, despite the launch of Firedancer and the increase in Solana network transactions.
Revenue from Solana DApps and decentralized exchanges (DEX) has decreased notably, signaling market fatigue as the ecosystem continues to evolve.

Solana's native token, SOL, has struggled to stay above $145 over the past month. A slowdown in network activity tied to decreased interest in decentralized applications has negatively influenced SOL’s forecast. The total value locked (TVL) in Solana has fallen more than $10 billion from its peak in September, showcasing a rapid cooling of user activity.

Solana TVL vs. 7-day DApp revenues Solana TVL (left) vs. 7-day DApp revenues (right), USD. Source: DefiLlama

The TVL on Solana has been on a downward trend since reaching its all-time high of $15 billion in September. A decline in smart contract deposits is increasing the available supply of SOL for sale. Recently, revenues generated from Solana’s DApps plummeted to $26 million per week, a sharp decrease from $37 million just two months prior.

Additionally, traders are showing less enthusiasm for memecoins following a significant flash crash in the cryptocurrency market on October 10, which highlighted vulnerabilities in leveraged positions and the overall liquidity of smaller altcoins. As a result, traders are hesitating to participate in decentralized exchanges after a substantial $19 billion liquidation event.

Memecoin market capitalization, USD. Source: TradingView

Memecoins had significantly boosted activity within SOL, particularly following the launch of Official Trump in January, which saw DEX volumes on Solana hit $313.3 billion. However, according to DefiLlama data, this volume has since dropped by 67%, contributing to the dwindling revenue trends among Solana's DApps.

Despite these challenges, the decline in interest for blockchain applications may mirror a broader market slowdown rather than indicating problems unique to Solana.

Blockchains ranked by 30-day network fees. Source: Nansen

Solana's network fees fell by 21% over the past month, although competing blockchains experienced more significant declines. For instance, fees on the BNB Chain decreased by 67%, while Ethereum's dropped by 41%, according to Nansen data. Notably, the number of transactions on Solana actually increased by 6%, contrasting with a 42% fall in activity on the BNB Chain.

Reduced Demand for SOL Long Leverage

SOL perpetual futures can serve as an effective indicator of traders' sentiment. Exchanges impose fees on buyers (longs) or sellers (shorts) depending on leverage demand. In stable market conditions, funding rates typically range from 6% to 12% per year, with long positions incurring fees to maintain their status due to capital costs. Conversely, a negative funding rate can signal a prevailing bearish sentiment.

SOL perpetual futures funding rate SOL perpetual futures 8-hour funding rate. Source: CoinGlass

On Friday, SOL’s annualized funding rate was at 6%, suggesting a weak appetite for bullish leverage. The unusual 11% negative reading from Thursday should not be directly interpreted as strong demand for bearish positions, as market makers acted swiftly to rectify imbalances. It may require some time for bulls to regain confidence after SOL’s 46% price drop over the last three months.

Several recent developments within the Solana ecosystem aim to rekindle investor interest, including the mainnet launch of Firedancer, a new validator client designed to enhance processing capacity. This project, taking over three years to develop under the guidance of Jump Trading, one of the industry’s leading market makers, has reportedly received a positive response since the validator node re-synced in under two minutes.

Related: J.P. Morgan taps Solana for Galaxy’s tokenized corporate bond issuance

Kamino, the second-largest Solana DApp by TVL, announced new products on Friday, such as fixed-rate and fixed-term borrowing, offchain collateral, private credit, and an onchain Bitcoin-backed institutional credit line. With $69 million in annualized fees and an average of 10% yield on deposits, Kamino illustrates the ongoing expansion of the ecosystem.

The future of SOL reaching the $190 mark seen two months ago remains uncertain, and it seems unlikely that enhancements like better validation software or a broader range of DApp offerings alone will restore the necessary confidence to support a sustained bullish trend.