How is Solana’s liquidity staking developing?

Written by: Algo Rhythmic

Translation: VernacularBlockchain

My goal is to provide a comprehensive introduction to Solana Liquid Stake Mining. To make everyone understand not only what Liquid Stake Mining is and how to do it, but also why to do it. What makes a person wake up in the morning and say to themselves: "I am going to liquid stake my SOL today? Come on, join me, and I will take you into a whole new world."

I have also tried to structure this rather long article so that you can skip certain parts if you are already familiar with the subject.

Note: This article is for scientific purposes only, not investment advice.

1. Staking on Solana

Before we jump into talking about Liquid Staking, let’s first understand regular Staking. In a delegated proof-of-stake (POS) network like Solana, Staking is about delegating your tokens to a validator, who must commit to faithfully verifying transactions on the network or face penalties. This is what creates a fundamental alignment between validators and network users, without which double spending, censorship, and various other abuses are possible. When you do “local” staking, you choose a specific validator and delegate your tokens to them. You can do this through a series ofwalletsoftware or use the Solana command line interface to do this.

Solana has been following this proposed inflation schedule since the Solana mainnet beta launch in February 2020:

As I write this, it is February 2024, four years after that launch, so it is easy to see that the current inflation rate is about 5%. The exact amount of inflation is controlled by three parameters: the initial inflation rate (8%), the deflation rate (-15%), and the long-term inflation rate (1.5%). The inflation rate starts at 8% and decreases by 15% on an annualized basis at each era boundary until it eventually stabilizes at 1.5%. This may change in the future, but this is the plan observed since launch.

Who owns the SOL tokens created through inflation? Simple: stake miners. This means that with each epoch, stake miners are increasing their relative ownership of the total amount of SOL tokens at the expense of non-stake miners. Nothing more complicated is actually happening. If all SOL were staked, no one would increase the total value of their holdings. This results in a high staking rate on the Solana network; at the time of writing, approximately 2/3 of all SOL is staked. However, the percentage of liquid stake mining is still low.

For POWBlockchainOn Solana, validators incur high equipment and energy costs, which forces them to sell some (or possibly all) of their earned tokens simply to break even. In a proof-of-stake network like Ethereum, these costs are very low, so there is hardly any selling pressure. On Solana, validators have slightly higher operating expenses than Ethereum because validators have to execute transactions as part of consensus, which incurs costs, and validator equipment costs slightly more than Ethereum because it requires higher performance than Ethereum. Therefore, validator selling pressure is still very low compared to Bitcoin, but slightly higher than Ethereum.

Translation: I think "Solana's cheap transactions are artificially subsidized by token inflation" has become a blood libel against Solana. CT learned something about inflation from Bitcoin, and now we can't forget it. There is no pressure to buy or sell

Next, let’s talk about Liquid Staking.

2. LSTs (Liquid Staked Tokens) and ongoing risks

There is a high incentive to stake on Solana to avoid being diluted by other stakers, and one of the few reasons not to stake is that it locks up your capital every epoch. With liquid stake mining, you contribute your tokens to a stake pool that manages the stake allocated by validators, and tokenizes the fact that you have committed your tokens to the pool. This action returns a new asset to the staker that represents that fact, and allows users to redeem it for the original staked SOL. Therefore, it can be used as a functional equivalent of SOL in many cases.

The most popular liquid staking tokens on Solana (LST for short) are almost all “rewarded” tokens. Almost all SOL in the pool is delegated to validators selected by the pool operator (sometimes minus a small buffer for quick redemption), so these delegated SOL in the pool accumulate rewards in the form of more SOL. Therefore, the amount of LST increases over time, but the amount of SOL it represents increases in each era, so the price relative to SOL increases. Another method is “rebasing”, that is, holders of LST will receive more liquid tokens, each of which can be redeemed 1:1 (with a delay), but this is not commonly used on Solana.

On Solana, each epoch lasts approximately 2.5 days. If a user wants to withdraw their original staking SOL, they must submit a request to withdraw their delegated stake and wait for the epoch to end before they can redeem it. In traditional financial markets, this is called taking ongoing risk. You are betting that the reward of locking up your capital for 2.5 days will outweigh the risk of needing it immediately. In terms of duration, 2.5 days is much less risky than a 10-year U.S. Treasury bond. On the other hand, U.S. Treasury bonds, in general, are…cryptocurrencyThe volatility is smaller.

