The Rise of Liquid Staking Tokens on Solana

Liquid Staking Tokens (LSTs) have emerged as a game-changing innovation in the world of cryptocurrency staking, particularly on the Solana blockchain. In this in-depth exploration, we dive into the fascinating realm of LSTs with Michael, a core contributor from Marinade Finance, one of the pioneering projects in Solana's liquid staking ecosystem.

Marinade Finance, launched in August 2021, introduced the concept of liquid staking to Solana, allowing users to stake their SOL tokens while maintaining liquidity. This revolutionary approach has since transformed the staking landscape, offering crypto enthusiasts new ways to maximize their assets' potential.

What are Liquid Staking Tokens?

Liquid Staking Tokens represent a user's staked position in a blockchain network, allowing them to maintain liquidity while earning staking rewards. In the case of Marinade Finance, users deposit their SOL tokens and receive mSOL in return. Michael explains:

"This liquid staking token means that you can actually put your SOL to a smart contract. And then you're given in return like a voucher deposit token which can be called different ways. In Marinade's example, it's the mSOL."

The key innovation here is that mSOL accrues value over time, reflecting the staking rewards earned. This means users can benefit from staking rewards while still having the flexibility to use their assets in other DeFi applications.

The Capital Efficiency of Liquid Staking Tokens

One of the primary advantages of LSTs is their capital efficiency. Users can simultaneously earn staking rewards and utilize their assets in various DeFi protocols. Michael highlights this benefit:

"With your mSOL you can use it to go to SOL participate in the Solana DeFi and provide liquidity with mSOL. You can borrow against mSOL. It's a perfect collateral."

This dual functionality allows users to maximize their returns and participate in the broader DeFi ecosystem without sacrificing the benefits of staking. It's a significant improvement over traditional staking methods, where tokens are typically locked and unusable for other purposes.

Marinade Finance: A Community-Driven Approach

Marinade Finance stands out in the cryptocurrency landscape for its unique, community-driven approach. Unlike many projects that rely on venture capital funding, Marinade was bootstrapped and developed without external investment. Michael proudly states:

"Marinade is completely bootstrapped. There is no VC funding. There was no private, public token sale, nothing like this."

This approach has resonated strongly with the Solana community, contributing to Marinade's rapid growth and adoption. Within months of its launch, Marinade's Total Value Locked (TVL) grew to nearly six million SOL, showcasing the demand for liquid staking solutions on Solana.

The Mechanics of Marinade's Liquid Staking

Marinade's liquid staking solution offers several key benefits over traditional staking methods. When users stake through Marinade, their SOL is distributed across more than 100 validators, selected based on performance metrics. This approach offers several advantages:

1. Risk Diversification: By spreading stakes across multiple validators, Marinade reduces the risk associated with any single validator underperforming or going offline.

2. Automatic Rebalancing: If a validator underperforms, Marinade automatically undelegates from that validator and redistributes the stake to better-performing ones.

3. Network Decentralization: By favoring smaller and medium-sized validators, Marinade contributes to the overall decentralization of the Solana network.

Marinade Native: Addressing Smart Contract Risk

Recognizing that some users may be hesitant to use smart contract-based solutions due to perceived risks, Marinade introduced a groundbreaking feature called Marinade Native. This innovative approach allows users to benefit from Marinade's validator selection and management without interacting with a smart contract.

Michael explains the mechanics of Marinade Native:

"You as a staker get to keep the full custody of your SOL, you get to keep the full custody, and you get to keep the withdrawal authority, and you put Marinade as the proxy on the stake authority so that Marinade handles the stake on your behalf."

This solution provides a middle ground for users who want the benefits of Marinade's decentralized staking approach without the need to trust a smart contract. It's a significant innovation that could potentially unlock institutional adoption of decentralized staking solutions.

The LST Landscape on Solana

While Marinade was one of the first liquid staking solutions on Solana, the ecosystem has since grown to include several competitors. However, Michael views this diversity as a strength rather than a threat:

"We think of those LSDs, they are like great supporting different use cases on Solana, different sectors, so that the community have a choice and that's great, right?"

