Solana's SOL Token Plunges 17% Amidst Declining Onchain Activity and Inflationary Pressure

Solana's native token, SOL, has experienced a significant correction, dropping to $131.90 on Feb. 25, its lowest point in five months. This unexpected decline triggered over $129 million in leveraged long SOL futures positions and resulted in a 17% decrease in SOL's value since Feb. 22, outpacing the broader altcoin market's 10% decline.

Several factors suggest that SOL may continue to underperform in the short term. Decentralized exchange (DEX) volumes on the Solana network have dropped by 30% over the past seven days, reaching their lowest level since October 2021. This decrease in onchain activity is not solely driven by the decline in memecoins but also affects areas like liquid staking, yield strategies, gambling, NFT lending, and Web3 infrastructure.

The scalability of the Solana network relies on economic incentives for its validators, with the cost of running a validator exceeding $72,000 per year. Additionally, there is a "voting cost" of approximately 1 SOL per day, which significantly impacts profitability. Currently, SOL native staking offers a 9.5% yield, but when adjusted for equivalent inflation, the net gains are much lower. Over 16.1 million SOL tokens are set to be unlocked between February and May 2024, representing a 10% annualized inflation rate and effectively creating a negative return for SOL staking during this period.

Demand for leveraged long positions on SOL futures has dropped to its lowest levels in over 12 months, according to derivatives markets data. SOL futures entered backwardation on Feb. 24, indicating that demand for short positions has significantly increased. The total open interest on SOL futures fell by 8.5%, reflecting traders' reduced expectations for the imminent approval of a spot Solana exchange-traded fund (ETF) in the United States.

Given the decline in onchain activity, inflationary pressure, weak demand for leveraged long positions, and reduced likelihood of a Solana ETF approval, SOL is likely to take longer to regain bullish momentum. Investors should remain cautious and monitor the situation closely as it develops.