The Evolution of Liquid Staking on Solana

Liquid staking has become a cornerstone of the Solana ecosystem, evolving rapidly since its inception in early 2021. FP Lee, a key figure in the development of liquid staking on Solana, provides a comprehensive overview of this journey. The initial liquid staking contract on Solana was built by John Cinkey from Solana Labs, potentially in collaboration with the Lido team. This early development sparked interest from various parties, including FP Lee, who initially proposed to build a dashboard for the new stake pools.

As the project progressed, FP Lee and his team discovered economic exploits in the contract and contributed to its improvement. This involvement eventually led to the creation of Socean, the first SPL-deployed staking pool on Solana. The chronology of liquid staking deployments saw Marinade and Lido entering the scene, followed by Socean utilizing the official SPL staking contract.

Architectural Differences: Solana vs. Ethereum Liquid Staking

One of the most significant aspects of liquid staking on Solana is its architectural differences compared to other blockchains, particularly Ethereum. Solana's native protocol delegation for staking sets it apart from Ethereum's model. On Solana, users can create stake accounts and attach them to validators, allowing for a more flexible and efficient staking process.

FP Lee explains, "On Ethereum, you need exactly 32 ETH, and then you can bundle it and stake it. But there is no way on a protocol level to combine a bunch of different people's stakes to have enough to actually run a validator." This fundamental difference has led to a more decentralized and diverse liquid staking ecosystem on Solana.

The Unique Withdrawal Process on Solana

A key technical distinction in Solana's liquid staking implementation is the withdrawal process. Unlike Ethereum, where users may need to wait in a withdrawal queue, Solana allows instant access to stake accounts upon withdrawal. FP Lee emphasizes this point: "When you do a withdrawal from a stake pool, there is no withdrawal queue, right? Like there is a LIDO, for example, right? There is an unbonding period. But the key is that you get the stake account right away, like this, right?"

This immediate access to stake accounts upon withdrawal has profound implications for the fungibility and liquidity of Solana's liquid staking tokens (LSTs). It allows for seamless swaps between different LSTs without the need for traditional liquidity pools, as long as there is an overlap in validator lists between the two tokens.

Sanctum's Innovative Approach to Liquidity

Recognizing the limitations of traditional liquidity mining strategies, Sanctum has developed innovative solutions to address liquidity challenges in the liquid staking ecosystem. FP Lee describes their flagship product, Unstake It (now called Sanctum Reserve), as a pool of naked SOL that services all LSTs and stake accounts.

This approach eliminates the need for fragmented liquidity pools for individual LST pairs. Instead, users can instantly unstake any LST or stake account through Sanctum's platform, paying a fee based on the utilization rate of the reserve pool. This model aggregates liquidity from various sources into a single, efficient mechanism.

The Sanctum Router: Enhancing LST Swaps

Building on the concept of fungibility between LSTs, Sanctum developed a router that enables direct swaps between different liquid staking tokens. FP Lee explains, "If you're going from B-SOL to G-SOL, I mean, it will pull out the stake account, and it will put it in. And that gives you a swap, even if there is zero native liquidity between these two LSTs."

This innovation significantly reduces the need for traditional AMM liquidity pools between LST pairs, improving capital efficiency and reducing slippage for users looking to switch between different liquid staking products.

Infinity: The First LST of LSTs

Sanctum's latest innovation, Infinity, represents a groundbreaking development in the liquid staking space. FP Lee describes it as "the first ever LST of LSTs, or basket of LSTs." This product holds a diverse range of liquid staking tokens, including B-SOL, J-SOL, and many others, allowing users to gain exposure to a broad spectrum of the Solana staking ecosystem through a single token.

Infinity not only provides users with the average staking yields from various LSTs but also generates additional returns through trading fees accrued from swaps between the underlying tokens. This approach offers a unique value proposition for users seeking diversified exposure to Solana's staking landscape.

The Expanding Universe of LSTs on Solana

FP Lee highlights the growing diversity of liquid staking tokens on Solana, moving beyond simple stake pool implementations. He discusses several innovative LST models:

1. Single Validator LSTs: These allow users to delegate to specific validators while enjoying the benefits of liquid staking, bridging the gap between personal relationships with validators and the liquidity advantages of LSTs.

2. Project-based LSTs: Tokens issued by projects like Jupiter, Helius, and Drift, which may or may not run their own validators but use staking rewards to support their ecosystems.

3. ISO (Initial Staking Offering): A model where staking returns are directed towards funding public goods or grants on Solana, as exemplified by the Cubic project.

4. NFT-linked LSTs: Innovative concepts like Pathfinder SOL, which combines liquid staking with NFT mechanics to create "unruggable" NFTs backed by staked SOL.

5. Individual LSTs: A concept where staking rewards can be directed to specific individuals, opening up new possibilities for artists, creators, and influencers to monetize their influence.

The Vision of a SOL Economy

FP Lee presents an ambitious vision for what he calls the "SOL economy." This concept envisions a future where SOL is not just held for speculation but actively used in various transactions and economic activities within the Solana ecosystem. He explains, "I want people to start thinking about using this SOL, not just holding it as an asset to speculate on. But as something that I can use to buy coffee, to buy art, to support this person."

This circular economy model aims to create and transfer value within the bounds of Solana, potentially revolutionizing how users interact with the blockchain and its native token.

Addressing Liquidity Challenges in Adverse Market Conditions

The podcast delves into the critical issue of maintaining liquidity during market downturns, a challenge that has affected liquid staking products across various blockchains. FP Lee and the host discuss the potential for price divergence between liquid staking tokens and their underlying assets during extreme market events, as witnessed with Lido's staked ETH during the FTX collapse.