Different LST providers cater to various needs within the Solana ecosystem. For example, some focus on specific validator clients, while others represent stakes on individual high-performance validators. Marinade aims to be an umbrella solution, offering a balance of decentralization, performance, and flexibility.

Marinade's Unique Value Proposition

In a growing field of LST providers, Marinade differentiates itself through its commitment to decentralization and performance. Unlike some competitors that may favor large, well-known validators, Marinade uses an algorithmic approach to select validators based on performance metrics while also considering network decentralization.

Michael emphasizes this point:

"Marinade basically goes where the best yield is with some factor of the decentralization and trying to spread the stake around. So that's how we thinking about really the core value of where mSOL stands out."

This approach not only benefits users by optimizing returns but also contributes to the overall health and decentralization of the Solana network.

The MND Token and Incentive Structure

Marinade's governance token, MND, plays a crucial role in the project's ecosystem. Unlike many projects that rely heavily on token emissions and liquidity mining to drive adoption, Marinade has taken a more sustainable approach.

In early 2023, Marinade redesigned its token economics to better align incentives between the team, token holders, and the broader community. Michael explains the new system:

"We said internally, let's freeze it. There will be something that we call a milestone budget, which is a budget of certain MND amount, but the team can only unlock it once reaching specific TVL milestones."

This performance-based unlocking mechanism ensures that the team's incentives are directly aligned with the project's growth and success. It's a novel approach that could serve as a model for other DeFi projects seeking to create more sustainable tokenomics.

Challenges and Opportunities in the LST Ecosystem

While liquid staking tokens offer numerous benefits, their adoption on Solana faces some unique challenges. One of the primary hurdles is the ease of traditional staking on Solana. Unlike Ethereum, where running a validator requires significant technical knowledge and capital, Solana's native staking system is user-friendly and accessible.

Michael points out this contrast:

"Compared to other ecosystems, for you to stake ETH, for example, you need to spin up your own validator, let's say before all liquid-saving auctions on ETH, you needed to spin up your own validator, you need to have exactly 32 ETH, not more, not less, and you needed to be the one who would run the validator and then stake it this way."

This ease of use in Solana's native staking system means that the value proposition of LSTs needs to be particularly compelling to drive adoption. Marinade and other LST providers are continually innovating to offer additional benefits and use cases for their tokens.

The Future of Liquid Staking on Solana

Despite the challenges, the future of liquid staking on Solana looks promising. With only about 2% of staked SOL currently in liquid staking tokens, there's significant room for growth. Marinade is positioning itself to capture this potential through ongoing innovation and community engagement.

One exciting development on the horizon is Marinade's plan to introduce a "skin in the game" system for validators. This system will require validators to provide collateral, ensuring they meet certain performance standards. Michael explains the benefits:

"So that even if the validator goes down or is not performing, Marinade would have a way to protect the users to protect the stakers. And this is especially a big concern for the bigger funds and institutions that we're talking to today."

This innovation could be a game-changer, providing an additional layer of security and reliability that could attract more institutional players to the Solana staking ecosystem.

Comparing Solana's LST Ecosystem to Ethereum's

While discussing the LST landscape, it's impossible not to draw comparisons with Ethereum, where Lido has become a dominant force in liquid staking. Unlike on Solana, where liquid staking represents a small fraction of total staked assets, Lido commands a significant portion of Ethereum's staked ETH.

Michael provides some context:

"I think the last time I looked at it, there was about like 25% of all ETH staked of which Lido have around 30%. So I think that they are about eight or 10% in total of all ETH to be staked with Lido."

This concentration has led to concerns about centralization risks in Ethereum's staking ecosystem. In contrast, Solana's LST landscape is more diverse, with multiple providers catering to different needs and use cases. This diversity could prove to be a strength for Solana in the long run, promoting a more resilient and decentralized staking ecosystem.

The Role of LSTs in DeFi Ecosystem Development

Liquid staking tokens play a crucial role in the development of the broader DeFi ecosystem on Solana. By unlocking the liquidity of staked assets, LSTs enable users to participate in various DeFi protocols while still earning staking rewards. This synergy creates a positive feedback loop, driving innovation and growth across the ecosystem.

