Solana DeFi Panel: Insights from Jito, Ellipsis Lab, and Margin Labs

In a recent episode of Lightspeed, a panel of Solana DeFi experts gathered to discuss the current state and future prospects of decentralized finance on the Solana blockchain. The panel featured Lucas from Jito, Jerry from Ellipsis Lab, and Nick Brennan from Margin Labs, offering a comprehensive look at the ecosystem's growth, challenges, and innovations.

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The Current State of Solana DeFi

Solana's DeFi ecosystem is experiencing a period of rapid growth and maturation. Nick Brennan from Margin Labs highlighted the recent explosion in Total Value Locked (TVL) across various protocols. He drew parallels between Solana's current phase and Ethereum's post-ICO era in 2018, noting that many teams have been building robust DeFi products during Solana's growth period.

The panelists emphasized three key factors contributing to Solana's DeFi success:

1. Liquidity: There's currently $7 billion staked to validators on-chain, ready for higher rates and more opportunities.
2. User base: Solana's daily active users rival or exceed those of Ethereum, Polygon, and Binance Smart Chain.
3. Mature DeFi ecosystem: Teams like Jito, Ellipsis, Zeta, Kamino, Drift, and Cypher have been developing solid infrastructure.

Liquid Staking Tokens (LSTs) and Their Impact

Lucas from Jito shared insights on the growth of liquid staking tokens, particularly Jito's soul. In June, Jito had 650,000 soul staked, which has now surpassed 1 million. This rapid growth is attributed to the resurgence of Solana DeFi and the symbiotic relationship between LSTs and DeFi platforms.

The true utility of LSTs comes from their use in DeFi platforms. As more protocols like Margin Fi, Mango, and Meteora gain adoption, the demand for LSTs increases. This creates a positive feedback loop, driving growth across the Solana DeFi ecosystem.

The Role of Points Systems in DeFi Growth

The panel discussed the controversial topic of points systems, which have been implemented by several Solana DeFi protocols. These systems are seen as a way to bootstrap activity and attract users, but they've also faced criticism.

Nick Brennan defended the use of points, explaining that they allow protocols to test incentive mechanisms and user behavior before launching a token. This approach helps teams refine their tokenomics and create more sustainable models.

Jerry from Ellipsis Lab offered a more cautious perspective, noting that while points systems can be effective for short-term growth, the long-term sustainability of DeFi should not rely heavily on token incentives. He emphasized the importance of building products that can operate independently of such incentives.

Open Source and Transparency in Solana DeFi

One of the more controversial topics discussed was the lack of open-source culture in the Solana ecosystem. Jerry argued that Solana developers need to focus more on traditional crypto values of being open and decentralized. He emphasized the importance of verifiable source code and transparency in protocol upgrades.

The panel explored reasons for this cultural difference, including:

1. Challenging developer experience on Solana
2. Pressure to ship products quickly
3. Lack of established norms around open-sourcing in the Solana community

They agreed that the ecosystem should encourage more transparency and open-sourcing, particularly for mainnet projects.

The Future of Solana DeFi

The panelists shared their visions for the future of Solana DeFi, highlighting several key areas of development:

1. Increased LST adoption and integration
2. More capital-efficient primitives
3. Launch of native Solana tokens for various projects
4. Development of truly decentralized stablecoins

Nick Brennan revealed that Margin Labs is working on a decentralized stablecoin called MUSD, which will be collateralized by LSTs like Jito Soul. This development addresses the ecosystem's reliance on centralized stablecoins like USDC and aims to provide a more resilient alternative.

Solana vs. Other Chains

The panel compared building on Solana to other chains, particularly Cosmos app chains and Ethereum L2s. They generally agreed that L2s offer advantages in terms of composability and existing liquidity, making them a good choice for many projects. However, they noted that Solana's speed and low costs enable unique use cases that may not be possible on other chains.

Challenges and Opportunities

The discussion touched on several challenges facing the Solana DeFi ecosystem:

1. Balancing the needs of professional investors with the vision of Solana as a consumer-focused chain
2. Improving capital efficiency in DeFi protocols
3. Developing better metrics to measure DeFi success beyond TVL
4. Attracting more users and liquidity to ensure long-term success

Despite these challenges, the panelists remained optimistic about Solana's future in DeFi. They emphasized the importance of continuing to innovate, attract talent, and build user-friendly products to drive adoption.

