Understanding Jito (JTO)

Introduction

Last year, the liquidity staking track became very popular, led by Lido, Rocket, and Frax. Due to the high threshold for earning staking rewards on the Ethereum network, combined with the prosperity of the DeFi ecosystem and the strong demand for token liquidity and protocol composability, liquidity staking has become one of the largest TVL (Total Value Locked) tracks in the Ethereum network.

The Solana network, unlike Ethereum, adopts the DPOS (Delegated Proof of Stake) consensus mechanism, similar to the BNB network. Users delegate SOL tokens to validate nodes, participate in maintaining the network, and receive SOL rewards. The main participants in its ecosystem include validators, delegators, and users. Half of the transaction fees paid by users are collected by nodes, and the other half are used for burning. Delegators receive SOL inflation rewards. The more SOL a validating node is delegated, the greater its probability of producing a block and, consequently, its earnings.

The staking rewards in Solana come from the inflation rewards of SOL tokens. The inflation rate of SOL decreases by 15% annually until it stabilizes at around 1.5%. The threshold for SOL staking is relatively low, with current staking rewards at about 6%. For liquidity staking products in the Solana network, the main problem they address is enjoying staking rewards while maintaining token liquidity and leveraging the composability between protocols. Since Lido’s exit from Solana’s liquidity staking, the Jito liquidity staking protocol has developed rapidly. This article will analyze the design logic of the Jito protocol’s liquidity staking, including its token model and current development status.

Jito Overview

Jito is a liquidity staking protocol on the Solana network that increases staking yields by capturing MEV (Maximal Extractable Value) and reducing congestion on the Solana network. Users can deposit SOL into the Jito platform to receive an equivalent value of JitoSOL tokens. As the value of the staked SOL tokens increases due to compounded staking yields, users can then unlock and exchange their JitoSOL tokens for SOL. The team behind Jito is anonymous, and the product officially launched on the Solana mainnet in November 2022. The protocol previously secured $10 million in Series A funding led by Multicoin in August 2022.

In late 2023, the protocol issued its governance token, JTO, and performed an airdrop to ecosystem participants. The airdrop amounted to 10% of the total supply. The project has seen significant growth, especially since October of the previous year when the number of SOL staked increased. As a result, the Total Value Locked (TVL) in the protocol has rapidly grown, making it the second-largest protocol by TVL in the Solana ecosystem.

Liquidity Staking

Through the Jito platform, users who deposit SOL tokens can receive JitoSOL. This token is similar to wstETH, accumulating staking rewards over time. Users can unlock and exchange their JitoSOL for SOL tokens. The Jito platform provides an unlocking feature with a two-day redemption period.

The Jito protocol charges a 4% annual management fee on the earnings obtained from staking SOL.

Source: https://www.jito.network/staking/

MEV Solutions

Arbitrage trades can lead to network congestion. Addressing this issue, the Jito protocol has developed its client. This move encourages validators to run this client to eliminate garbage transactions associated with Maximal Extractable Value (MEV) and offers rewards to stakers. Primarily, it aims to resolve MEV issues through an auction system similar to Flashbots. Traders submit sequences of arbitrage trades for bidding. The “Third Ethereal Block Engine” simulates and provides the most valuable combination of transactions. These bids are then passed to validators, with profits shared between validators and stakers.

As for the SOL token, the current MEV income is minimal. To date, Jito validators have received a total of 145,535 SOL in staking rewards, with MEV earnings amounting to only 1,619.21 SOL. This indicates that the MEV income is very small, underscoring that Jito’s client is primarily aimed at addressing the issue of garbage transactions in the Solana network, rather than enhancing staking profits.

Source: https://dune.com/ilemi/jitosol

Jito StarkNet

Due to the reliance on centralized keys and servers for the management of staking pools, there exists a risk of centralization. To address this issue, the team developed Jito StarkNet, a decentralized smart staking pool operation protocol, consisting of two parts:

1. Validator History Program: This component stores a three-year history record for every validator on the network.
2. Steward Program: Utilizing the on-chain Validator History Program, it calculates the score and delegation amount for each validator, thereby ensuring that staking shares are allocated to better-performing validators, achieving a transparent and efficient delegation mechanism.

Source: Image Source:https://www.jito.network/blog/a-deep-dive-into-stakenet/

Token Model

Jito’s native token, JTO, was officially issued on December 7, 2023, with a total supply of 1 billion tokens. The team has released its allocation plan, which includes 34.3% for community growth; 24.5% allocated to core contributors; 25% for ecosystem development; and 16.2% distributed to investors.

Source:https://www.jito.network/blog/announcing-jto-the-jito-governance-token/

The portion of JTO designated for community growth is used for airdrops, accounting for 10% of the total supply, i.e., 100 million tokens. Of these, 80 million tokens are distributed to JitoSOL holders, 15 million to validators operating the Jito client, and 5 million for distribution to Jito MEV searchers.

Source: https://www.jito.network/blog/jto-airdrop-eligibility-and-allocation-specifications/

JTO is used for governance, with voting rights to set the fees for the JitoSOL staking pool. The initial supply of JTO is 115 million tokens, with the JTO allocated to the team and investors subject to a one-year lock-up period. After unlocking, they will be distributed over two years, as detailed in the token unlocking schedule shown below:

Image Source: https://www.jito.network/blog/announcing-jto-the-jito-governance-token/

Development Status

The protocol launched a points mechanism event on September 15, 2023, and announced an airdrop in November of the same year, attracting significant capital and users. The Total Value Locked (TVL) surged after October, currently standing at around $670 million, ranking second in the Solana ecosystem.

Source: https://defillama.com/protocol/jito

Due to the airdrop event, the protocol saw its peak number of active stakers in November, with the weekly active stakers exceeding 15,000 at its highest. Recently, there has been a slight decline, with the number of active stakers per week around a hundred.

Source: https://dune.com/ilemi/jitosol

Conclusion

In terms of mechanism design, Jito does not significantly differ from traditional liquidity staking protocols. Its main feature is the capture of MEV to reduce congestion on the Solana network and enhance staking returns, focusing more on resolving network congestion through an auction mechanism effectively. With the resurgence of the Solana ecosystem and the allure of the token airdrop, the TVL of the staking pool has soared, now exceeding $670 million, making it the second-largest protocol by TVL in the Solana ecosystem.