Therefore, when holders of LSTs want to obtain the underlying SOL Token, they can redeem it from the equity mining pool controlled by the Liquid Staking protocol, choose to wait for the end of the era when it can be undelegated by the underlying pool, or trade mSOL for SOL on the open market through existing liquidity pools. Here is an example from Marinade Finance:

Marinade uses Jupiter decentralized exchange aggregator to trade mSOL in exchange for Xiaobai NavigationI did some checking and found that unwinding 10,000 mSOLs will have a 0.01% impact on the price, but when the number of orders is increased to 100,000 mSOLs, the price impact shown is 100,000 (I don't actually have that many mSOLs, but I can simulate it), what does this mean?

This means that if you want to uncommit and get SOL immediately, you will get 8.162% less SOL than if you waited for the era to end and then uncommitted. The above price impact is determined based on current market conditions, which means it depends on the liquidity situation. If you recheck, this number may increase or decrease. This highlights an important fact about LST. As I mentioned before, they can serve as a functional equivalent of SOL in many scenarios, but one of the important differences between them is that you will bear a certain degree of ongoing risk. If you need funds urgently and need a large amount, you will have to accept a lower price to get the funds you need.

A simple example can help to understand this. Let’s look at the “mSOL decoupling” event that occurred on December 12, 2023. In just 20 minutes, awalletThe address 85b5jKkgSuopF3MUA9s4zsBhRANrererBLRx689PqTPA exchanged approximately 68,536 mSOL for SOL in 9 transactions on the open market. This caused the price of mSOL to drop from approximately $78 to $66. Here is the analysis from birdeye.so:

You can see that the price recovered to its previous level relatively quickly. Why did this happen? Because arbitrage bots and other speculators sensed this opportunity and started buying mSOL since they didn’t really need to use the funds until the next era. The price of the base SOL didn’t actually change, so they were essentially buying SOL at a discount.

This is not limited to mSOL, but applies to every LST (with some additional conditions that we will explore later). The liquidity of any particular LST will inevitably be lower than the liquidity of SOL tokens. However, this is mainly a problem to worry about when you have a large amount of liquid staked SOL. In general, having more funds also means facing more challenges.

So the lesson here is that while Liquid Staking Tokens carry some of the same ongoing risks as regular Staking SOLs, they only become apparent when there is insufficient liquidity in the market. The more liquid the LST market is, the less impact the ongoing risk has. If your holdings are relatively small, you may not feel this ongoing risk at all. Nonetheless, it is still very important to understand the liquidity limits of your tokens.

3. LST leaders and their incentive structure

There are three LSTs on Solana with over $100 million in total locked value, highlighting different approaches to incentivizing adoption: Jito (jitoSOL), Marinade (mSOL), and BlazeStake (bSOL). This is obviously also subject to change, but you can see the ballpark numbers here:

https://defillama.com/protocols/Liquid%20Staking/Solana

Currently, Jito is in first place, so we’ll start with it.

1) Jito’s value proposition

Jito Protocol invites stakers to join the ranks of earning MEV on Solana and provides rewards for minting JitoSOL.SafetyThe SPL Stake Pool implementation of JitoSOL is optimized for validator groups and MEV allocation. The protocol supports efficient transaction processing through the Jito-Solana client and plays an important role in Solana DeFi. The use of JitoSOL can earn points in the growing Solana ecosystem and provide competitive returns and performance, providing aCommunityProviding a unique staking experience.

However, one real difference is in Maximum Extractable Value (MEV). In short, MEV allows traders to extract value from transactions, but Solana is designed to make MEV more difficult to extract. Jito has created a more orderly and accessible environment for the MEV market by modifying the Solana Labs validator software to increase the ability of validators to accept orderly transactions and charge fees for them. Liquid stake mining pools that delegate SOL to Jito receive a portion of this profit. Other LST can also be delegated to validators running Jito's modified validator software and benefit from it.

2) Marinade’s Value Proposition

Marinade is the first liquid staking protocol on Solana, and it leads the way in best practices in the space. When you stake directly, you need to choose a validator, but liquid staking pools automatically assign you to multiple validators, reducing risk. Last month, Marinade proposed an initiative requiring validators to create an insurance fund to protect the interests of delegators. In addition, they have launched a "directed staking" feature that allows miners to support specific validators and receive additional incentives. Marinade's governance is carried out by MNDEToken, and holders can vote on how the protocol runs. This token is independent of mSOL. Now they are running an event where participants can receive additional MNDEToken as a reward to encourage them to support the development of the protocol.