Advice for DeFi Founders

The panel concluded with advice for aspiring and existing DeFi founders:

1. Focus on strategy and hiring, not just technology
2. Move quickly and surround yourself with talented people
3. Find a good co-founder who will push you and hold you accountable
4. Prioritize tasks effectively and focus on the most important things
5. Be comfortable with being uncomfortable and continue to push yourself and your team

As Solana's DeFi ecosystem continues to evolve, it's clear that the platform is poised for significant growth. With innovative projects like Jito, Ellipsis Lab, and Margin Labs leading the way, Solana is well-positioned to become a major player in the future of decentralized finance.

The Importance of Liquid Staking Tokens in Solana's DeFi Ecosystem

Liquid Staking Tokens (LSTs) have emerged as a crucial component of Solana's DeFi ecosystem. These tokens allow users to stake their SOL while maintaining liquidity, enabling them to participate in various DeFi activities. Lucas from Jito emphasized the symbiotic relationship between LSTs and DeFi platforms, stating, "The true utility comes from using it in these DeFi platforms."

The growth of LSTs on Solana has been remarkable. Jito's soul, for example, has seen its staked amount increase from 650,000 to over 1 million in a short period. This rapid adoption is driven by the increasing number of DeFi protocols that support LSTs, creating a positive feedback loop that benefits both LST providers and DeFi platforms.

LSTs offer several advantages to the Solana ecosystem:

1. Increased capital efficiency: Users can earn staking rewards while simultaneously using their assets in DeFi protocols.
2. Enhanced liquidity: LSTs provide liquidity to the staking ecosystem, making it easier for users to enter and exit staking positions.
3. Composability: LSTs can be easily integrated into various DeFi protocols, enabling complex financial strategies.
4. Risk distribution: By spreading staked assets across multiple validators, LSTs help mitigate the risk of slashing or downtime.

As the Solana ecosystem continues to mature, the role of LSTs is expected to grow even further. Nick Brennan from Margin Labs revealed plans for a new decentralized stablecoin called MUSD, which will be collateralized by LSTs like Jito Soul. This development highlights the potential for LSTs to serve as the foundation for innovative DeFi products on Solana.

Capital Efficiency and Order Books in Solana DeFi

One of the key advantages of building on Solana is the ability to create highly capital-efficient DeFi protocols. Jerry from Ellipsis Lab discussed the benefits of order book-based systems compared to Automated Market Makers (AMMs), particularly in terms of capital efficiency.

Order books allow market makers to set precise price levels and sizes for each order, giving them more control over their trading strategies. This precision can lead to better capital utilization and potentially higher profits for liquidity providers. Jerry explained, "A real-life market maker would never let themselves get sandwiched," highlighting the advantages of order book systems in preventing common DeFi exploits.

The panel agreed that while AMMs have their place in DeFi, order books offer several benefits:

1. Higher capital efficiency: Order books can achieve higher trading volumes with less locked liquidity.
2. Better price discovery: The competition between market makers can lead to more accurate asset prices.
3. Reduced impermanent loss: Liquidity providers have more control over their positions, potentially reducing the risk of impermanent loss.
4. Flexibility for sophisticated traders: Order books allow for more complex trading strategies and limit orders.

Jerry shared an impressive statistic about Phoenix, an order book-based DEX: "Phoenix regularly does like $5 million of volume in the SOL-USDC market with less than $100,000 in the book." This level of capital efficiency is difficult to achieve with traditional AMMs.

While order books offer significant advantages, the panelists noted that for everyday users, the difference between AMMs and order books might not be noticeable. The key is to provide a seamless user experience, regardless of the underlying market structure.

Challenges and Opportunities in Solana DeFi

The panel identified several challenges facing the Solana DeFi ecosystem, as well as opportunities for growth and improvement:

Balancing Professional and Retail Users

Solana faces the challenge of catering to both professional investors and retail users. Nick Brennan emphasized the importance of being adaptive to different market cycles and user archetypes. He explained, "When you're building like an order book on chain, you know, you're building infrastructure on MEV, you're building a borrow lend, you have to be like very sensitive to where our interest rates, like what's going on on like the finance base."

