Liquid Staking Tokens (LST)
A comprehensive overview of the liquid staking ecosystem on Solana.
Last updated
A comprehensive overview of the liquid staking ecosystem on Solana.
Last updated
Staking: A Quick Recap
Proof of Stake (PoS) is a consensus mechanism used in blockchain networks to verify and authenticate transactions. In Proof-of-Stake (PoS) systems, participants lock up their cryptocurrency with network validators who validate transactions and create new blocks. In return, stakers receive rewards from both inflation and the validator's performance, making staking a potentially profitable activity.
Unlike PoW, which requires solving complex mathematical problems to add new blocks, PoS allows validators to add new blocks based on their cryptocurrency stake in the network:
Staking: Validators lock up a certain amount of cryptocurrency in a smart contract, making these funds unavailable for other uses.
Eligibility: Once staked, validators are eligible to be chosen to create and validate new blocks, with the probability of selection proportional to their staked amount.
Block Creation: Selected validators create new blocks and broadcast them to the network.
Validation: Other validators validate the new block and add it to the blockchain.
Rewards and Penalties: Validators earn rewards through newly minted cryptocurrency and transaction fees but risk losing their staked funds if they behave dishonestly or attempt to attack the network.
Adjusting Stakes: Validators can withdraw their staked cryptocurrency or add more to increase their chances of being chosen to create and validate new blocks.
Energy Efficiency: PoS is more environmentally friendly as it requires less computational power.
Scalability: PoS can handle more transactions with faster confirmation times.
Network Security: PoS maintains a highly secure network. Validators receive financial incentives to uphold network integrity, and those acting maliciously can lose their stakes, which serves as a strong disincentive for bad behavior.
Liquid staking is an advanced form of staking where you can stake your tokens and receive a liquid receipt token representing the staked tokens and staking rewards. This liquid synthetic token can be traded, used in DeFi protocols, or held in your wallet while still earning staking rewards.
Liquidity: Users can maintain liquidity and participate in DeFi while earning staking rewards.
Flexibility: Liquid staking tokens can be traded or used as collateral, offering more utility than traditional staked assets.
Enhanced Yield: Platforms like Jito offer additional rewards from MEV, increasing the potential returns for users, and providing users with opportunities to leverage their resources. In return for staking your SOL with a validator, you receive rewards in SOL each epoch (2-3 days).
Network Security: Enhance network performance through specialized software, reducing congestion. When you stake your SOL tokens to a validator, you are contributing to the decentralization and performance of Solana.
Diversification: Users can diversify their strategies, staking on one platform while using the LST to engage with another.
Liquid staking on Solana enhances traditional staking by providing liquidity and flexibility:
Deposit SOL Tokens: Users deposit their SOL tokens into a liquid staking platform.
Mint Liquid Staking Tokens: The platform mints a liquid staking token (e.g., mSOL, JitoSOL) representing the staked SOL and its rewards.
Platform Stakes SOL: The platform stakes the SOL tokens on behalf of the user, earning staking rewards.
Utility of Liquid Tokens: Liquid staking tokens can be traded, used in DeFi protocols, or held while continuing to earn rewards.
Redeeming Tokens: Users can redeem their liquid staking tokens for SOL, with an optional waiting period or a small fee for immediate redemption.
https://dune.com/KARTOD/lido-staking
Lido is a leading liquid staking protocol where users deposit ETH into a staking pool and receive stETH in return. The pooled ETH is distributed among 39 trusted node operators, with Lido charging a 10% fee on staking rewards, split between the operators and the Lido DAO treasury. Lido's stETH boasts the highest liquidity among liquid staking tokens (LSTs), facilitating high-value transactions with minimal price impact and enabling integration into lending protocols.
Around 27% of all ETH is staked, and nearly 30% of this is through Lido, giving it a total value locked (TVL) of approximately $33.5 billion. This is significantly higher than the second-largest staking protocol, RocketPool, which has a TVL of $4 billion. Lido's stETH allows transactions worth over $7 million with less than a 2% price impact, whereas rETH, the second-largest LST, has the same price impact for transactions under $600,000.
Lido's dominance in the liquid staking market raises concerns about Ethereum's decentralization. Controlling about 30% of staked ETH with only 39 node operators, Lido faces risks of collusion, transaction censorship, and manipulation, particularly if its control grows. Lido’s governance token holders are incentivized to maximize the protocol's market share, potentially conflicting with Ethereum's broader interests.
To mitigate these risks, Lido is expanding its node operator set, increasing geographic decentralization, and proposing dual governance involving both stETH and Lido token holders. Despite these measures, Lido's dominance poses long-term risks to Ethereum's decentralization and security.
