Headline: What are the problems with Solana? And are “hot wallets” and “blockchain bridges” partially to blame?
Body: Just like so many other firms, Solana is beginning to have its own problems. Solana decentralized finance (DeFi) platform Friktion is shutting down its user interface and urging customers to withdraw their assets from the protocol, according to a statement on Jan. 26. Only withdrawals will be permitted and new money cannot be invested. (I note, with interest, that their cryptocurrency is abbreviated SOL.)
So, what is a “hot wallet”? Are they sold with hot pants?
No, they are not. A hot wallet is a place where you can store digital assets, but they are always connected to the Internet. This is advantageous and disadvantageous. On one hand, it does mean that your entire balance of cryptocurrency is always available for trading. Given the price volatility, this accessibility of your assets is likely good. On the other hand, it also means that hackers have constant access to the defenses guarding your cryptocurrency investments. Let’s be honest, sometimes they do get lucky. To access them, there are both public and private keys. To send money to a hot wallet, one needs the public key. To get money out of a hot wallet, one needs the private key.
Some people prefer hot wallets because of their constant connection with the Internet. Some prefer to use a particular hot wallet because it synchs so well with the web applications for a particular cryptocurrency. Common wisdom seems to be to place a small amount of cryptocurrency in a hot wallet, and the majority of your digital assets should be kept in a very secure cold wallet.
What is a blockchain bridge?
A blockchain bridge is a tool that lets you port assets from one blockchain to another. Say, you open up an Ethereum wallet, and then purchase some Cardano coin. There is a bridge between these 2 blockchains (making them inter-operable) but, the asset resting in your Ethereum wallet is essentially a derivative instrument. There are unidirectional and bi-directional bridges that allow you to make the transaction and reverse the procedure. Bridges are either custodial (centralized thru something like Coinbase) or non-custodial.
| Trusted Bridges | Trustless Bridges |
| Depend upon a central entity for their operations. | These bridges operate using smart contracts. |
| Users have to rely upon the reputation of the bridge operator. | The security of the bridge is the same as the security of the involved blockchain. |
| Users need to give up control of their assets. | Users maintain sole control of their digital assets. |
One might want to use a bridge because denominating a transaction in a different cryptocurrency might be far more profitable. (Think of exchange rates between countries. Due to exchange rates, it might be cheaper to pay for goods in Euros as compared to USD.) Further, these small pieces of code used to be difficult to use, but they are becoming increasingly user-friendly. Currently, the largest bridge is the “Wrapped Bitcoin” bridge with $10.2 Billion in assets. Like any bridge, it provides opportunities, but entails risk. The opportunities entail the easy cross-chain transfer of assets, and allows one to use d’apps seen on other chains.
What are the problems Solana is facing?
Well, remember that this is a very small community, including not too many exchanges and hedge funds. So many firms have gone down, that the remaining firms are doubtlessly affected.
The Solana system has suffered more than their fair share of hacking exploits.(Hackers destroyed nearly $200 Billion in value.) This makes people leery of trading on their platform, and causes other problems like outages. These outages encourage other investors to consider using a different cryptocurrency. Both blockchain bridges and hot wallets are targets for a constant line of hopeful hackers. This is why most experts recommend that if you have a hot wallet, keep it in the custody of a reputable firm.
In the recent past, Solana has been a very popular option when buying or selling NFTs. But as of late, the bottom has fallen out of that portion of the industry, and the usage of Solana coin has also decreased markedly.
Is this really a big deal?
Just recently, one day’s value of trading in Solana coin was over $3 Billion (USD).
Is there any relationship to other cryptocurrency firms?
In a word, yes. Many cryptocurrency exchange firms sit on their Board of Directors, including Alameda Research and Genesis Trading, among others. They are especially tied to FTX and their founder SBF. SBF helped create Serum for Solana. Serum is a centralized order book that serves to increase transactional speed and increase liquidity. Serum is central to Solana. By any measure, Serum is a very effective piece of software, executing more than $32 Billion of transactions in 2022.
Are there services helping these cryptocurrency firms?
Yes. There are all manner of government agencies offering advice in addition to issuing new regulations. Besides the government agencies, there are for-profit services too that seem to serve as consultancies for these companies. The largest of these that I have come across are TRM and Elliptic. (Elliptic is really interesting as they are based in London, and the U.K. has been quite busy in its work to attract cryptocurrency firms to the U.K. and especially London.) In fact, the chief scientist of this company, a Mr. Tom Robinson, was quoted in the Washington Post. “To date, approximately $1.8 billion has been stolen from these services and it’s worrying that their security standards don’t seem to match the huge amounts of capital being entrusted to them.”
The Verdict
Solana faces difficulty in many areas that include hot wallets and blockchain bridges Solana might serve as a very useful reminder to do your own research thoroughly when making any investment in cryptocurrency.
REFERENCES
https://cointelegraph.com/news/solana-defi-project-friktion-shuts-down-its-user-platform
https://www.fool.com/investing/2023/01/29/better-buy-cardano-vs-solana/
https://www.washingtonpost.com/technology/2022/08/03/solana-nomad-hacks-security-questions/
https://www.thestreet.com/investing/cryptocurrency/cryptocurrency-solana-collapses-in-ftx-scandal
https://www.coindesk.com/learn/what-are-blockchain-bridges-and-how-do-they-work/
https://ethereum.org/en/bridges/
https://www.investopedia.com/terms/h/hot-wallet.asp
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.