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The Future of Liquid Staking on Solana | FP Lee

By Lightspeed

Published on 2024-05-08

Discover how Sanctum is transforming liquid staking on Solana, creating an infinite LST future with enhanced liquidity and user-friendly solutions.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

Introduction to Sanctum and the Infinite LST Future

Sanctum, an innovative protocol built on Solana, is revolutionizing the concept of liquid staking tokens (LSTs) and aiming to create what they call the "infinite LST future." In a recent episode of Lightspeed, FP Lee, a key figure behind Sanctum, shared insights into their vision and the problems they're solving in the Solana ecosystem.

The core idea behind Sanctum's infinite LST future encompasses two main concepts. Firstly, they believe that most, if not all, SOL should be staked, and of that staked SOL, the majority should be liquid staked. Secondly, Sanctum aims to provide users with numerous reasons to stake their SOL beyond just earning yield. This approach envisions a future where there are thousands of different LSTs, each serving its own unique purpose, whether it's supporting art, funding public goods, or offering enhanced yields.

FP Lee explains, "We want to give you a thousand reasons for you to stake your SOL. And that means sort of a thousand of different LSTs, each with their own sort of purpose." This vision sets Sanctum apart from traditional liquid staking protocols and positions them as a catalyst for innovation in the Solana ecosystem.

Infinity: The LST of LSTs

At the heart of Sanctum's offerings is Infinity, a groundbreaking product that functions as an LST of LSTs, or alternatively, a basket of LSTs. Unlike traditional LSTs that hold stake accounts, Infinity is the first-ever LST that holds other LSTs, including popular options like mSOL, JITOSOL, and bSOL, as well as LSTs from various validators.

This unique approach allows Infinity to serve as a versatile pool that earns the average combined staking rewards from all the LSTs it holds. Moreover, it enables swaps between any two LSTs within the pool, making it an incredibly capital-efficient solution for the envisioned infinite LST future.

FP Lee highlights the significance of this innovation: "The idea of infinity is that it is a single pool that allows all of these LSTs to be in the same pool. And it allows swaps between any two of them, which then makes it the most capital efficient AMM possible for an infinite LST future."

The Mechanics of Infinity

One of the key differentiators of Infinity is its ability to perform swaps without relying on traditional AMM curves or oracle prices. This is possible because all LSTs are semi-fungible, as they all ultimately redeem to staked SOL. This characteristic allows Sanctum to calculate fair prices for swaps based on the ratio of one LST to another in terms of staked SOL value.

FP Lee explains, "We don't have a curve and we don't use an Oracle price, right, because the key insight is that all LSTs are like semi-fungible in a way. They all redeem down to stake SOL." This approach enables Infinity to offer zero-slippage swaps, regardless of the size of the transaction, with only a small fee applied.

The innovative design of Infinity addresses several inefficiencies present in traditional AMMs. For instance, in a typical SOL/mSOL pool, half of the asset (SOL) isn't being fully utilized, as users can already stake SOL directly into mSOL with zero slippage. Infinity's design eliminates this inefficiency, making it a more capital-efficient solution for the Solana ecosystem.

Risk Considerations in Infinity

While Infinity presents a novel solution to liquidity issues, it's essential to consider the potential risks associated with this model. FP Lee acknowledges two primary risk factors: smart contract risk and the potential for asset exploitation.

The smart contract risk is inherent to any blockchain-based protocol and remains a consideration for Infinity. However, the more unique risk comes from the possibility of one of the assets in the pool being compromised or exploited, which could potentially drain the entire pool.

FP Lee addresses this concern by explaining that most LSTs on Solana, except for Marinade SOL, use the same smart contract (the SPL stake pool contract). This commonality significantly reduces the risk profile of adding new LSTs to the pool. As Lee puts it, "The marginal risk of adding new LST assets that use that same deployment is zero."

Sanctum's Partner LST Infrastructure

Beyond Infinity, Sanctum is also providing infrastructure for partners to launch their own LSTs. This service has already attracted about 20 partners, including prominent names in the Solana ecosystem like Jupiter, Helius, Bonk, and Drift.

The key innovation here is that Sanctum has dramatically lowered the barrier to entry for creating new LSTs. Traditionally, launching an LST required significant capital to provide liquidity. With Sanctum's infrastructure, partners can launch LSTs without this substantial upfront investment.