This adaptability has led to the development of diverse DeFi products on Solana, from sophisticated trading platforms to more user-friendly applications for retail users.

Improving Transparency and Open-Source Culture

Jerry highlighted the need for greater transparency and open-source development in the Solana ecosystem. He argued that making source code public and verifiable should be the norm for mainnet projects. This shift towards greater openness could help build trust in the ecosystem and attract more developers and users.

Developing Better DeFi Metrics

The panel discussed the limitations of using Total Value Locked (TVL) as the primary metric for measuring DeFi success. While TVL provides some indication of trust in a protocol, it doesn't necessarily reflect capital efficiency or real usage. The experts suggested looking at additional metrics such as:

1. Volume over TVL ratio
2. User adoption and retention rates
3. Liquidity depth for large trades
4. Profitability of liquidity providers

Creating Truly Decentralized Stablecoins

The reliance on centralized stablecoins like USDC was identified as a potential risk for the Solana ecosystem. Nick Brennan announced Margin Labs' plans to launch MUSD, a decentralized stablecoin collateralized by LSTs. This development could provide a more resilient foundation for Solana's DeFi ecosystem and reduce dependence on centralized entities.

Expanding Global Reach

Nick Brennan pointed out that Solana's user base is primarily concentrated in Western countries. He emphasized the need to expand into Asian markets, where other blockchain ecosystems have gained significant traction. Broadening Solana's global appeal could be crucial for its long-term success in the competitive blockchain landscape.

The Role of Composability in DeFi Growth

Composability emerged as a crucial factor in the growth and success of DeFi ecosystems. The ability for different protocols to interact seamlessly and build upon each other creates a powerful network effect that can drive innovation and user adoption.

Jerry highlighted the importance of composability when comparing different blockchain ecosystems: "I think that like the composability thing is that thing that's pretty cool where like you can do things with existing infrastructure where like on Ethereum, I think that they've done a very good job of like composability."

On Solana, composability is enhanced by the blockchain's high speed and low transaction costs. This allows for more complex DeFi strategies and products that might not be feasible on other chains due to gas fees or slower block times.

The panelists discussed several ways in which composability is driving growth in Solana's DeFi ecosystem:

1. Liquid Staking Tokens (LSTs) being used across multiple DeFi protocols
2. Order book liquidity being accessible through aggregators like Jupiter
3. Margin trading protocols leveraging liquidity from various DEXes
4. Yield aggregators optimizing returns across multiple platforms

As the Solana ecosystem continues to mature, the compounding effects of composability are likely to accelerate innovation and create more sophisticated DeFi products.

The Future of Solana DeFi: Predictions and Innovations

The panel shared their visions for the future of Solana DeFi, highlighting several key areas of development and innovation:

Increased LST Adoption

Lucas predicted significant growth in liquid staking token adoption on Solana. With less than 2% of all staked SOL currently in LSTs, there's enormous potential for growth. This increased adoption could drive liquidity across the entire DeFi ecosystem.

More Capital-Efficient Primitives

The experts anticipate the development of more capital-efficient DeFi primitives, building on the success of platforms like Phoenix. These innovations could lead to better yields for liquidity providers and more competitive prices for traders.

Launch of Native Solana Tokens

Several projects are expected to launch their native tokens on Solana in the coming months. These token launches could bring new users and liquidity to the ecosystem, as well as enable new governance models for DeFi protocols.

Decentralized Stablecoins

Nick Brennan's announcement of MUSD, a decentralized stablecoin collateralized by LSTs, signals a move towards more resilient and decentralized financial infrastructure on Solana. This development could reduce the ecosystem's reliance on centralized stablecoins and create new opportunities for DeFi innovation.

Real-World Asset Integration

The panel discussed the potential for bringing real-world assets onto the Solana blockchain. This could include tokenized securities, commodities, or even forex markets, opening up new possibilities for global finance.

Improved User Experience

As the ecosystem matures, the experts expect to see a greater focus on user experience and abstraction of blockchain complexities. This could make Solana DeFi more accessible to mainstream users who may not be familiar with cryptocurrency concepts.

