Solana DeFi 2.0: The Comeback

The world of decentralized finance (DeFi) on Solana is experiencing a remarkable resurgence, with new protocols, innovative features, and a growing user base. In this in-depth exploration, we dive into the exciting developments in Solana's DeFi ecosystem, featuring insights from industry experts Jarry Xiao, Lucas Bruder, and MacBrennan Peet.

The Resurgence of Solana DeFi

Solana's DeFi ecosystem is witnessing a significant comeback, with a surge in Total Value Locked (TVL) and user activity. This resurgence is attributed to several factors, including the maturation of DeFi products, increased liquidity, and the introduction of innovative features like token incentives and points systems.

MacBrennan Peet, from Margin Labs, highlights the explosion in TVL: "We just raised caps two days ago, and within like a second, raised like three and a half million. Three and a half million was poured into that, hitting like new supply caps." This rapid influx of capital demonstrates the growing interest and confidence in Solana's DeFi protocols.

The Evolution of Solana's DeFi Ecosystem

The current state of Solana's DeFi ecosystem is the result of continuous development and innovation. Many teams, such as Jito, Ellipsis Labs, Zeta, Kamino, Drift, and Cypher, have been building during the quieter periods, and their products are now reaching inflection points.

Lucas Bruder from Jito notes the significant growth in liquid staking: "In the last like month, we've seen the protocol grow like 50% or more." This growth is attributed to the narrative around Solana DeFi's comeback and the emergence of new protocols that complement liquid staking tokens.

Token Incentives and Points Systems

One of the driving forces behind the recent growth in Solana's DeFi ecosystem is the introduction of token incentives and points systems. Protocols like Margin Fi, Mango, and Meteora have implemented these systems to attract users and drive adoption.

MacBrennan Peet explains the rationale behind Margin Fi's points system: "What we're doing live is we're testing, okay, if we did have a token live right now, how could we effectively ingrain that into our product, into our protocol? What incentives work, what incentives don't work? What user archetype does this attract?"

The Debate Over Points Systems

While points systems have been effective in driving growth, they are not without controversy. Some argue that they are simply a way to defer airdrops and may not contribute to long-term sustainability.

Jarry Xiao from Ellipsis Labs offers a balanced perspective: "I do think that like growth hacking as a way to like bootstrap users is not a bad strategy. But I do think in the much longer term, what we should be like striving towards is building products that are sustainable."

Capital Efficiency: CLOBS vs AMMs

A key advantage of Solana's DeFi ecosystem is its support for Central Limit Order Books (CLOBs), which offer greater capital efficiency compared to Automated Market Makers (AMMs). Jarry Xiao, who is building Phoenix, an order book protocol, explains the benefits:

"Order books are this thing where they have been this proven mechanism where you can provide liquidity and be profitable. And that I think is like kind of powerful. And for DeFi to succeed in the long term, I think that this is something that has to be addressed."

The Importance of Liquid Staking

Liquid staking is playing a crucial role in the growth of Solana's DeFi ecosystem. Lucas Bruder highlights the potential: "I think we're going to see that ramp up a lot here in people like minting LSTs and using them in like stable swaps and borrow and stuff like that. I think less than 2% of all stake SOLs in liquid staking. We're on Ethereum that number is like much much higher."

The growth of liquid staking tokens like Jito SOL is expected to drive further adoption and innovation in the Solana DeFi space.

Building on Solana vs L2s and Other Chains

When it comes to building DeFi protocols, Solana offers unique advantages over Layer 2 solutions and other blockchain platforms. The panel discusses the benefits of building on Solana, including its high throughput, low costs, and unique programming model.

Jarry Xiao emphasizes the expanded design space on Solana: "There's so many things that you can potentially do on Solana that you just aren't unable to do on Ethereum, even unable to sustainably do on an L2 because I think right now the fees are probably too high."

The Future of Solana DeFi

Looking ahead, the panel discusses several exciting developments for Solana's DeFi ecosystem:

1. Increased adoption of liquid staking tokens
2. More vertical integration among DeFi protocols
3. The emergence of decentralized stablecoins
4. Enhanced automation and AI integration
5. Improved capital efficiency through order book protocols

MacBrennan Peet reveals an exciting development: "We will be announcing a decentralized stablecoin on Margin that's collateralized by LST like Jito SOL. So it's truly decentralized, it will not be collateralized by USDC."

The Importance of Open Source and Transparency

The panel emphasizes the need for greater transparency and open-source practices in the Solana ecosystem. Jarry Xiao argues that Solana developers should focus more on traditional crypto values of being open and decentralized:

"If you have some source code that is publicly available but I can't confirm that this code compiles down to the exact thing that you upload it on chain, you can have like a hidden rug function in there, right? Like it's table stakes for Ethereum to do this, and it's ridiculous to me that like teams in Solana don't treat this as like a priority number one."