Marinade uses the Jupiter decentralized exchange aggregator to trade mSOL for SOL. When simulating the unstaking of 10,000 mSOL, the price impact was 0.01%, but for 100,000 mSOL, the price impact was 8.162%. This means that if you traded 100,000 mSOL immediately instead of waiting for the end of the epoch, you would receive 8.162% less SOL due to market conditions and liquidity.
This scenario highlights an important aspect of liquid staking tokens (LSTs): while they can function similarly to SOL in many contexts, they still carry some duration risk. If you need the capital quickly and in large amounts, you might have to accept a discount.
An example of this is the "mSOL depeg" on December 12, 2023, where a wallet swapped about 68,536 mSOL for SOL in a short period, causing the mSOL price to drop from $78 to $66. The price eventually recovered as arbitrage bots and other opportunists bought mSOL, recognizing the temporary discount. This incident underscores that LST liquidity can be less than that of the underlying SOL, especially for large transactions, thus imposing some liquidity risk.
This phenomenon is not unique to mSOL and applies to all liquid staking tokens (LSTs), which generally have less liquidity than the underlying SOL.
Jito’s blog post highlights four reasons to stake with them, but the key differentiator is Maximum Extractable Value (MEV). MEV involves traders profiting from ordering transactions in a way that maximizes value from trades. While Solana's design makes MEV extraction more difficult compared to systems like Ethereum, it still exists. MEV is controversial because it can result in worse prices for other users, but it is an inherent part of open, permissionless systems.
Jito’s approach is to capitalize on MEV by sharing the profits with their stakers. They have modified the Solana Labs validator software to accept ordered transactions for a fee, creating a more orderly and accessible MEV market. Validators using Jito’s software pass some of the extra SOL earned through MEV to their stakers as yield.
Their airdrop in 2023 woke Solana from its post-FTX slumber, creating wealth effects and a resurgence of activity on the chain. Backed by venture capital and the goodwill of the community, Jito is following Lido’s playbook, and looking to dominate LSTs on Solana
Jito’s Strategic Growth in Solana Staking:
Incentivizing Liquidity:
Jito uses its governance token, JTO, to incentivize liquidity for JitoSOL pairs on exchanges.
JitoSOL has the highest APY, TVL, and volume among all LSTs on Kamino liquidity vaults.
Strategic Partnerships:
Jito is partnering with top Solana protocols like Solend, Drift, Jupiter, and marginfi, integrating JitoSOL deeply into the ecosystem.
Multichain Expansion:
Partnering with Wormhole, Jito is expanding JitoSOL to Arbitrum, enhancing its utility and attractiveness.
Dominance and Timing:
With surging activity and liquidity, Jito timed JitoSOL's release perfectly, making it the dominant LST on Solana and the protocol with the highest TVL on the chain.
Jito's rapid rise and strategic maneuvers position it for potential dominance in Solana's liquid staking landscape. While this growth can bring benefits, it also raises concerns about centralization and the health of the broader ecosystem. As Jito continues to expand, the balance between its growth and the decentralization of Solana will be critical to watch.
Before exploring liquid staking, it’s important to understand regular staking on a delegated proof-of-stake (DPoS) network like Solana. Regular staking involves committing tokens to a validator, who verifies transactions and must act faithfully to avoid penalties. This alignment prevents abuses like double-spending. Users can delegate their tokens to specific validators through wallet software or the Solana command line interface.
Solana’s inflation schedule, starting from its mainnet-beta launch in February 2020, began with an 8% inflation rate, decreasing annually by 15% until it stabilizes at 1.5%. As of February 2024, the inflation rate is about 5%. The newly created SOL tokens are distributed to stakers, increasing their relative ownership of the total SOL supply. Consequently, around 2/3 of all SOL is staked, though less than 10% is liquid staked.
Staking on Solana is incentivized to prevent dilution by other stakers. However, the capital is locked each epoch, which deters some users. Liquid staking solves this by allowing users to contribute their tokens to a stake pool managed by validators, in exchange for a liquid staking token (LST) that can be traded or used in DeFi protocols while still representing staked tokens.
On Solana, most LSTs are reward-bearing, meaning they represent an increasing amount of SOL as staking rewards accrue. This makes them appreciate in value relative to SOL over time.
An epoch on Solana is about 2.5 days. If users want to withdraw staked SOL, they must wait until the end of the epoch. This is similar to duration risk in traditional finance. Users can redeem their LSTs for SOL either by waiting for the epoch to end or by trading on the open market.
On Solana, LSTs represent less than 5% of the total staked amount. Jito and Marinade represent 35% and 42% of the LST market, respectively.
Liquidity:
Traditional Staking: Locks up your SOL tokens, preventing you from using or selling them during the staking period.