3) BlazeStake’s Value Proposition

BlazeStake’s main point of difference is associated with the BLZE governance token. Similar to MNDE, BLZE can be used to vote on incentive allocations, but also has independent value. BlazeStake is a relatively young project, so they have only distributed ~80% of their total supply of tokens, whereas Marinade has fully distributed their tokens and must repurchase them to create MNDE token incentives. This can be a pro or a con depending on your perspective and investment time horizon. Jito also has a governance token, JTO, but it is not currently being used to incentivize staking with Jito. Let’s quickly compare the top three governance tokens by TVL of the protocol, including market cap, circulating supply, and growth trends:

Data was collected on February 16, 2024, from Deflama, Coingecko and Birdeye

BLZE performs well in terms of the ratio of total locked value to fully diluted market cap of governance tokens. However, there are a few issues to note. First, JTO's FMDC is high because the circulating supply is low, which may cause FMDC to be less accurate in the short term. Second, BLZE has only unlocked 2/3 of the token supply, so there are new tokens that will enter the market. To understand the unlocking schedule, please refer to this: https://twitter.com/solblaze_org/status/1688480225255161856.

What uses does BLZE have that make it valuable? Similar to MNDE, you can vote for specific governance proposals to help bSOL achieve its goals. However, BlazeStake uses a mechanism called a stake gauge to give users more continuous and fine-grained control. You can choose to participate in the Decentralized Autonomous Organization (DAO) of Realms.today.DAO) to direct additional stake to specific validators, or direct more BLZE rewards to specific liquidity pools in DeFi. BLZE holders can also lock their BLZE for up to 5 years to increase their stake in DeFi. DAO 中的投票权。以下是权益量的截图，显示了存入 DAO 后可以将投票定向到的一些示例选项。在 LST 中，这些功能都是相当独特的。

Some DeFi protocols require you to claim BLZE rewards within their user interface, and BLZE rewards will be airdropped directly every two weeks. You can view your BLZE rewards at rewards.solblaze.org.walletCurrent SolBlaze score. There is no real advantage to trying to improve your score by faking multiple wallets. The basic formula is: 1 bSOL in your wallet = 1 point, 1 bSOL in your supported lending protocol = 1.5 points, and 1 bSOL in your supported bSOL liquidity provision position = 2 points. This is roughly in line with the risk you take with your capital, so it makes sense that the greater the risk, the higher the reward.

Also of note, BlazeStake offers an option to stake your SOL with a single validator which they call “Custom Liquid Stake Mining”. Unlike Marinade, 100% of stake will be assigned directly to that validator. As a reminder, unlike Marinade, Marinade only delegates 20% of stake directly to the validator of your choice, with the remaining 80% being allocated via their delegation strategy algorithm. Marinade spells this out in detail in their documentation, but it’s not immediately apparent in their UI, which I find a bit suboptimal.

BlazeStake has some other interesting features. They offer a real SOL faucet, meaning that if you mistakenly lock up all your SOL on their platform and don't have enough SOL to pay the unlocking transaction fee, you can use this faucet to get some SOL to pay for the fee. This is very convenient because you don't have to bring in new funds through a centralized exchange. In addition, they provide a simple token minting UI that allows you to easily create an SPL token, and provide an RPC status page and SOL Pay SDK. All of these are beneficial features that help promote the idea of SOL and liquid staking mining.

If the main value of BlazeStake comes from the issuance of its governance token, then the price movement of BLZE is what drives the value. The price of BLZE has been rising since the end of November 2023 and has remained stable between $0.002 and $0.004, but based on the above data, there may be a lot of room for growth. If it can remain stable like Marinade, there is still room for 2.8 times growth.

In my opinion, BLZE should be valued on par with MNDE, if not higher. I’m not sure how JTO’s valuation compares to the other two. I like the project, what they’re doing with MEV on Solana is fundamentally unique, and I look forward to new innovations in the future, but a token supply of almost 90% still to be issued seems a bit high. But fully diluted market cap doesn’t matter… until it does. Regardless, I think all three projects have good chances of appreciation relative to the USD because these liquid staking mining protocols are creating value. Simple argument: liquid staking mining is good.

