Market Opportunities
Liquidity staking revolutionizes the way assets are managed in PoS networks by turning traditionally illiquid staked assets into liquid assets. Staking typically involves locking up cryptocurrency holdings to support the security and operation of a blockchain, which makes those assets inaccessible during the staking period. However, Liquidity Staking issues Liquidity Staking Tokens (LSTs) in exchange for staked assets. These LSTs represent the amount staked and the accumulated rewards, allowing users to trade, use in DeFi applications, or use as collateral for leverage without having to wait for the staking period to end.
EigenLayer is a decentralized re-staking protocol on the Ethereum network that takes this concept a step further. It allows users to re-stake by depositing LST into EigenLayer's smart contract to obtain Liquid Re-staking Tokens (LRT). These LRTs encapsulate the value of the staked tokens, staking rewards, and additional rewards for EigenLayer operations, providing users with greater flexibility and higher profit potential.
The total locked value (TVL) of liquidity staking has soared from $30 million to over $57 billion in less than four years. Lido is one of the major players in the liquidity staking space, accounting for approximately $35 billion of the staking assets.
Source: DeFiLlama
Despite this growth, there are still differences in staking ratios across networks. For example, Solana’s pledge ratio is over 70%, significantly higher than Ethereum’s 27%. However, LST accounts for only 6% of Solana’s pledged supply, compared with over 40% on Ethereum, according to Dune Analytics.
This presents a huge market opportunity for Sanctum in the Solana ecosystem. By introducing innovative re-staking options and promoting a competitive environment, Sanctum can provide Solana stakers with more flexibility, increased liquidity, and additional profit opportunities. This not only meets the needs of the growing DeFi movement, but also caters to the need for more efficient and diverse staking solutions, ensuring that Solana will not be dominated by a dominant staking protocol (such as Lido) like Ethereum.
protocol
Sanctum's Infinite Pool
Sanctum Infinity is an innovative liquidity pool designed to make trading and staking Liquidity Staking Tokens (LST) on Solana easier and more efficient. Think of it as a large, flexible pool that can seamlessly swap a variety of LST.
When you buy LST with SOL, you may notice that you get slightly less than one LST. This is because LST earn staking rewards over time, making them more valuable. For example, JitoSOL is priced higher than SOL because it has been collecting rewards since launch, showing a return of about 11%.
Sanctum Infinity uses Solana’s staking pool data to accurately price LST. Traditional AMMs can be inefficient when liquidity is low or large transactions occur, but Infinity’s approach ensures accurate pricing regardless of liquidity because it uses reliable on-chain data.
When you deposit LST into the Infinity pool, you get INF tokens in return. These tokens are special because not only do they earn staking rewards for all LST in the pool, they also collect transaction fees, giving you an additional source of income.
Infinity also maintains balance by dynamically adjusting swap fees. This means it encourages trades that help maintain a good mix of different LSTs in the pool, ensuring both new and old tokens grow and provide good returns.
The Infinity pool allocation strategy encourages the creation of new LSTs, leaving 20% of the pool for new, approved LSTs. Each new LST requires at least 1,000 SOL and is adjusted based on the value of its holdings and recent earnings. The remaining 80% of the pool is dedicated to a mix of existing LSTs and trading returns, aiming to achieve diversified earnings and high trading volume, with allocations based on the holding value of each LST, and future adjustments will take into account earnings and support for smaller LSTs.
Validator LST
Validator LST is a token that represents your stake with a specific validator. These tokens increase in value as staking rewards accumulate, providing a flexible and efficient way to stake.
When you stake SOL traditionally, a staking account is created and delegated to a validator. To unstake, you need to deactivate this account, which takes some time. In the liquid version, when you deposit SOL into a validator LST pool, a staking account is created and delegated for you. In return, you receive a validator LST that is staked on your behalf.
Benefits of LST for Validators
● APY for native staking is similar across validators, making it difficult for them to stand out.
● Validator LST helps validators differentiate themselves by issuing their own tokens and offering unique rewards.
● LST allows stakers to participate in a wider range of DeFi fields, providing more reward opportunities.
● LST reduces the need to create liquidity pools, enabling new and smaller validators to compete with larger validators, making the validator set more decentralized and competitive.
● LST simplifies the staking process, provides instant exchanges, and avoids the long waiting periods associated with unstaking in traditional methods.
The Reserve
The Sanctum Reserve Pool provides deep liquidity for all LST on Solana, offering unique advantages and solving key challenges in the staking ecosystem.
Users usually have two ways to redeem LST:
1. Deactivate and wait: Deactivate the staking account and wait 2-4 days to get SOL.
2. Instant Trading: Trade LST on DEX to gain immediate liquidity.
The Sanctum Reserve Pool simplifies the process of redeeming LST by allowing users to exchange LST for SOL immediately. The reserve pool then deactivates the staked account and takes back the SOL after a cool-down period. It works by accepting staked SOL and returning SOL, then unstacking the SOL at the end of each epoch to replenish its reserves.
The reserve pool also supports various DeFi protocols, allowing them to accept any LST as collateral. This wide compatibility increases the utility and adoption of LST.
More importantly, reserve pools promote a more decentralized network by providing a shared source of liquidity, helping smaller validators more easily compete with larger validators. This democratizes staking, providing users with more choices and higher returns.
