The Landscape of Liquid Staking on Solana is Set for a Transformation

In the liquid staking market of PoS (Proof of Stake) chains, the prevailing narrative tends to depict a monopolistic outcome, where one or two leading liquid staking solutions eventually prevail, surpassing all other competitors. This monopolistic or winner-takes-all characteristic is evident in protocols like Lido on Ethereum and Jito and Marinade on Solana. These market leaders have generated strong network effects due to their competitive advantages, raising the barriers for other players to enter the liquid staking market, thereby reinforcing the existing market competition dynamics. However, not all liquid staking mechanisms are identical. For Solana, some subtle design differences might lead us to witness an interesting shift. This article will delve into the evolution and current state of liquid staking on Solana, focusing on how it is gradually moving away from traditional monopolistic models, showcasing different development trends.

Currently, liquid staking on Solana accounts for only 5.3% of the total staking supply.

source:https://dune.com/ilemi/solana-staking

Compared to Ethereum, liquid staking on Solana has not yet been widely adopted. This is mainly due to fundamental differences in their staking mechanisms and the value propositions of liquid staking assets.

On Ethereum, staked ETH is completely locked until the Shanghai upgrade, and post-merge, withdrawals require queueing. These factors have driven the demand for liquid staking, allowing investors to trade locked assets. Additionally, with Ethereum’s minimum staking requirement of 32 ETH and the risk of slashing for poorly performing validators, staking pools have become a necessary and safer option for many users.

In contrast, Solana’s delegated proof-of-stake (PoS) model supports instant liquidity with only about a two-day unstaking period. There is no minimum staking requirement and no slashing penalties, which reduces the need for liquid staking. Solana users can easily choose validators without significant risk, thereby lessening their reliance on staking pools.

Although platforms like Jito and Marinade aim to offer better services by optimizing validator selection, the consistency in Solana validator performance means that complex delegation strategies do not provide significant advantages. While Solana’s staking pools offer features like tokenization of staked assets and validator monitoring, the appeal of these features is waning as more user-friendly solutions emerge in the market.

Why do winner-take-all patterns appear frequently in the liquidity staking field?

In the past on various blockchains, including Solana, the liquidity staking space has tended to exhibit a winner-take-all pattern, largely due to the fragmentation of liquidity between different pools and platforms. Every staking pool, operating on platforms like Saber, Raydium or Orca, competes fiercely for liquidity, seeing it as a critical moat to defeat their opponents. The competition is fierce and reminiscent of the Curve War on Ethereum, with protocols like Marinade and Lido investing huge sums of money into their weekly token releases to incentivize users to deposit into liquidity pools. This situation greatly increases the difficulty of competition for small liquidity staking protocols, because in order to enter this competition, they must have sufficient liquidity to prevent their tokens from de-anchoring, which essentially diverts those validators with potential from the flow. Marginalizing the pledge agreement.

The winner-take-all phenomenon in the liquidity staking space is further reinforced by strong network effects that favor established liquidity staking solutions and platforms. Network effects specifically include a focus on security—users tend to choose platforms with a history of stable operations, audited protocols, and a low risk of smart contract vulnerabilities or security breaches. At the same time, liquidity also plays a key role - deep trading liquidity means that users can quickly adjust positions without significantly affecting the market price, which is crucial to the practicality of LST in token trading and other aspects. . At the same time, the degree of integration of LST with other protocols will also affect its appeal. Users want to freely use their assets on different DeFi platforms. But small liquidity staking solutions often fall short in this regard and have limited appeal. Finally, the “currency” of LST is also a key factor - LST tokens such as stETH actually play the role of currency. Brand value and the Lindy Effect (the expected future life of a technology or idea is directly proportional to its current existence) play an important role in this process. Over time, these factors have accumulated, favoring solutions that excel in security, liquidity, and integration, resulting in a winner-take-all situation in the liquidity staking space.

The Emergence of Long-Tail LSTs

The introduction of long-tail LST (Liquid Staking Token) has brought numerous benefits to the blockchain ecosystem, as evidenced by Solana’s recent exploration of validator LSTs. This innovation skillfully combines the advantages of native staking (such as zero commissions and the freedom to choose validators) with the unique benefits of liquid staking (like instant liquidity and the convenience of using staked assets within the Solana ecosystem). This combination not only significantly optimizes traditional native staking methods but also provides a practical alternative to conventional staking pools. However, the value of LSTs extends beyond this. They can also serve as an innovative tool, offering holders additional revenue opportunities and enabling project teams to provide LST holders with annual percentage yields (APY) that far exceed those of native staking.

