My goal is to provide a comprehensive introduction to Solana Liquid Staking Mining. I want everyone to understand not only what liquid staking mining is and how to do it, but also why you should do it. What makes a person wake up in the morning and say to himself: “Today I am going to mine my $SOL for liquid staking? Come on, join me and I will take you into a whole new world.”
I've also tried to structure this rather long article so that you can skip certain parts if you're already familiar with the subject. On this basis, here is the table of contents:
Staking on Solana
LSTs and ongoing risks
Leading LSTs and their incentive structures
Sanctum and the Infinite LST Future
How to carry out liquid staking mining
LSTs and decentralized finance
in conclusion
Note: This article focuses on popular science, not investment advice.
1. Staking on Solana
Before we talk directly about Liquid Staking, let’s first understand regular staking. In a delegated proof-of-stake (POS) network like Solana, staking is delegating your tokens to a validator who must commit to faithfully validating transactions on the network or face penalties. This is what creates fundamental alignment between validators and network users, without which double spending, censorship, and all kinds of other abuses can occur. When you do "local" staking, you choose a specific validator and delegate your tokens to them. You can do this through a range of wallet software or using the Solana command line interface.
Since the Solana mainnet beta launch in February 2020, Solana has been following this proposed inflation plan:
As I write this, it's February 2024, four years after that launch, so it's easy to see that inflation is currently around 5%. The precise amount of inflation is controlled by three parameters: initial inflation rate (8%), deflation rate (-15%) and long-term inflation rate (1.5%). Inflation starts at 8% and decreases at an annualized rate of 15% at each Epoch 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 Token generated through inflation? It’s simple: stake miners. This means that every epoch, staking miners are increasing their relative ownership of the total $SOL Tokens at the expense of non-staking miners. Nothing more complicated is actually happening. If all $SOL was stake mined, no one would increase the total value of their holdings. This results in a high staking ratio for the Solana network; at the time of writing, approximately 2/3 of $SOL is stake-mined. However, the proportion of liquid staking mining is still low.
For PoW blockchains, validators bear high equipment and energy costs, which forces them to sell some (or perhaps all) of the tokens they receive just to balance costs. In a proof-of-stake network like Ethereum, these costs are very low, so there is hardly any selling pressure. On Solana, the operating expenses of the validator are slightly higher than that of Ethereum, because the validator must execute transactions as part of the consensus, which incurs costs, and the cost of the validator equipment is slightly higher than that of Ethereum, because it requires more than Ethereum. for higher performance. 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 through token inflation” has become a blood libel on 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 continuing risks
There are high incentives to stake on Solana to avoid being diluted by other staking miners, and one of the few reasons not to staking is that it locks your capital into each epoch. With liquid staking mining, you contribute your tokens to a stake pool that manages the stakes distributed by validators, and tokenize the fact that you have committed your tokens to the pool. This move returns a new asset representing that fact to the staking miner and allows the user to redeem it for the original staking mining $SOL. Therefore, it can be used as the functional equivalent of $SOL in many cases.
The most popular liquid equity mining tokens (LST for short) on Solana are almost all “rewarded” tokens. Nearly all $SOL in the pool is delegated to validators chosen by the pool operator (sometimes minus a small buffer for quick redemptions), so these delegated $SOL in the pool are traded for more $SOL form to accumulate rewards. Therefore, the amount of LST keeps increasing over time, but in each period the amount of $SOL it represents increases, and therefore the price relative to $SOL increases. Another method is "rebasing", that is, LST holders will obtain more liquid tokens, and each liquid token can be redeemed at a 1:1 (with delay), but this is not commonly used on Solana.
On Solana, each epoch takes approximately 2.5 days. If a user wants to get back their original stake-mined $SOL, they must submit a request to retrieve their delegated stake and wait for the period to end before they can redeem it. In traditional financial markets, this is known as taking ongoing risk. You're betting that the reward of locking up your capital for 2.5 days will outweigh the risk of you needing it immediately. Duration-wise, the 2.5-day is much less risky than the 10-year Treasury note. On the other hand, U.S. Treasuries...are a bit less volatile than cryptocurrencies overall.