To summarize the section on the three most important liquid stake mining protocols on Solana, they all highlight the benefits of Solana’s decentralization. Liquid stake mining pools will spread the stake across a wide set of validators, rather than setting up a winner-take-all situation. They all publicly promote theirSafetyEach Liquid Staking protocol has a smartcontractRisk is intelligencecontractThere is a risk of error when operating a stake mining pool, but they all have a credibleSafetyThese are all good things, but they don’t really differentiate the three approaches, which is why I’ve tried to highlight their unique characteristics above.

4. Sanctum and the future of unlimited liquidity equity mining

There are many other Liquid Staking protocols on Solana, and the number of these protocols is about to increase significantly due to the liquidity support pool that sanctum.so is working hard to promote. Their goal is to make any of the Liquid Staking protocols as liquid as possible by accepting all Liquid Staking protocols and providing SOL exchange services. They charge less than 0.03%, usually 0.01%, which is basically equivalent to taking the period risk for you. You can exchange your Liquid Staking tokens for SOL immediately, and the pool provides a buffer for this, spreading the period risk over a wider range.

As of now, Sancrum supports twelve different Liquid Staking protocols, but their goal is to solve the liquidity onboarding problem for almost all Liquid Staking protocols. Liquidity for Liquid Staking protocols is only as good as the liquidity available in the liquidity pools of protocols like Orca and Radium, so new Liquid Staking protocols often need to develop strategies to ramp up liquidity in order to achieve the promised portion of the Liquid Staking protocol. Sancrum provides a huge additional buffer, allowing new and low market share Liquid Staking protocols to have liquidity immediately.

As of now, the liquid staking tokens that you can use Sanctum to instantly redeem for SOL include: bSOL, cgntSOL, daoSOL, eSOL, jitoSOL, JSOL, laineSOL, LST (Marginfi’s liquid staking token), mSOL, riskSOL, scnSOL, and stSOL.

Sanctum’s universal LSTs liquidity pool enables larger-scale experiments in the Liquid Staking space.

5. How to perform Liquid Staking

Now that you understand some of the options, let’s take a brief look at how to do it. Using bSOL as an example, simply go to stake.solblaze.org, click on the “Stake” tab, and the following UI will appear.

Keep in mind that, like most LSTs on Solana, bSOL also accrues yield, so you get back less bSOL than you submit SOL. Don’t be scared by this. In the image, you can see that 0.8993 bSOL = 1 SOL. This is because 0.8993 bSOL represents a claim on the BlazeStake liquid stake mining pool equal to 1 SOL, so you don’t lose any value. As the liquid stake mining pool’s SOL holdings grow, this number will continue to drop, meaning the amount of SOL you receive per bSOL will continue to increase. Currently 1 bSOL = 1.11 SOL, and this number will continue to rise over time.

Select the amount, tap the button, approve the transaction, and you're done.

6. LSTs and DeFi

Now that we have a pretty good understanding of how LSTs work, knowing the options for LSTs and the benefits of different approaches, let’s look at DeFi options. The purpose of all this is to turn your collateral token into liquidity so that you can do various things with it.

Let's start with something relatively simple, like metonymy.

Metonymy

One of the easiest and lowest-risk things you can do with LST is to lend it out. Platforms like MarginFi, Solend, and Kamino allow users to deposit collateral and borrow other assets of their choice.cryptocurrencyTypically very volatile, all of these platforms only offer overcollateralized borrowing positions. This means that your counterparty must post collateral of a higher value than the assets they are borrowing. This is usually variable based on an assessment of the quality of the collateral. If the value of the deposited collateral falls below a certain threshold, the collateral will be liquidated and used to repay the borrower.

The rules for this type of liquidation are somewhat complex, and different projects take different approaches. If you are investing a large amount of money in a venture, it is important to understand these rules.

Typically, the annualized yield on LST is relatively low because demand is not that high. Since it is already pledged, the largest, lowest-risk yield opportunity has already been taken. Nonetheless, you can stillSafetyYou can lend it out in a staking way and get some extra yield, or possibly earn some protocol rewards by lending it out, so this is an option worth considering.