FP Lee emphasizes the transformative nature of this offering: "Given that the cost of LSTs becomes so low, like the cost, the marginal cost of spinning up and maintaining an LST becomes so low, there's no fixed cost... it means that anybody can sort of spin up an LST without, you know, having to have this massive cash outlay."

Diverse LST Use Cases

Sanctum's infrastructure enables a wide range of LST use cases beyond traditional stake pools. Some innovative examples include:

  1. Single validator LSTs: Projects can run a validator and create an LST that delegates exclusively to that validator.
  2. Public goods funding: LSTs like ISO that direct yields to fund public goods.
  3. NFT-linked LSTs: Tokens that whitelist or are linked to "unruggable" NFTs.
  4. Personal LSTs: FP Lee recently launched "FP SOL" as a proof of concept, demonstrating how individuals could create their own LSTs.

These diverse use cases showcase the potential for LSTs to become a versatile tool for various purposes within the Solana ecosystem, far beyond simple staking yields.

Solving the Liquidity Problem

One of the most significant challenges in the liquid staking space has been providing sufficient liquidity for LSTs. Traditional approaches often required millions of dollars in liquidity incentives to make LSTs viable. Sanctum's approach fundamentally changes this dynamic.

FP Lee explains their solution: "The idea of having this naked, you know, this naked SOL pool is that anybody, right, it doesn't matter if they have their own liquidity or not, they can just spin it up and they can borrow this liquidity."

This approach allows even small LSTs to tap into the liquidity of larger, more established LSTs through Infinity. For example, a new LST with limited liquidity can utilize the deep liquidity of JITOSOL or mSOL through Infinity, making it immediately viable and tradeable.

The Sanctum Reserve and Infinity Pool

Sanctum's liquidity solution operates on two layers. The first is the Sanctum Reserve, a pool of naked SOL that accepts all LSTs. The second layer is the Infinity pool itself, which holds various LSTs and can perform swaps between them.

FP Lee notes that as the Infinity pool grows, it could potentially replace the need for a separate reserve pool: "The infinity pool is a super set of the reserve pool, because the infinity pool also holds SOL as an asset. So if the infinity pool, when the infinity pool gets big enough, right, it can basically supplant the infinity pool by just holding that amount of SOL."

This dual-layer approach provides a robust liquidity solution that can adapt and scale as the Solana ecosystem grows.

Value Accrual and Business Model

While Sanctum's primary focus is on growing the liquid staking ecosystem on Solana, they have implemented a sustainable business model. Trading fees earned in the Infinity pool are split, with 10% going to the protocol and 90% to depositors.

However, FP Lee emphasizes that their current priority is growth rather than immediate profitability: "Even if we don't take any fee on those LSTs, right, if I can get the proportion of LSTs from what was like 4% and 4.5% when we started and now it's at 6%, if I can get that to 50%, right, and I can capture that trading volume... then something can make like a ton of money."

This long-term vision demonstrates Sanctum's commitment to building a sustainable ecosystem that benefits all participants.

Sanctum Wonderland: Reimagining User Loyalty Programs

In addition to their core products, Sanctum has launched Wonderland, an innovative user loyalty program designed to engage users in a fun and whimsical way. Unlike traditional points programs that often feel competitive and stressful, Wonderland aims to make the experience enjoyable and inclusive.

FP Lee explains the rationale behind Wonderland: "Instead of thinking about how can we like, how can we maximize our metrics, we really, the primary design goal is how can we make our users like have fun, right? How can we make our users feel like this joy and whimsical, you know, like, and feel like, okay, like this new LST future is like so exciting."

Key features of Wonderland include:

  1. Cute, engaging design with animated elements
  2. Frequent updates (every 5 minutes) for a more responsive user experience
  3. Emphasis on collecting different LSTs rather than competing for ranks
  4. Low entry barriers to ensure inclusivity (e.g., requiring only 0.1 of each LST to participate)

This approach to user engagement represents a fresh take on loyalty programs in the crypto space, potentially setting a new standard for how protocols interact with their communities.

Comparing Solana and Ethereum: Liquidity and Decentralization

The discussion touched on the differences between liquid staking on Solana and Ethereum, particularly regarding the "winner-take-all" dynamics observed on Ethereum with Lido's dominance (about 70% market share of liquid staked ETH).