The Router
Sanctum’s Router is a tool that makes it easy to swap different LST on the Solana blockchain. Here’s a simplified explanation:
A staking account is a locked SOL account that you delegate to a validator. When you stake SOL or deposit it into LST, a staking account is created and managed by a pool. Previously, the liquidity of LST was limited to its specific pool. Shallow pools made it difficult to quickly convert LST to SOL, reducing its effectiveness and attractiveness in DeFi.
Sanctum's router solution enables seamless swaps between any LST by moving staking accounts between pools. This process unifies the liquidity of all LST. Sanctum charges a fixed fee of 0.01% for each LST to SOL swap made through the router.
Essentially, Sanctum's router unlocks the full potential of liquid staking on Solana by enabling easy and efficient exchange between LST, thereby enhancing liquidity and usability in the DeFi ecosystem. Lido has become a dominant force in the Ethereum staking ecosystem. As of now, 27% of ETH is staked, of which nearly 30% is deposited in Lido. This equates to approximately $35.5 billion in total locked value (TVL), surpassing the second largest staking protocol RocketPool, which holds $4.6 billion. Lido's TVL accounts for more than half of Ethereum's total staked value and nearly a third of the total TVL of all on-chain DeFi.
Sanctum vs Lido
Lido's liquid staking token stETH has become a key element of the Ethereum ecosystem. Its liquidity and wide acceptance make it the "dollar of staking assets." The high liquidity of stETH has attracted many users and enhanced its dominance. However, this concentration of power has also raised concerns. Lido DAO controls about 30% of the staked Ethereum and could have a significant impact on the network, affecting its decentralization.
In contrast, Sanctum took a different approach on Solana. Their journey led to a key realization: LST is inherently fungible and is just a wrapper around staking accounts. This insight shifted their strategy toward fostering a multi-LST environment rather than competing directly with other staking pools.
Sanctum's philosophy is collaboration rather than competition. Their goal is to create an infrastructure that supports a variety of LSTs. By focusing on expanding the overall staking market rather than dominating it, Sanctum hopes to achieve greater success.
Lido's success on Ethereum is built on its dominance and widespread adoption of the stETH token. This model has proven to be very effective, but it also brings risks associated with centralization. In contrast, Sanctum aims to build a more decentralized and cooperative ecosystem on Solana. By supporting multiple LSTs and promoting cooperation, Sanctum hopes to create a healthier and inclusive staking environment and has the potential to surpass Ethereum's staking landscape in innovation and participation.
Sanctum vs Jito
Jito is a Solana native protocol that gained significant attention through airdrops in 2023. Since then, it has dominated Solana’s LST market by leveraging its governance token, JTO, to incentivize liquidity and integration with other major Solana protocols.
Key Features
● JitoSOL is the leading LST on Solana, with the highest APY, TVL, and trading volume in the Kamino liquidity vault.
● Collaboration with top protocols such as Solend, Drift, Jupiter, and Marginfi strengthens its ecosystem presence. Through Wormhole, Jito is expanding its influence to Arbitrum, increasing the utility of JitoSOL.
● Jito excels at maximizing extractable value (MEV) through its innovative Solana client and blockchain engine. This technical advantage enables it to offer higher staking rewards and optimize transaction ordering.
While Jito’s growth is similar to Lido’s on Ethereum, it raises similar concerns about whether such dominance could pose a risk to Solana’s ecosystem health.
Sanctum is focused on providing robust infrastructure support to ensure the stability and security of the Solana ecosystem. Key features of Sanctum include:
● Infinity multi-LST liquidity pool brings together liquidity from various trading pairs, enhancing liquidity and reducing slippage risk.
● Reserve pools and routers facilitate instant unstaking services and efficient LST token swaps, supporting liquidity and stability.
Bullish fundamentals for Sanctum
1. Sanctum’s unique reserve and router approach provides users with a capital-efficient way to redeem and exchange LST, enhancing liquidity and user appeal.
2. Sanctum’s reserve pool has over 200,000 SOL (~$30 million) in liquidity, ensuring instant redemption for LST holders and reducing slippage, making it an attractive option for users.
3. By lowering the barrier to creating LST, Sanctum enables smaller validators to issue their own tokens, promoting decentralization and increasing validator competition in the Solana network.
4. Sanctum’s TVL has grown to over $700 million, making it the fourth largest protocol on Solana, demonstrating strong market acceptance and trust.
Bearish fundamental factors for Sanctum
1. Despite its innovation, Sanctum faces stiff competition from established players such as Jito, which already dominates the LST market on Solana.
2. Sanctum’s success is closely tied to the growth and stability of the Solana ecosystem, which has experienced volatility and infrastructure challenges.
3. Although Solana does not currently implement slashing, its future introduction may pose risks to validators and stakers, affecting the attractiveness of staking and LST. Sanctum's unique mechanism of reserves and routers, while innovative, may face challenges in user understanding and adoption compared to simpler staking solutions.
4. Like all crypto protocols, Sanctum faces regulatory scrutiny and potential legislative changes that could impact its operations and the broader Liquid Staking environment.
Deep Dive into the Sanctum Ecosystem: Part 2
In the upcoming second part of our Sanctum research report, we will take a deep dive into all of the Liquid Staking Tokens in the Sanctum ecosystem. Our goal is to provide a concise comparison, analyzing the risks and potential staking benefits of each LST. Additionally, we will share insights and opinions on the future of this innovative project.
We recommend connecting and following us on social media to get the latest updates and insights. Your participation will ensure you don’t miss any key developments, including our deep dives into how innovative features like the Sanctum Router work within the wider blockchain environment.