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 period before it can be decommissioned by the underlying pool, or pass Existing liquidity pools trade $mSOL into $SOL on the open market. Here is an example from Marinade Finance:
Marinade uses the Jupiter decentralized exchange aggregator to trade $mSOL in exchange for $SOL. I did some checking and found that removing the order for 10,000 $mSOL would have a 0.01% price impact, but when the order amount increased to 100,000 $mSOL, the price impact shown was 100,000 (actually I didn't More mSOL, but can be simulated), what does this mean?
This means that if you want to de-delegate and receive $SOL immediately, you will receive 8.162% less $SOL than if you wait for the period to end and then de-delegate. The above price impacts are determined based on current market conditions, i.e. dependent on liquidity conditions. If rechecked, this number may increase or decrease. This highlights an important fact about LST. As I mentioned before, they can serve as functional equivalents of $SOL in many situations, but there is one important difference: you take on a certain level of ongoing risk. If you need funds urgently and in large quantities, you will have to accept a lower price to get the funds you need.
A simple example can help understand this. Let’s take a look at the “$mSOL decoupling” event that occurred on December 12, 2023. In just 20 minutes, one wallet 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’s an analysis from birdeye.so:
You can see the price returning to its previous levels relatively quickly. Why is this so? Because arbitrage bots and other speculators sensed this opportunity and started buying $mSOL since they didn’t need the funds in the next period. The price of base $SOL doesn't really change, so they are essentially buying discounted $SOL.
This situation is not limited to $mSOL, but applies to every LSTs (with some additional conditions that we will explore later). The liquidity of any given LST will inevitably be less liquid than the $SOL Token. However, this is primarily a concern if you have a large amount of $SOL mined for liquid staking. Overall, having more money also means facing more challenges.
So the lesson here is that while liquid staking mining tokens carry some of the same ongoing risks as regular staking mining $SOL, these only become apparent when there is a lack of liquidity in the market. The more liquid the LST market is, the smaller the impact of ongoing risks. If your position is relatively small, you may not feel this ongoing risk at all. Nonetheless, it is still important to understand the liquidity limitations of a token.
3. LST leaders and their incentive structure
There are three LSTs on Solana with a total locked value of over $100 million, highlighting different approaches to incentivizing adoption: Jito ($jitoSOL), Marinade ($mSOL), and BlazeStake ($bSOL). This is obviously subject to change, but you can see the rough numbers here:
Currently, Jito is number one, so we'll start with that.
1. Jito’s value proposition
The Jito Protocol invites stakers to join the ranks of earning MEV on Solana and offers rewards for minting $JitoSOL. $JitoSOL is implemented via a secure SPL Stake Pool with optimized validation node groups and MEV allocation. The protocol supports efficient transaction processing through the Jito-Solana client and occupies an important position in Solana DeFi. Use of $JitoSOL earns points within the growing Solana ecosystem and provides competitive yields and performance, providing the community with a unique staking experience.
However, one real difference is the Maximum Extractable Value (MEV). In short, MEV allows traders to extract value from transactions, but Solana’s design makes it harder to extract MEV. Jito 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 and charge for ordered transactions. The liquid staking mining pool that delegates $SOL to Jito can receive this portion of the profit. Other LSTs can also benefit from being delegated to validators running Jito's modified validator software.
An Invitation To Stake With the Jito Protocol
2. Marinade’s value proposition
Marinade is the first liquid staking mining protocol on Solana, leading the industry’s best practices. When you do staking mining directly, you need to choose a validator, but the liquid staking mining pool will automatically assign you to multiple validators, reducing the risk. Last month, Marinade launched an initiative requiring validators to create an insurance fund to safeguard the interests of delegators. In addition, they also launched a "targeted equity" function that allows miners to support specific validators and obtain additional incentives. Marinade’s governance is conducted by the $MNDE Token, which allows holders to vote on how the protocol is run, and this token is independent of $mSOL. Now they are running a campaign where participants can be rewarded with additional $MNDE Tokens to encourage them to support the development of the protocol.
