Solana Trading: How Outage Reveals Vulnerability of Crypto Blockchains

Its market cap blew past $62 billion earlier this month. Its price grew some 6,000% in a year. Superfans touted it as a better alternative to Bitcoin and Ethereum.

And yet for 17 excruciating hours this Tuesday, the ability to buy and sell the SOL crypto token was disrupted. The Solana blockchain it runs on — billed as the world’s fastest — had hit the fritz.

The network simply couldn’t process any transactions. Which was a stark contradiction, given that Solana’s own website — slick as, say, Apple.com — boldly claimed that on its network, “transactions will never be stopped.”

But, in fact, they were.

The people behind the blockchain later blamed something called “resource exhaustion.” Some social-media users fumed. Others rallied to its defense. It’s what happens on days when one of the worst things that can happen to a blockchain does happen: an outage. 

“This is something we’ve seen over and again in the cryptocurrency markets since they’ve become a phenomenon,” said Teddy Fusaro, president of Bitwise Asset Management. “And it does reflect how new the industry is, that the industry needs to scale.”

Any massively growing technology is bound to run into bandwidth constraints. When founders and their early developers build a new product — be it an app, a website, a blockchain — they really have no clue how popular it’s going to become. “Move fast and break things,” sure. But that mantra takes on a whole new meaning when fans flock so fast they literally break the product.

Solana Market Cap

So in some ways Solana this week became a victim of its own success. The coin long traded for cents. Earlier this year, its SOL coin eased into $1 territory. It wasn’t until early September that prices took a sharp turn above $200, according to CoinMarketCap.com. Proponents touted the claimed speed and lower cost of transactions on the blockchain as well as its potential to support high-frequency trading strategies compared with other blockchains.

To be fair, digital outages are common across digital industries. One at Facebook Inc. was so bad in 2019 that the company had to consider refunding its advertisers. Users of digital trading platform Robinhood Markets Inc. were so incensed about losing money during in 2020 outages that they sued the company. Major cryptocurrency exchanges such as Coinbase Inc. and Binance have notoriously crashed at moments of market exuberance. Just this week, the blockchain network Arbitrum One suffered an outage, too.

That’s why the co-founder of Solana Labs, Anatoly Yakovenko, shrugged off this week’s incident with two words: “growing pains.”

“Blockchains are run by basically volunteers, random people with different incentives,” he told Bloomberg. “It’s impossible to guarantee that these networks are fully bug free.”

His comments reveal an important truth about the booming crypto market: For all the marketing buzz about the speed, security and improved performance of digital coins and their associated blockchains, at the end of the day the systems are still underpinned by numerical codes — all vulnerable to attacks or, even more prosaically, technical difficulties.

It's just that the when the codes for a service like Facebook go down, people can’t post their pictures for a couple hours. When the codes for a blockchain network snarl, the ability to transact billions of dollars worth of cryptocurrencies is at stake.

MISO Hack

In another example of the vulnerabilities inherent in anything that runs on code: A hacker this week allegedly stole and later returned Ethereum worth $3 million by exploiting a security weakness in a launchpad called MISO. Launchpads provide access to early-stage crypto projects and tokens.

This is all compounded by the fact that right now, there is a stark age imbalance in the cryptocurrency world. Bitcoin has been around for over a decade. Ethereum went live when Barack Obama still lived in the White House. Solana was launched about a year and half ago. In 2021 alone, crypto hopefuls have created more than 10,000 new coins, according to data from Dune Analytics. 

“A lot of these projects are not as battle tested or audited for security to the same degree that more well known projects are,” said Paul Sibenik, lead case manager at CipherBlade, a blockchain investigation agency. 

Emin Gun Sirer, chief executive of Ava Labs, which develops the Avalanche blockchain, compares the practical use of cryptocurrency networks to the weather.

“One of the biggest challenges is seeing how systems react in various unique situations in real-time,” he said. “Developers across the community can forecast and prepare for every event with extensive modeling and testing, but you can never be 100% certain.”

Cardano, BINANCE Coin

The relative resilience and stability of blockchains aren’t easy to discern from price-ranking charts on cryptocurrency exchanges. Everything from Bitcoin to Dogecoin and Cardano to Binance Coin can all be purchased with little to no research by the consumer about what’s really on the back end. 

And questions about Solana’s back end came up after this week’s outage. 

The network markets itself as “decentralized.” That’s one of the buzziest words in the crypto space right now. It basically means that there’s not some intermediary dictating who pays whom or how the network is being used. 

Yet third parties that validate transactions on Solana ended up coordinating to restart the network, which observers took as a sign that the blockchain may be more centralized than its marketing lets on. 

“Lots of people say this means Solana is decentralized in name only (DINO), and I tend to agree,” said Frances Coppola, author of “The Case for People’s Quantitative Easing.”

John Griffin, a finance professor at University of Texas at Austin, noted the fact that Solana’s validators were able to coordinate together to restart the network during the outage suggests that they know each other, which is a threat to the immutability of the blockchain.

“Solana needs to balance the trade-off between being a fast payment processor and having a larger, more decentralized network for future security,” he said.

The Twitter account that updates the public on the blockchain’s status said on Thursday that its community would issue a “detailed post-mortem” in the coming weeks.

Whether investors care about a post-mortem or the outage is another story, said Nic Carter, co-founder of data provider Coin Metrics.

“Blockchains actually experience stoppages all the time,” he says. “It’s just that they are often swept under the rug and ignored.”

For Sibenik of CipherBlade, Solana could go further with its communication strategy. 

“I think readily admitting to a project being experimental, admitting to centralization aspects, not trying to promote or urge investments or return on investment into a token is generally a good idea,” he said.

Early-Stage Investing

Yet in the eyes of some Solana supporters, this week’s outage was a positive sign. 

“The outage that we got with Solana only proved that the tech is not only superior but is ready for mass adoption,” said Jacques Letesson, a 40-year-old retail investor from Brussels who bought into the project when its SOL coin was trading at $15 earlier this year. “The outage probably will be patched with another security feature that will prevent it from ever happening again. It’s proving that the system is growing, and being perfected as we speak.”

Letesson thinks one of the biggest problems in cryptocurrency is that investors don’t do their diligence before putting their money into technology they don’t understand.

Avi Felman, co-portfolio manager at BlockTower Capital, agrees. He recommends that individual investors think of early stage projects as they would early stage companies. 

“Investing with the mindset of an early-stage investor is important for those looking to allocate capital to new projects like Solana,” he said. “Everything in the crypto world is still very much an experiment — with a high probability of failure.”