For example, a single validator can distribute block rewards, MEV (Maximal Extractable Value) income, and priority fees to LST holders—substantially increasing the APY and thereby attracting more staking funds.

Additionally, LSTs introduce unprecedented opportunities within the ecosystem, such as granting holders exclusive privileges to participate in NFT minting events or serving as keys to access premium services like private community memberships. This versatility and practicality showcase the limitless potential of LSTs, marking a new chapter in blockchain network participation and reward mechanisms.

Ultimately, the diversification of LSTs significantly propels Solana towards deeper decentralization. By increasing the variety of LST options, it ensures that power and influence within the network are more evenly distributed among various validators and projects. This democratization process can stimulate a healthier competitive environment, encouraging validators and project teams to continuously improve service quality, enhance security measures, and introduce more attractive incentives to win and maintain user loyalty. Consequently, such competition not only reduces the risk of excessive centralization, enhancing the network’s security and resilience, but also fosters innovation, providing users with a broader range of choices and better returns on staked assets.

Why Project Teams Want to Launch Their Own LST

Under the stake-based Quality of Service (QoS) mechanism adopted by Solana, validators are strongly motivated to increase their total stake, thereby enhancing their transaction processing priority. This mechanism ensures that validators with larger stakes enjoy priority in handling the queue, effectively reducing transaction latency and improving operational efficiency. During periods of network congestion, this priority mechanism becomes especially crucial, allowing validators to maintain high levels of performance and stability for their clients. By increasing their stake, validators can not only boost their transaction throughput but also attract users and applications seeking fast and reliable transaction processing. This, in turn, can increase the validators’ rewards and establish a stronger reputation within the Solana ecosystem, creating a positive feedback loop that incentivizes validators to continually increase their staking investments.

As notable protocols on Solana such as Jupiter, Drift, and Margin launch their own Liquid Staking Tokens (LST) to attract more staking, this trend is becoming increasingly prominent.

How to Solve Liquidity Issues

To ensure the survival of long-tail LSTs (Liquid Staking Tokens), it is crucial to address the liquidity challenge. The Sanctum protocol on Solana serves as an example of tackling this issue by building the underlying infrastructure aimed at breaking market monopolies and creating a more favorable ecosystem for long-tail LSTs.

Sanctum offers innovative solutions to the liquidity challenges faced by long-tail LSTs on Solana. These solutions not only lower the barriers for new LSTs to enter the market but also enhance their usability within the DeFi ecosystem. The reserve pool acts as a universal liquidity provider, allowing any LST to be instantly converted to SOL, regardless of the LST’s size. This ensures that even smaller LSTs can offer immediate liquidity to their holders, making them a viable option for integration as collateral in DeFi protocols.

The Sanctum router, developed in collaboration with Jupiter, is a crucial infrastructure component that enables seamless conversion between different LSTs, even in the absence of direct liquidity paths. This connectivity leverages the liquidity of larger LSTs to enhance the liquidity of smaller LSTs. Additionally, the Infinity multi-LST liquidity pool supports trades between any LSTs within the pool, breaking the traditional limitation of trading only between two assets and improving capital efficiency. It relies on on-chain oracles for real-time LST value assessment, ensuring accurate and secure transactions within an infinite array of LSTs.

These mechanisms collectively ensure that emerging and smaller LSTs can continue to develop within Solana’s DeFi ecosystem by providing the necessary liquidity and interoperability.

Examples of emerging LST

source:https://app.sanctum.so/lsts

Conclusion

With the significant increase in user engagement and Solana’s unique staking weight QoS mechanism, it is foreseeable that major projects on Solana will urgently need to increase their staking volumes. This goal will likely be achieved by launching their distinctive Liquid Staking Tokens (LSTs). In this emerging paradigm, the overall scale of the LST market is expected to surpass the current 5.3% of all staked SOL. Unlike the winner-takes-all paradigm in Ethereum, Solana is likely to see a more diversified LST ecosystem. In this context, projects like Sanctum, which aim to unify LST liquidity within the Solana ecosystem, will be particularly important.

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