Introducing PSR: Protected Staking Rewards
Let Marinade Earn Season 2 Begin!
3. BlazeStake’s value proposition
The main point of differentiation for BlazeStake is associated with the $BLZE governance token. Similar to $MNDE, $BLZE can be used to vote on incentive distributions, but also has independent value. BlazeStake is a relatively young project, so they have only distributed ~80% of the total supply of tokens, while Marinade has fully distributed their tokens and must repurchase them to create $MNDE Token incentives. Depending on your perspective and investment time horizon, this may be a benefit or a disadvantage. Jito also has a governance token $JTO, but it is not currently used to incentivize staking mining with Jito. Let’s quickly compare the top three governance tokens in the protocol’s TVL, including market capitalization, circulating supply, and growth trends:
$BLZE performs well in terms of the ratio of total locked value to the governance token’s full diluted market cap. However, there are several issues to be aware of. First, $JTO’s FMDC is high because the circulating supply is lower, which may cause FMDC to be less accurate in the short term. Second, $BLZE has only unlocked ⅔ of the token supply, so there are still new tokens that will enter the market. To understand the unlocking schedule, you can refer to the following:
What are the uses of $BLZE that make it valuable? Similar to $MNDE, you can help $bSOL achieve its goals by voting for specific governance proposals. However, BlazeStake uses a mechanism called staking gauges to give users more consistent and granular control. You can choose to vote in Realms.today’s Decentralized Autonomous Organization (DAO), 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 voting power in the DAO. Below is a screenshot of the stake amount showing some example options to which votes can be directed after depositing into the DAO. These features are quite unique in LST.
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 check your wallet’s current SolBlaze score on BlazeRewards. There is no real advantage to trying to improve your score by forging 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 providing position = 2 minutes. This roughly corresponds to the risk you take with your capital, so it makes sense that the higher the risk, the higher the reward.
It’s also worth noting that BlazeStake offers an option to stake mine your $SOL with a single validator with what they call “Custom Liquid Staking.” Unlike Marinade, 100% of the stake will be allocated directly to that validator. It should be noted that unlike Marinade, Marinade only delegates 20% of the equity directly to the validator of your choice, and the remaining 80% is distributed through their delegation strategy algorithm. Marinade details this in its documentation, but it's not immediately apparent in its UI, which I think is a bit less than ideal.
BlazeStake has some other interesting features. They offer a real $SOL faucet, meaning if you mistakenly have all your $SOL locked up on their platform and don't have enough $SOL to cover the unlocking transaction fees, you can use this faucet to get some $SOL to Pay the fee. This is very convenient because you don’t need to bring in new funds through a centralized exchange. In addition, they provide a simple token minting user interface that allows you to easily create an SPL Token, as well as 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 BlazeStake’s primary value comes from the issuance of its governance token, then $BLZE’s price action is what drives value. The price of $BLZE started to increase towards the end of November 2023 and remained stable between $0.002 and $0.004, but based on the above data, there may be a lot of room to rise. If it can remain as stable as Marinade, there's still 2.8x room to grow.
In my opinion, $BLZE should be valued on par with $MNDE, if not higher. I'm not sure how to compare $JTO's valuation to the other two. I love this project, what they are doing with MEV on Solana is fundamentally unique, and I look forward to new innovations in the future, but with almost 90% of the token supply still to be issued, that 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 U.S. dollar because these liquid staking mining protocols are creating value. Simple argument: liquid stake mining is good.
To summarize the sections on the three most important liquid staking mining protocols on Solana, they all highlight the benefits of Solana decentralization. Liquid stake mining pools spread stake across a broad set of validators rather than creating a winner-take-all situation. They all openly advertise their safety. Each Liquid Staking protocol has smart contract risk, that is, the risk that the smart contract will be wrong when operating the staking mining pool, but they all have a credible security awareness. These are all good things, but they don't really differentiate between the three methods, which is why I tried to highlight their unique features above.
