Solana's native token, SOL (SOL), dipped to its lowest level in three weeks, hitting $162.40 on April 10. This 19.8% decline over ten days coincided with the U.S. Consumer Price Index inflation announcement, which was slightly higher than expected at 3.5% year-over-year in March.
Several factors have adversely affected SOL's price performance, including the network's difficulties in managing increased transaction requests, diminished interest in Solana SPL tokens, along with the rampant use of excessive leverage in derivatives markets.
SOL’s correction: an isolated event within the cryptocurrency market
Despite reclaiming the $168 support level on April 10, SOL remains the least performant coin among the top 15 on a weekly scale. To provide context, SOL lagged behind its primary competitors, BNB and Ethereum, by 16% and 14%, respectively, over the past week. This suggests that the bearish momentum for SOL is largely unconnected to trends in the broader cryptocurrency market.
There are opinions suggesting that the recent surge and subsequent decline in SOL's price were driven by an unsustainable demand spurred by the memecoin frenzy and recent Solana SPL token airdrops, rather than factors occurring within the last 24 hours. This viewpoint supports the idea that SOL's price correction on April 10 is part of a longer-term downtrend, evidenced by the failed attempt to surpass the $200 mark on March 31.
Andre Cronje, the creator of the Fantom network, interprets the congestion on Solana as indicative of increased demand for block space, arguing that recent transaction failures and performance issues should not be viewed as technical shortcomings. Cronje suggests that the network is, in fact, a victim of its own success. Solana Labs has announced a tentative bug fix scheduled for April 15 in response to these issues.
On April 9, Solana validators passed a proposal aimed at reducing the latency of consensus votes, a move Solana Labs says could discourage the incentives to delay block finalization by awarding a variable number of credits to the first-acting validators. A software upgrade for Solana, anticipated in the coming weeks, is expected to implement this solution.
Failed transactions on Solana coincide with the SPL tokens' negative performance
Whether or not Solana's congestion issues can be viewed as bullish, the significant number of transaction failures has coincided with a downturn in the performance of relevant tokens within its SPL ecosystem. In the decentralized finance (DeFi) sector, Jupiter (JUP) saw a 23% decline month-to-date in April, while Raydium (RAY) and Jito (JTO) experienced decreases of 14.5% and 15.5%, respectively. Likewise, Solana's most prominent memecoins, including Dogwifhat (WIF), faced a 20% drop over ten days.
Despite this uptick in activity, Solana's transaction fees have remained modest. This unexpected dynamic prompts questions regarding the network’s long-term viability, especially when considering the relatively high setup and maintenance costs for validators in comparison to other chains.
In a comparison of blockchains by weekly transaction volume, Solana emerged as the clear leader, with 39.5 million transactions over the past week—more than double Polygon's 12.9 million. However, in the realm of transaction fees, Solana collected a mere $16.9 million, significantly less than Uniswap's $30 million or Ethereum's $68 million. This indicates that competing projects may offer better returns on fees to their tokenholders compared to Solana.
Furthermore, Solana’s derivatives market is facing the potential threat of cascading liquidations, with futures open interest surging by 32% over the last week. The total value of matched positions between longs and shorts reached SOL 17 million, equivalent to $2.86 billion. This does not necessarily suggest an over-reliance on leverage by bulls, but it does highlight a risk should Solana's price continue to fall.
In light of Solana's on-chain data and derivatives market performance, the prospects for a positive surprise in the SOL token price seem limited, at least until the congestion issues are fully addressed.