Liquid Staking: Provides synthetic SOL tokens, allowing you to use or trade them while still earning rewards from your staked SOL tokens.
Flexibility:
Traditional Staking: Your SOL tokens are tied up solely for staking purposes.
Liquid Staking: Synthetic SOL tokens can be used in various DeFi protocols, such as lending, borrowing, and yield farming. They can also be used as collateral for loans, maximizing the utility and profitability of your staked assets.
Solana has x3 times more $SOL staked than Ethereum. However, only 6.9% of SOL is liquid staked compared to 65% for $ETH. This disparity highlights a significant growth potential for liquid staking on Solana.
Users receive a liquid staking token for staked SOL, usable in DeFi and NFT ecosystems. iLoop is designed to offer users a secure and reliable means of accessing leverage and optimizing capital efficiency, with eMode, their LTV can be raised to 93.4%, allowing for up to 15x leverage.
Solana's gas fees are very low (well under 1 cent), making it easy for SOL holders of any size to participate in staking. This is in contrast to Ethereum, where gas fees can significantly impact smaller holders, especially during periods of high network congestion.
These differences highlight why native staking on Solana is often preferred, whereas staking pools like Lido are more critical on Ethereum.
Staking Mechanism
Utilizes delegated proof of stake, allowing users to stake any amount of SOL directly with validators without minimum requirements. This can be done natively through wallets like Phantom and Backpack.
Lacks delegated staking, necessitating the use of staking pools like Lido for most stakers to participate effectively.
Slashing
Slashing is not yet active, reducing the criticality of validator selection. Users can stake with any validator offering decent returns without significant risk.
Slashing is active, making validator selection crucial to avoid penalties, a key function performed by staking pool solutions like Lido.
Staking Pool Returns
Returns from a staking pool distributing stakes to multiple validators are not significantly different from directly staking with one top validator.
Pool solutions help mitigate slashing risk and may offer optimized returns through professional management and selection of validators.
DeFi Ecosystem
The DeFi ecosystem is less mature compared to Ethereum, providing fewer opportunities to utilize liquid staking tokens (LSTs). This makes native staking more appealing due to lower associated risks, such as potential smart contract hacks
A more mature DeFi ecosystem allows for extensive use of LSTs, integrating into various protocols for additional yield and liquidity options
Sanctum is reimagining liquid staking to avoid Solana following Ethereum’s path of having a dominant staking protocol, aiming instead for an ecosystem with infinite LSTs. At the heart of their products lies a unique insight: LSTs are fungible. Let me explain what that means.
Fungibility of LSTs: Since each stake account, whether created directly with a validator or through a staking pool, contains the same locked SOL, LSTs are fundamentally fungible. This fungibility, unique to Solana, is the cornerstone of Sanctum’s innovation in liquid staking.
The Sanctum Reserve offers a new method for redeeming Liquid Staking Tokens (LSTs) on Solana. Instead of waiting for the cooldown period, users can exchange their stake account for instant SOL from the Reserve, which holds over 200,000 SOL (worth more than $30 million). Sanctum deactivates the stake account and recoups the SOL after the cooldown, charging a dynamic fee based on the Reserve's SOL percentage to ensure efficient usage.
This approach is more capital-efficient than traditional liquidity pools, as it unifies liquidity across all LSTs and minimizes slippage. Users benefit from a common pool to liquidate any LST, freeing up SOL in exchange pairs to be staked. The Sanctum Router, built with Jupiter, facilitates easy integration by allowing efficient swaps between any LSTs, enhancing liquidity and utility within the ecosystem.
Sanctum's second product, the Sanctum Router, created in collaboration with Jupiter, allows for efficient swapping between any two Liquid Staking Tokens (LSTs) on Solana. When swapping, the process involves withdrawing the stake account, burning the old LST, depositing the new stake account, minting the new LST, and transferring it to the user—all in a single transaction.
The Router and Reserve have collectively processed over 2.2 million SOL. These innovations eliminate the need for deep liquidity pools for smaller LSTs, guaranteeing instant redemption and low-slippage swaps. This enhances the utility of LSTs across the DeFi ecosystem, such as enabling lending protocols to liquidate loans backed by any LST. Consequently, these advancements have sparked significant innovation in Solana's liquid staking space.
Cubik launched iceSOL, with all staking returns funding public goods on Solana, offering holders a way to support the network without financial loss.
Pathfinders introduced pathSOL, which provides NFT whitelist spots and is locked in NFTs; users can burn the NFT to redeem SOL while the team earns yield on the locked SOL.
Bonk released bonkSOL, offering staking yields and $BONK token rewards.
This trend may continue with projects like Tensor potentially creating LSTs to allow users to earn yield on idle SOL or gamify earnings.