4. Sanctum and the future of unlimited liquid equity mining
There are many other Liquid Staking protocols on Solana, and the number of these protocols is about to increase significantly thanks to the liquidity support pool that Sanctum is working on. Their goal is to make any kind of liquid staking mining protocol as liquid as possible by accepting all liquid staking mining protocols and providing $SOL exchange services. They charge less than 0.03%, typically 0.01%, which essentially amounts to taking on the period risk for you. You can immediately exchange your liquid staking mining tokens for $SOL, and the pool provides a buffer for this, spreading the period risk over a wider range.
As of now, Sanctum supports twelve different Liquid Staking mining protocols, but their goal is to solve the liquidity launch problem for almost all Liquid Staking protocols. The liquidity of a Liquid Staking protocol only depends on the liquidity available in the liquidity pools of protocols such as Orca and Radium, so new Liquid Staking protocols often need to develop strategies to boost liquidity in order to fulfill the committed part of the Liquid Staking protocol. Sanctum provides a huge additional buffer so that new and low-market liquid staking mining protocols can have immediate liquidity.
As of now, you can use Sanctum to instantly redeem $SOL’s liquid equity mining tokens, including: $bSOL, $cgntSOL, $daoSOL, $eSOL, $jitoSOL, $JSOL, $laineSOL, LST (Marginfi’s liquid equity mining tokens ), $mSOL, $riskSOL, $scnSOL and $stSOL.
Sanctum’s universal LSTs liquidity pool enables larger-scale experiments in the Liquid Staking industry.
5. How to perform Liquid Staking
Now that you know some of the options, let’s briefly look at how to do it. Taking $bSOL as an example, just go to SolBlaze, click the "Stake" option, and the following user interface will appear.
Keep in mind that like most LSTs on Solana, $bSOL accrues yield, so you get back less $bSOL than you submit. Don't let this scare you. In the image you can see 0.8993 $bSOL = 1 $SOL. This is because 0.8993 $bSOL represents a claim on the BlazeStake liquid staking mining pool equal to 1 $SOL, so you won’t lose any value. As the $SOL holdings of liquid staking mining pools grow, this number will continue to decrease, which means the amount of $SOL you receive for each $bSOL will continue to increase. Currently 1 $bSOL = 1.11 $SOL, and this number will continue to rise over time.
Select the amount, click 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, the options for LSTs, and the benefits of different approaches, let’s look at the DeFi options. The purpose of all this is to turn your staking token into liquidity so that you can do all kinds of things with it.
Let's start with something relatively simple, like taking out a loan.
loan
One of the easiest and lowest-risk things you can do with LST is to lend it out. Platforms such as MarginFi, Solend and Kamino allow users to deposit collateral and borrow other assets of their choice. Cryptocurrencies are often very volatile, and all these platforms only offer overcollateralized lending positions. This means that your counterparty must post collateral worth more than the asset they are borrowing. This usually changes based on an assessment of the quality of the collateral. If the value of deposited collateral falls below a certain threshold, it will be liquidated and used to repay the borrower.
The rules for this liquidation method are somewhat complex, and different projects take different approaches. If you are going to invest a lot of money in venture capital, be sure to understand these rules.
Typically, the annualized yield on borrowing for LST is relatively low because demand is not that high. Since it's already staked, the biggest, lowest-risk profit opportunity has already been taken advantage of. Still, you can lend it out in a relatively safe way, get some extra yield, or possibly get some protocol rewards for lending, so it's an option worth considering.