Addressing the Challenges of Decentralized Leverage

The concept of decentralized leverage in DeFi is discussed, with Jarry Xiao pointing out potential challenges: "I think that like decentralized leverage is like an oxymoron where like if you have a protocol that offers leverage, ultimately somewhere down the line there's going to be some centralized piece of the system."

This observation highlights the need for careful consideration of risk management and centralization in DeFi protocols.

The Role of Stablecoins in Solana's DeFi Ecosystem

The panel discusses the importance of stablecoins in the Solana ecosystem, particularly the reliance on USDC. MacBrennan Peet emphasizes the need for decentralized alternatives: "If the USDC depeg actually happened when we had that massive scare, Solana's ecosystem would have been decimated. Solana is completely reliant on USDC as a token pairing for everything."

This discussion underscores the importance of developing robust, decentralized stablecoin solutions for the long-term stability of Solana's DeFi ecosystem.

Advice for Aspiring DeFi Founders

The panel offers valuable advice for aspiring founders in the DeFi space:

1. Focus on strategy and hiring, not just technology
2. Move fast and surround yourself with brilliant 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 accelerate

Conclusion: The Bright Future of Solana DeFi

As Solana's DeFi ecosystem continues to evolve and mature, it presents exciting opportunities for users, developers, and investors alike. With innovative protocols, improved capital efficiency, and a focus on sustainability, Solana is well-positioned to become a leading platform for decentralized finance.

The resurgence of Solana DeFi demonstrates the platform's resilience and potential for growth. As more users discover the benefits of building and using DeFi applications on Solana, we can expect to see continued innovation and adoption in the coming months and years.

Facts + Figures

• Solana DeFi is experiencing a resurgence, with protocols like Margin Fi seeing rapid growth in TVL
• Jito SOL, a liquid staking token, grew from 650,000 SOL staked to over a million in June
• Margin Fi went from 3 million in TVL to 17 million after introducing points on July 3rd
• Less than 2% of all staked SOL is currently in liquid staking on Solana, compared to a much higher percentage on Ethereum
• Phoenix, an order book protocol on Solana, regularly does $5 million of volume in the SOL-USDC market with less than $100,000 in the book
• Solana currently has 312 million in TVL, a stablecoin market cap of 1.5 billion, and a 7-day volume of 781 million
• Margin Fi is planning to launch a decentralized stablecoin collateralized by LSTs like Jito SOL
• The Solana ecosystem is heavily reliant on USDC for token pairings
• Many Solana DeFi protocols are not open-source or lack verifiable on-chain code
• Building on Solana offers unique advantages due to its high throughput and low costs
• Points systems and token incentives have been driving recent growth in Solana DeFi

Questions Answered

What is driving the resurgence of Solana DeFi?

The resurgence of Solana DeFi is driven by several factors, including the maturation of DeFi products, increased liquidity, and the introduction of innovative features like token incentives and points systems. Many teams have been building during quieter periods, and their products are now reaching inflection points. Additionally, the growth of liquid staking tokens and the introduction of new protocols that complement them have contributed to the ecosystem's expansion.

How do points systems and token incentives work in Solana DeFi?

Points systems and token incentives in Solana DeFi are mechanisms used by protocols to attract users and drive adoption. These systems typically reward users for participating in the protocol, such as providing liquidity or using specific features. For example, Margin Fi introduced a points system that led to significant growth in their TVL. These systems allow protocols to test different incentive structures and user behaviors before potentially launching a token, helping them to create more sustainable and effective tokenomics in the long run.

What are the advantages of building DeFi protocols on Solana compared to other chains?

Building DeFi protocols on Solana offers several advantages compared to other chains. Solana's high throughput and low costs allow for more complex and efficient DeFi applications. The unique programming model of Solana enables developers to create innovative features that may not be possible or sustainable on other chains. Additionally, Solana's support for Central Limit Order Books (CLOBs) provides greater capital efficiency compared to Automated Market Makers (AMMs) commonly used on other chains. These factors combined make Solana an attractive platform for DeFi development and innovation.

What is liquid staking, and why is it important for Solana's DeFi ecosystem?

Liquid staking is a process that allows users to stake their SOL tokens while receiving a liquid representation (like Jito SOL) that can be used in other DeFi applications. This is important for Solana's DeFi ecosystem because it enables users to earn staking rewards while simultaneously participating in other DeFi activities, increasing capital efficiency. The growth of liquid staking tokens is expected to drive further adoption and innovation in the Solana DeFi space, as these tokens can be used as collateral, in liquidity pools, and for other DeFi applications.

What are some of the challenges facing Solana's DeFi ecosystem?

Some of the challenges facing Solana's DeFi ecosystem include the need for more transparent and open-source practices among developers, the reliance on centralized stablecoins like USDC, and the potential risks associated with decentralized leverage. Additionally, there's a need to attract more liquidity and users to the ecosystem to compete with more established DeFi platforms. Addressing these challenges will be crucial for the long-term success and sustainability of Solana's DeFi ecosystem.