FP Lee argues that the key difference lies in Solana's unique staking mechanism: "The stakeholder program was designed in such a way that you get back your stake account, which then allows the other thing that also makes a difference is that the like there's a two, the epoch is only about two and a half days, right? Like if the epoch was 21 days, then this product would be a lot less viable."

These design choices in Solana's staking mechanism allow for more innovation and competition in the liquid staking space, potentially preventing the emergence of a single dominant player like Lido on Ethereum.

Stake-Weighted Quality of Service (QoS) on Solana

Another unique aspect of Solana that impacts the staking landscape is the implementation of Stake-Weighted Quality of Service (QoS). This feature addresses network congestion by allocating transaction throughput to validators proportional to their stake in the network.

FP Lee explains: "The idea is that the validator gets the right to send transactions to the leader proportional to the stake that it has over the network." This mechanism incentivizes protocols and large users to run their own validators and attract stake to ensure they can process transactions during high-demand periods.

This feature has created additional demand for Sanctum's services, as more projects seek to set up their own validators and associated LSTs to improve their transaction throughput on the network.

The Vision for a Circular Solana Economy

Looking to the future, FP Lee shared an ambitious vision for how LSTs could transform the Solana ecosystem. He envisions a circular economy where LSTs become the primary medium of exchange for goods and services within the Solana ecosystem.

"I want everybody to have an LST. I want it to be like this circular Solana economy where you pay for things like you pay for goods and services not by giving you USDC or you know paying on fiat or whatever, but rather by just moving your SOL into the LST of the person to pay for that good of service," Lee explains.

This vision goes beyond simple staking yields, imagining a future where value is created and captured natively on Solana through a web of interconnected LST holdings. Such a system could potentially position Solana as a global currency, rivaling or even surpassing Bitcoin in terms of adoption and utility.

Challenges and Future Developments

While Sanctum's vision is ambitious, there are challenges to overcome. The team continues to work on improving the efficiency of their systems, exploring ways to minimize cash drag in the Infinity pool, and developing more sophisticated rebalancing mechanisms.

Furthermore, as the Solana ecosystem evolves, particularly with the implementation of features like stake-weighted QoS, Sanctum will need to adapt its offerings to align with these changes and continue providing value to its users and partners.

Conclusion: Sanctum's Role in Shaping Solana's Future

Sanctum's innovative approach to liquid staking is poised to play a significant role in shaping the future of the Solana ecosystem. By lowering the barriers to entry for creating LSTs, providing robust liquidity solutions, and fostering a more diverse and dynamic staking landscape, Sanctum is contributing to a more decentralized and efficient Solana network.

As the protocol continues to grow and evolve, it will be exciting to see how their vision of an infinite LST future unfolds and potentially transforms the way we think about staking, liquidity, and value creation in the blockchain space. With its user-friendly approach and focus on fostering innovation, Sanctum is well-positioned to drive adoption and push the boundaries of what's possible in the world of decentralized finance on Solana.

Facts + Figures

  • Sanctum aims to create an "infinite LST future" where most, if not all, SOL is staked and liquid staked.
  • Infinity, Sanctum's flagship product, is the first LST that holds other LSTs, allowing for efficient swaps between any two LSTs in the pool.
  • Sanctum is working with about 20 partners, including Jupiter, Helius, Bonk, and Drift, to launch their own LSTs.
  • The Infinity pool currently holds about 400k in JITOSOL.
  • Sanctum's reserve pool holds about 210k SOL.
  • Currently, about 33% of SOL is not being staked, representing a significant opportunity for growth in liquid staking.
  • The epoch length on Solana is about two and a half days, compared to 21 days on Ethereum, which makes Sanctum's model more viable.
  • Lido, the dominant liquid staking protocol on Ethereum, holds about 70% market share of liquid staked ETH.
  • Lido charges a 10% fee on staking returns, with 5% going to the DAO and 5% to validator operators.
  • Sanctum's Wonderland loyalty program takes snapshots every 5 minutes for a more responsive user experience.
  • Sanctum's trading fees are split 90% to depositors and 10% to the protocol.
  • The percentage of liquid staked SOL has grown from 4-4.5% to 6% since Sanctum started.
  • Stake-Weighted QoS on Solana allocates transaction throughput to validators proportional to their stake in the network.