Looping
Now that we've talked about borrowing, let's talk about what borrowing enables. Assuming you have 10 $bSOL, the currently advertised annualized return is 7.34% (keep in mind that this figure will vary slightly from period to period), plus 0.81 in the form of $BLZE issuance % annualized yield (this depends on the price of $BLZE). How can you earn more? One way to do this is to deposit these $bSOL into a lending protocol, lend out more $SOL, and then stake that $SOL with BlazeStake. Drift Protocol and Kamino Finance offer a simple product that does this with one click, as well as variable leverage that you can configure. You can also do this manually via a protocol like Solend. An important variable to note is the $SOL lending rate. The higher this interest rate, the lower your overall APR. why? Because you have to deduct it as a cost. Here is a quick example of the SuperStakeSOL UI from Drift.
In this example, you lend 5 $SOL using 10 $bSOL as collateral. You have to pay an APR of 0.6% to lend out $SOL, but you can then stake that $SOL again alongside $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 similar to $mSOL mentioned above. This can happen at any time because the mechanism that ties its value to $SOL has a duration component.
Provide liquidity
Another way to increase LST returns by providing liquidity. Underpinning decentralized exchanges are liquidity pools that enable you to exchange Token pairs. If there are enough of these pools, you can exchange any asset via a cross-pool swap through a list of pools. Since $USDC and $SOL generally have the deepest liquidity, any route will usually go through them, for example, if you wanted to exchange $WIF for $WHALES, you might first exchange $WIF for $SOL and then $ SOL is exchanged for $WHALES.
Pools charge fees for exchanges, which are returned to liquidity providers (LPs). When the transaction is balanced and the amount of $WIF exchanged is the same as the amount of $WHALES exchanged, the price remains stable and LP is simply withdrawing fees. However, this fee is justified because of the risk of volatile losses. If demand starts to shift significantly towards $WHALES, the amount of $WHALES in the pool will decrease and the amount of $WIF will continue to increase until LPs only hold $WIF, which is now worth less than before. This trend can obviously reverse, which is why it's called a volatile loss, but it's something to keep in mind.
So, which liquidity pools are attractive to LST? First, the SOL-LST pool is popular because it supports instant staking and unstaking operations. Secondly, LST1-LST2 type pools are also great because you hold two LSTs and they both earn normal staking benefits while also earning a small portion of the transaction fees. You know their prices should be highly correlated since they are correlated (although not anchored) to the $SOL price. The risk of volatile losses is low. Third, for a higher risk, higher reward option, you may want to consider a pool that allows you to exchange LST for its protocol governance token, such as jitoSOL-JTO or bSOL-BLZE. These are typically incentivized through additional governance token rewards to ensure reasonable liquidity.
I cannot emphasize enough the importance of understanding the additional nuances that liquidity offers. Different pools differ in how they allocate liquidity and the control LPs have over this. Different approaches will be better or worse depending on how the tokens are trading against each other, so you need a good mental model of how the price action will unfold, so you want to put liquidity in the pool to get that good all the time result. For the first two options (SOL-LST, LST1-LST2), your mental model is basically "they will continue to be highly correlated", which makes this very simple. If you want to delve deeper than the simple options, I recommend starting with a very small amount and watch how the price action unfolds. Pay attention to how the balance in the pool changes as assets trade, how fees accumulate, and decide whether 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 don't exhaust your options on LST, but I don't want to turn this into a thesis. If you haven't tried all three of these options, you might want to give them a try before diving in.
7. Conclusion
Hopefully this article gave you a solid understanding of Liquid Staking on Solana. The future of LST and DeFi on Solana is very promising, and the speed of innovation in this industry is also amazing.
If you find any errors in the article that need to be corrected, or you feel that I've described something incorrectly, I'd be happy to receive feedback and consider making changes.
The amazing thing about Solana is that you can try almost all of them for $10. If you're worried about the risks involved and whether you understand them enough to try this, you can start cautiously and get a feel for it. The only person who can evaluate your risk appetite, and whether any given opportunity is worth taking, is you.
Disclaimer: This article does not constitute investment advice. Users should consider whether any opinions, views or conclusions in this article are consistent with their specific situations, and comply with the relevant laws and regulations of the country and region where they are located.
This article is reprinted with permission from: "MarsBit"
Original author: Algo Rhythmic
Compiled by: Vernacular Blockchain