Michael highlights this interconnection:

"So for LST adoption, for mSOL adoption to increase, you need to have the DeFi use cases. Since your mSOL is supposed to be liquid and you want to be liquid if you have a use case for your stake."

As more DeFi protocols integrate LSTs like mSOL, the value proposition of liquid staking becomes even stronger, potentially driving further adoption.

Marinade's Approach to Network Decentralization

One of Marinade's core missions is to contribute to the decentralization of the Solana network. The project achieves this through its validator selection strategy, which favors smaller and medium-sized validators over the largest ones. Michael explains:

"Marinade skips the biggest 30 validators and supports rather the mid and long tail of the validators. So it skips this group called the security group or the Nakamoto coefficient."

By directing stake to a diverse set of validators, Marinade helps prevent the concentration of power in the hands of a few large validators. This approach not only enhances network security but also promotes a more resilient and decentralized Solana ecosystem.

The Impact of Firedancer on Solana's Staking Ecosystem

The upcoming release of Firedancer, a new validator client for Solana, could have significant implications for the staking ecosystem. Michael expresses enthusiasm for this development:

"We'd love to see more client diversity. Because when Marinade started, and even up until a few months back, it was 100% run on the Labs original client."

Client diversity is crucial for network resilience, as it reduces the risk of a single bug or vulnerability affecting the entire network. Marinade plans to incorporate client diversity into its validator selection criteria, further enhancing the security and decentralization of the Solana network.

Marinade's Vision for the Future

As Marinade continues to innovate and grow, its vision extends beyond simply providing a liquid staking solution. The team is focused on creating a more secure, decentralized, and efficient staking ecosystem for Solana. Upcoming features, such as the validator "skin in the game" system, demonstrate Marinade's commitment to continuous improvement.

Michael shares his excitement about the future:

"So this is another level of protection and another level of delivering the best product that we can. So that from now on, Marinade will not only stake in the diversified and decentralized way, but it will also protect the yield at all costs for the stakers, for the best of the users."

This focus on user protection and yield optimization could set a new standard for liquid staking protocols across the cryptocurrency industry.

The Potential for Institutional Adoption

As the liquid staking ecosystem matures, there's growing potential for institutional adoption. Features like Marinade Native, which allows for liquid staking without smart contract risk, could be particularly appealing to institutional investors. Additionally, the upcoming validator incentive system could provide the level of security and guaranteed yield that many institutions require.

Michael notes the importance of these developments:

"This is especially a big concern for the bigger funds and institutions that we're talking to today. They would love to see some insurance, some guaranteed yield, they call it, because our set is unknown."

By addressing these concerns, Marinade is positioning itself to capture a significant portion of institutional interest in Solana staking.

The Role of Community in Marinade's Success

Throughout the discussion, it's clear that Marinade's community-driven approach has been a key factor in its success. From its bootstrapped beginnings to its ongoing development, Marinade has relied on community support and engagement. This approach has fostered a strong sense of ownership and loyalty among Marinade users.

The project's governance structure, which allows MND token holders to participate in decision-making, further reinforces this community-centric model. As the project continues to grow, maintaining and nurturing this community connection will likely remain a core focus for Marinade.

Conclusion: The Evolving Landscape of Solana Staking

As we've explored in this deep dive into Marinade and the world of liquid staking tokens on Solana, it's clear that the staking landscape is rapidly evolving. Innovations like LSTs are opening up new possibilities for users to maximize the potential of their assets while contributing to network security and decentralization.

Marinade's approach, combining liquid staking with a strong focus on decentralization and community engagement, offers a compelling vision for the future of staking on Solana. As the ecosystem continues to mature and new features like Marinade Native and validator incentives come online, we can expect to see further growth and innovation in this space.

The story of Marinade and LSTs on Solana is still in its early chapters. With the potential for increased institutional adoption, growing DeFi integrations, and ongoing technical innovations, the future of liquid staking on Solana looks bright. As Michael and the Marinade team continue to push the boundaries of what's possible in the staking ecosystem, they're not just building a product – they're helping to shape the future of decentralized finance on Solana.