Questions Answered

What is Sanctum's vision for the future of liquid staking on Solana?

Sanctum envisions an "infinite LST future" where most, if not all, SOL is staked and liquid staked. They aim to provide users with numerous reasons to stake their SOL beyond just earning yield, imagining a future with thousands of different LSTs serving various purposes such as supporting art, funding public goods, or offering enhanced yields. This vision seeks to transform Solana into a circular economy where LSTs become the primary medium of exchange for goods and services within the ecosystem.

How does Infinity, Sanctum's flagship product, differ from traditional LSTs?

Infinity is unique because it functions as an LST of LSTs, or a basket of LSTs. Unlike traditional LSTs that hold stake accounts, Infinity is the first-ever LST that holds other LSTs, including popular options like mSOL, JITOSOL, and bSOL. This approach allows Infinity to serve as a versatile pool that earns the average combined staking rewards from all the LSTs it holds and enables swaps between any two LSTs within the pool, making it an incredibly capital-efficient solution for the liquid staking ecosystem on Solana.

How does Sanctum solve the liquidity problem for new LSTs?

Sanctum solves the liquidity problem for new LSTs through its innovative two-layer approach. The first layer is the Sanctum Reserve, a pool of naked SOL that accepts all LSTs. The second layer is the Infinity pool, which holds various LSTs and can perform swaps between them. This approach allows even small LSTs to tap into the liquidity of larger, more established LSTs through Infinity, making them immediately viable and tradeable without requiring millions of dollars in liquidity incentives.

What is Sanctum Wonderland, and how does it differ from traditional loyalty programs?

Sanctum Wonderland is an innovative user loyalty program designed to engage users in a fun and whimsical way. Unlike traditional points programs that often feel competitive and stressful, Wonderland aims to make the experience enjoyable and inclusive. Key features include cute, engaging design with animated elements, frequent updates for a more responsive user experience, emphasis on collecting different LSTs rather than competing for ranks, and low entry barriers to ensure inclusivity. This approach represents a fresh take on loyalty programs in the crypto space.

How does Solana's stake-weighted Quality of Service (QoS) impact the staking landscape?

Solana's stake-weighted Quality of Service (QoS) addresses network congestion by allocating transaction throughput to validators proportional to their stake in the network. This mechanism incentivizes protocols and large users to run their own validators and attract stake to ensure they can process transactions during high-demand periods. This feature has created additional demand for Sanctum's services, as more projects seek to set up their own validators and associated LSTs to improve their transaction throughput on the network.

How does Sanctum's approach to liquid staking differ from Lido on Ethereum?

Sanctum's approach to liquid staking differs significantly from Lido on Ethereum due to Solana's unique staking mechanism. On Solana, users can quickly retrieve their stake account, and the epoch length is only about two and a half days (compared to 21 days on Ethereum). These design choices allow for more innovation and competition in the liquid staking space on Solana, potentially preventing the emergence of a single dominant player like Lido on Ethereum. Additionally, Sanctum's infrastructure enables a wide range of LST use cases beyond traditional stake pools, fostering a more diverse and dynamic staking landscape.

What are the potential risks associated with Sanctum's Infinity pool?

The primary risks associated with Sanctum's Infinity pool are smart contract risk and the potential for asset exploitation. While smart contract risk is inherent to any blockchain-based protocol, the more unique risk comes from the possibility of one of the assets in the pool being compromised or exploited, which could potentially drain the entire pool. However, Sanctum mitigates this risk by focusing on LSTs that use the same smart contract (the SPL stake pool contract), which significantly reduces the risk profile of adding new LSTs to the pool.

How does Sanctum plan to generate revenue and ensure long-term sustainability?

While Sanctum's primary focus is on growing the liquid staking ecosystem on Solana, they have implemented a sustainable business model. Trading fees earned in the Infinity pool are split, with 10% going to the protocol and 90% to depositors. However, their current priority is growth rather than immediate profitability. As the proportion of liquid staked SOL increases and trading volume grows, Sanctum expects to generate significant revenue. Additionally, they have the option to implement fee switches or commissions on assets under management in the future if needed.

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