Looping

Now that we’ve talked about borrowing, let’s talk about what borrowing enables. Let’s say you have 10 bSOL, which is currently advertised at an APY of 7.34% (keep in mind that this number will vary slightly with each epoch), plus an APY of 0.81% in the form of BLZE issuance (which depends on the price of BLZE). How can you get more yield? One way is to deposit those bSOL into a borrowing protocol, borrow more SOL, and then stake that SOL with BlazeStake. Drift Protocol and Kamino Finance offer a simple product that does this in one click, along with variable leverage that you can configure. You can also do this manually through protocols like Solend. The important variable to note is the SOL borrowing rate. The higher this rate, the lower your overall APY will be. Why? Because you have to deduct it as a cost. Here’s a quick example from Drift’s SuperStakeSOL UI.

In this example, you borrow 5 SOL using 10 bSOL as collateral. You have to pay an annualized interest rate of 0.6% to borrow the SOL, but you can then stake that SOL again along with bSOL and earn additional yield again. This makes sense as long as the borrowing rate is lower than the reward. Remember, you are taking a risk here. The main risk is a "decoupling" event like the one mentioned above for mSOL. This can happen at any time because the mechanism that ties its value to SOL has a duration component.

Providing liquidity

Another way to increase your LST earnings is by providing liquidity. What underpins decentralized exchanges are liquidity pools, which enable you to exchange token pairs. If there are enough of these pools, you can exchange any asset through a cross-pool swap via a pool list. Since USDC and SOL typically have the deepest liquidity, any route will typically go through them, for example, if you want to exchange WIF for WHALES, you might first exchange WIF for SOL, and then exchange SOL for WHALES.

The pool charges a fee for the swaps, which are returned to the liquidity providers (LPs). When the trades are balanced and the same amount of WIF is exchanged as WHALES, the price remains stable and the LPs simply extract a fee. However, this fee is justified by the risk of destabilizing losses. If demand starts to tilt significantly towards WHALES, the amount of WHALES in the pool will decrease, while the amount of WIF will increase until LPs are left holding only WIF, which is now worth less than before. This trend can obviously reverse, which is why it is called destabilizing losses, but it is something to keep in mind.

So, which liquidity pools are attractive for LST? First, the SOL-LST pool is popular because it supports instant staking and unstaking operations. Second, LST1-LST2 type pools are also good because you hold two LSTs and both of them can get normal staking returns while also getting a small portion of trading fees. You know that their prices should be highly correlated because they are correlated to the SOL price (although not pegged). The risk of unstable losses is low. Third, for a higher risk, higher return option, you may want to consider pools that allow you to exchange LST for their protocol governance tokens, such as jitoSOL-JTO or bSOL-BLZE. These are usually incentivized by additional governance token rewards to ensure reasonable liquidity.

I can’t stress enough how important it is to understand the more nuanced aspects of liquidity provisioning. Different pools differ in how they allocate liquidity and the control LPs have over that. Different approaches will work better or worse depending on how the tokens trade against each other, so you need a good mental model of how price action will unfold, and therefore where you want to place your liquidity in the pool to get consistently good results. With the first two options (SOL-LST, LST1-LST2), your mental model is basically “they will continue to be highly correlated,” which makes this all very simple. If you’re going to dive deeper than the simple options, I recommend starting with very small amounts and watching how price action unfolds. Pay attention to how the balance in the pool changes as assets trade, how fees accumulate, and decide if it’s worth making a larger investment.

Some DeFi protocols, like Kamino, offer vaults that automatically manage LP strategies so you don't have to do much. They come with a pre-built strategy for putting funds into the liquidity pools they follow. You should understand what it is before doing this, but it means you don't have to manually go into the pool and rebalance your range. Of course, they charge a small fee.

The three combinations of lending, revolving, and providing liquidity do not exhaust your options on LST, but I don’t want to turn this into a thesis. If you haven’t tried all three options, you may want to try them before diving in.

7. Conclusion

Hopefully, this article has given you a solid understanding of Liquid Staking on Solana. The future of LST and DeFi on Solana is very promising right now, and the pace of innovation in this space is amazing.

If you find any errors in the article that need to be corrected, or if you feel I have described something incorrectly, I will be happy to receive feedback and consider making changes.

The amazing thing about Solana is that you can try almost all of this with just $10. If you’re concerned about the risks involved and whether you understand them enough to try it all, you can start carefully and get a feel for it. The only person who can assess your risk appetite, and whether it’s worth trying any given opportunity, is you.

The article comes from the Internet:How is Solana’s liquidity staking developing?

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