Facts + Figures

• Marinade Finance launched in August 2021 as the first liquid staking solution on Solana.
• Within months of launch, Marinade's Total Value Locked (TVL) grew to nearly six million SOL.
• Currently, only about 2% of staked SOL is in liquid staking tokens, indicating significant room for growth.
• Marinade distributes stakes across more than 100 validators, selected based on performance metrics.
• The Marinade Native feature allows users to benefit from Marinade's validator selection without interacting with a smart contract.
• Marinade's governance token, MND, has a unique milestone-based unlocking mechanism tied to TVL growth.
• On Ethereum, about 25% of all ETH is staked, with Lido commanding around 30% of that staked ETH.
• Marinade skips the top 30 largest validators on Solana to promote network decentralization.
• The unstaking period on Solana can be as short as tens of minutes, compared to 21 days on some other networks like Cosmos.
• Marinade is planning to introduce a "skin in the game" system for validators to ensure performance and protect user yields.
• Marinade was bootstrapped without any VC funding or token sales.
• The project initially grew from zero to close to six million SOL in TVL within a few months of launch.
• Marinade considers geographical concentration in its validator selection process to enhance network resilience.
• The United States alone accounts for about 30% of all stake on Solana, which Marinade sees as a concern for decentralization.
• Marinade is transitioning from a time-based vesting schedule for team tokens to a performance-based unlocking mechanism tied to TVL milestones.

Questions Answered

What is a Liquid Staking Token (LST)?

A Liquid Staking Token is a representation of a user's staked position in a blockchain network that allows them to maintain liquidity while earning staking rewards. In the case of Marinade Finance on Solana, users deposit their SOL tokens and receive mSOL in return. This mSOL token accrues value over time, reflecting the staking rewards earned, while still allowing users to utilize their assets in other DeFi applications, effectively providing both staking rewards and liquidity simultaneously.

How does Marinade Finance contribute to Solana's decentralization?

Marinade Finance contributes to Solana's decentralization through its validator selection strategy. The project deliberately skips the 30 largest validators on the network, instead favoring smaller and medium-sized validators. This approach helps prevent the concentration of stake in the hands of a few large validators, promoting a more distributed and resilient network. Additionally, Marinade considers geographical distribution in its validator selection, aiming to spread stake across different regions to further enhance network resilience and decentralization.

What is Marinade Native and how does it work?

Marinade Native is a feature introduced by Marinade Finance that allows users to benefit from the project's validator selection and management without interacting with a smart contract. With Marinade Native, users retain full custody of their SOL tokens and keep the withdrawal authority. They only grant Marinade the stake authority, allowing the protocol to manage the stake on their behalf. This solution addresses concerns about smart contract risk while still providing the benefits of Marinade's decentralized staking approach, potentially opening the door for more conservative or institutional users to participate.

How does Marinade's tokenomics work?

Marinade's tokenomics revolve around the MND governance token. Unlike many projects that rely on continuous token emissions and liquidity mining, Marinade has implemented a performance-based unlocking mechanism. The team's token allocation is tied to specific Total Value Locked (TVL) milestones. This means that team tokens are only unlocked when the project achieves certain growth targets, aligning the team's incentives with the project's success. Additionally, Marinade has moved away from traditional liquidity mining to a system where new MND tokens are only released when there's actual TVL growth, ensuring that token distribution is tied to real adoption and usage of the protocol.

What challenges does liquid staking face on Solana compared to other networks?

Liquid staking on Solana faces unique challenges due to the network's native staking system being relatively user-friendly and accessible. Unlike Ethereum, where running a validator requires significant technical knowledge and capital (32 ETH), Solana allows users to stake as little as 1 SOL with just a few clicks. This ease of use in traditional staking means that liquid staking solutions need to offer compelling additional benefits to drive adoption. Additionally, the quick unstaking period on Solana (as short as tens of minutes in some cases) reduces one of the key advantages of liquid staking tokens seen on other networks with longer unstaking periods.