Advice for DeFi Founders and Developers

The panelists offered valuable advice for those looking to build in the Solana DeFi space:

1. Focus on strategy and team-building: Nick Brennan emphasized that technical challenges are often easier to solve than strategic and human resource issues.

2. Move quickly and surround yourself with talent: The fast-paced nature of DeFi requires rapid iteration and a team of skilled individuals.

3. Find a complementary co-founder: Jerry stressed the importance of having a partner who can challenge and support you throughout the entrepreneurial journey.

4. Prioritize effectively: With limited resources, it's crucial to focus on the most impactful tasks and build in the right order.

5. Embrace discomfort and continuous learning: The DeFi space is constantly evolving, requiring founders to adapt and push themselves continually.

6. Consider the broader ecosystem: Lucas highlighted the importance of building products that contribute to the overall growth and sustainability of the Solana ecosystem.

7. Balance innovation with user needs: While pushing the boundaries of what's possible on Solana, it's essential to create products that solve real user problems and drive adoption.

As Solana's DeFi ecosystem continues to evolve, it's clear that the platform is poised for significant growth and innovation. With talented teams like Jito, Ellipsis Lab, and Margin Labs leading the way, Solana is well-positioned to become a major player in the future of decentralized finance. The combination of high performance, low costs, and a maturing ecosystem creates a fertile ground for the next generation of DeFi applications.

The panel's insights reveal a bright future for Solana DeFi, with opportunities for both incremental improvements and radical innovations. As the ecosystem addresses challenges around transparency, decentralization, and user experience, it has the potential to attract a wider audience and compete effectively with more established blockchain platforms.

Ultimately, the success of Solana DeFi will depend on its ability to create real value for users, from retail investors to sophisticated traders and institutions. By focusing on capital efficiency, composability, and user-centric design, Solana-based projects can continue to push the boundaries of what's possible in decentralized finance.

Facts + Figures

• Solana currently has $7 billion staked to validators on-chain, waiting for higher rates and more opportunities.
• Solana's daily active users rival or exceed those of Ethereum, Polygon, and Binance Smart Chain.
• Jito's liquid staking token (soul) grew from 650,000 staked in June to over 1 million currently.
• Phoenix, an order book-based DEX, regularly does $5 million of volume in the SOL-USDC market with less than $100,000 in the book.
• Less than 2% of all staked SOL is currently in liquid staking tokens, indicating significant growth potential.
• Margin Labs announced plans to launch MUSD, a decentralized stablecoin collateralized by LSTs like Jito Soul.
• Solana's current TVL is 312 million, with a stablecoin market cap of 1.5 billion and a 7-day volume of 781 million.
• The panel identified that Solana's user base is primarily concentrated in Western countries, highlighting the need for expansion into Asian markets.
• Jerry from Ellipsis Lab emphasized that source code for mainnet projects should be public and verifiable to improve transparency in the ecosystem.
• Nick Brennan revealed that Margin Fi recently raised caps and saw $3.5 million poured into the protocol within seconds.
• The panelists agreed that L2s offer advantages in terms of composability and existing liquidity for many projects, but Solana's speed and low costs enable unique use cases.
• The experts predicted an increase in native Solana token launches in the coming months, which could bring new users and liquidity to the ecosystem.

Questions Answered

What is driving the current growth in Solana's DeFi ecosystem?

The growth in Solana's DeFi ecosystem is driven by three main factors: abundant liquidity (with $7 billion staked to validators), a large user base rivaling other major blockchains, and a maturing DeFi infrastructure built by teams like Jito, Ellipsis, Zeta, and others. The ecosystem has reached an inflection point where these elements are coming together to create explosive growth across various protocols.

How are Liquid Staking Tokens (LSTs) impacting Solana's DeFi landscape?

Liquid Staking Tokens are playing a crucial role in Solana's DeFi growth. They allow users to stake their SOL while maintaining liquidity, enabling participation in various DeFi activities. The growth of LSTs, such as Jito's soul, is creating a positive feedback loop with DeFi platforms, driving adoption and liquidity across the ecosystem. LSTs also serve as the foundation for new innovations, such as the upcoming MUSD decentralized stablecoin.

