LST Oracles

What Are LST Oracles?

LST (Liquid Staking Token) oracles are crucial components in decentralized finance (DeFi) platforms like iLoop, which determine the theoretical price of each LST on the platform. These oracles help ensure the accuracy and security of the pricing mechanism, which is fundamental for various DeFi operations, including the looping process.

How Do LST Oracles Work?

1. Theoretical Price Calculation:

• Formula: The price of an LST is calculated using the formula:

$$LST Stake Pool Price = \frac {SOLStaked} {LSTminted} ​$$

• Components:

  • SOLStaked: The total amount of SOL staked in the pool.

  • LSTminted: The total amount of LST tokens minted.

1. Price Increase Mechanism:

• Epoch-Based Adjustments: Each epoch, the amount of SOL in the stake pool increases due to:

  1. SOL Proof of Stake Emissions: Rewards from staking SOL.

  2. Transaction Fees: Fees collected from transactions processed by the network.

• Stable LST Supply: The number of LST minted remains relatively stable, while the amount of staked SOL increases. This results in the LST price increasing relative to SOL over each epoch.

Advantages of Using Theoretical Price Over Market Price

• Decoupling from Market Liquidity: By relying on the theoretical price rather than the market price, the platform does not depend on external liquidity conditions to determine the price of an LST. This reduces the risk of price manipulation and ensures a more stable and predictable pricing mechanism.

Application in the Looping Process

The looping process involves leveraging LSTs by depositing them as collateral and borrowing against them. Here’s how the LST oracles integrate into this process:

1. Initial Deposit: A user deposits SOL and receives LSTs with a theoretical price determined by the oracle.

2. Borrowing: The user can then borrow SOL against the deposited LSTs, with the loan amount calculated based on the theoretical price provided by the oracle.

3. Looping: The borrowed SOL can be redeposited to mint more LSTs, repeating the process to achieve higher leverage.

4. Security: The oracle ensures that the price used for calculations is accurate and not subject to market fluctuations, providing a secure basis for the collateral value.

5. Liquidation: In the event of a market downturn, the oracle’s accurate pricing helps in the timely identification and liquidation of undercollateralized positions, protecting the protocol from bad debt.