What are the advantages of order book-based systems over Automated Market Makers (AMMs) in DeFi?

Order book-based systems offer several advantages over AMMs, including higher capital efficiency, better price discovery, reduced impermanent loss for liquidity providers, and more flexibility for sophisticated traders. Order books allow market makers to set precise price levels and sizes for each order, leading to better capital utilization. For example, Phoenix, an order book-based DEX, can handle $5 million in daily volume with less than $100,000 in the book, demonstrating superior capital efficiency compared to typical AMMs.

How is Solana addressing the challenge of balancing professional and retail users in its DeFi ecosystem?

Solana's DeFi ecosystem is adapting to different market cycles and user archetypes to cater to both professional and retail users. During periods of high on-chain activity and rates, protocols focus on sophisticated features for algorithmic traders and prop shops. In quieter periods, teams pivot to develop more user-friendly interfaces and products for retail users. This adaptability allows Solana to serve a wide range of users and remain competitive across different market conditions.

What is the significance of the newly announced MUSD stablecoin for Solana's DeFi ecosystem?

The announcement of MUSD, a decentralized stablecoin collateralized by Liquid Staking Tokens like Jito Soul, is a significant development for Solana's DeFi ecosystem. It addresses the reliance on centralized stablecoins like USDC, which poses a potential risk to the ecosystem. MUSD aims to provide a more resilient and decentralized alternative, potentially becoming one of the highest-yielding stablecoins for individual minters due to its ability to capture staking yields, MEV, and lending yields while remaining truly decentralized.

How does composability contribute to the growth of Solana's DeFi ecosystem?

Composability is a crucial factor in Solana's DeFi growth, allowing different protocols to interact seamlessly and build upon each other. This creates a powerful network effect that drives innovation and user adoption. Solana's high speed and low transaction costs enhance composability, enabling more complex DeFi strategies and products. Examples include LSTs being used across multiple protocols, order book liquidity being accessible through aggregators, and margin trading protocols leveraging liquidity from various DEXes.

What advice do the panelists offer for aspiring DeFi founders on Solana?

The panelists offer several key pieces of advice for DeFi founders on Solana: focus on strategy and team-building alongside technical development, move quickly and surround yourself with talented individuals, find a complementary co-founder who can challenge and support you, prioritize tasks effectively, embrace discomfort and continuous learning, consider the broader ecosystem impact of your product, and balance innovation with real user needs. They emphasize that success in DeFi requires adaptability, strong prioritization skills, and a willingness to push boundaries while solving genuine user problems.

How is Solana addressing the need for transparency and open-source development in its DeFi ecosystem?

The panel identified a need for greater transparency and open-source development in the Solana ecosystem. They suggest that making source code public and verifiable should become the norm for mainnet projects. This shift towards greater openness could help build trust in the ecosystem and attract more developers and users. The experts recommend "lightly bullying" projects to open-source their code and implement time-locked upgrades for better transparency. However, they acknowledge that challenges in developer experience and pressure to ship quickly have contributed to the current lack of open-source culture.

What are the key metrics to consider when evaluating DeFi protocols on Solana beyond Total Value Locked (TVL)?

While TVL provides some indication of trust in a protocol, the panelists suggest looking at additional metrics to evaluate DeFi protocols on Solana. These include the volume over TVL ratio, which can indicate capital efficiency; user adoption and retention rates; liquidity depth for large trades, which demonstrates the protocol's ability to handle significant transactions; and the profitability of liquidity providers. They emphasize that a holistic approach to measuring protocol success is necessary to understand its true impact and sustainability in the ecosystem.

What future developments can we expect in Solana's DeFi ecosystem?

The panel predicts several key developments for Solana's DeFi future: increased adoption of Liquid Staking Tokens, with potential for significant growth from the current <2% of staked SOL; development of more capital-efficient DeFi primitives; launch of native Solana tokens for various projects, bringing new users and liquidity; creation of decentralized stablecoins like MUSD; integration of real-world assets onto the Solana blockchain, including potentially tokenized securities or forex markets; and improved user experiences that abstract away blockchain complexities for mainstream adoption. These innovations are expected to drive Solana's competitiveness in the global DeFi landscape.