They explore the concept of a "death spiral" where the expectation of lower future prices leads to increased discounts on staked assets, potentially creating a self-reinforcing cycle of price depression. The discussion touches on the need for mechanisms to mitigate these risks as the percentage of liquid staked assets on Solana continues to grow.

The Role of Blockchain Foundations in Market Stability

An intriguing proposal emerges from the conversation: the potential role of blockchain foundations, such as the Solana Foundation, in providing market stability during crises. Drawing parallels to central banks in traditional finance, the discussion explores whether foundations should maintain reserves of unstaked tokens to act as buyers of last resort during extreme market events.

FP Lee suggests, "I think, especially when you know that this is not like a systemic, I think there's a case to be made for like maybe there's like a systemic fault in the, you know, in the blockchain or something. And then sort of coming in and buying might be conceived as market manipulation. But if you have a place where, you know, if you're in a situation where the market is kind of spiraling on its own, then I feel like it could make sense, both sort of like, you know, ethically and also like pragmatically for the foundation to come in and essentially pick, you know, money off the floor in some sense."

This concept, while potentially controversial, opens up a fascinating debate about the responsibilities and potential actions of blockchain foundations in maintaining ecosystem health.

Sanctum's Future Plans and Community Engagement

Looking ahead, FP Lee shares exciting developments for Sanctum. The project is currently running a user experience program, aiming to engage the community in a fun and innovative way. More significantly, Sanctum is preparing to launch its own token. FP Lee has published a draft proposal for Sanctum's tokenomics on his Twitter account (@souleconomist), inviting community feedback and participation in shaping the token's design.

This approach to tokenomics development represents a departure from traditional top-down models, emphasizing community involvement and collaboration. FP Lee stresses the importance of community support in driving the "LST revolution" and Sanctum's growth, stating, "We are, we want to, you know, like this whole LSD revolution is not possible without all our partners and without everybody who believes in LSD."

The Impact of Solana's Staking Architecture on DeFi

The unique staking architecture of Solana has far-reaching implications for the development of decentralized finance (DeFi) on the platform. By allowing immediate access to stake accounts upon withdrawal, Solana enables a level of liquidity and flexibility that is not easily achievable on other blockchains. This feature has become a cornerstone for innovative DeFi products and strategies on Solana.

FP Lee emphasizes how this architectural choice has enabled the creation of more efficient liquidity provision mechanisms and novel financial products. The ability to seamlessly move between different LSTs and stake accounts without traditional liquidity pools opens up new possibilities for capital efficiency and risk management in DeFi protocols.

Challenges and Opportunities in Scaling Liquid Staking

As liquid staking continues to grow on Solana, the ecosystem faces both challenges and opportunities. One key challenge is maintaining the balance between decentralization and efficiency as more SOL becomes liquid staked. FP Lee acknowledges the need for continued innovation to ensure that the growth of liquid staking doesn't lead to centralization risks.

On the opportunity side, the increasing adoption of liquid staking tokens presents new avenues for financial product development. The ability to use LSTs as collateral in lending protocols, yield farming strategies, and other DeFi applications is expanding the utility and demand for these tokens.

The Potential for LSTs in Funding Innovation

One of the most intriguing concepts discussed is the potential for LSTs to serve as a new funding mechanism for projects and public goods. FP Lee draws parallels to traditional venture capital funding, suggesting that staking rewards could potentially replace or complement traditional seed funding for some projects.

He explains, "You can VC fund your project. You can do a public sale. Or maybe you can do this kind of staking as a way to bootstrap something." This model could allow projects to raise capital without diluting equity or relying solely on token sales, potentially creating a more sustainable and aligned funding mechanism for blockchain projects.

The Role of Validators in the LST Ecosystem

The conversation highlights the evolving role of validators in the Solana ecosystem, particularly in light of liquid staking innovations. FP Lee notes that validators are increasingly looking to differentiate themselves and build brand recognition through LSTs. This trend is partly driven by the commoditization of validation services and the pressure on validator economics.

By launching their own LSTs, validators can create a more direct relationship with their delegators, potentially building a loyal community and offering additional value beyond basic staking services. This shift could lead to a more diverse and competitive validator ecosystem on Solana.

Addressing Regulatory Concerns in Liquid Staking

While not explicitly discussed in detail, the podcast touches on the potential regulatory implications of liquid staking and the role of blockchain foundations in market operations. As the liquid staking ecosystem grows and becomes more integral to DeFi on Solana, it's likely that regulatory scrutiny will increase.

The discussion about the Solana Foundation potentially acting as a buyer of last resort raises interesting questions about the regulatory landscape for blockchain foundations and their role in maintaining market stability. Future developments in this area will likely need to carefully navigate regulatory considerations to ensure compliance while fostering innovation.

The Importance of User Experience in Staking

FP Lee emphasizes the significance of user experience in driving adoption of liquid staking. He points out that traditional staking through stake accounts can be cumbersome for retail users, involving complex processes of activation, deactivation, and management of multiple accounts.

Liquid staking tokens offer a more user-friendly alternative, allowing users to stake and unstake with the simplicity of token transactions. This improved UX is crucial for onboarding new users to Solana and encouraging participation in the staking ecosystem.

The Potential for LSTs in Creating New Economic Models

The concept of individual LSTs, where staking rewards can be directed to specific individuals or entities, opens up fascinating possibilities for new economic models on Solana. FP Lee suggests that this could be particularly impactful for creators, artists, and influencers, providing them with a new way to monetize their work or influence.

This model could potentially disrupt traditional funding and patronage systems, allowing supporters to back creators without directly spending money, instead allocating their staking rewards. It represents a novel intersection of decentralized finance and the creator economy.

The Future of Sanctum and Community-Driven Development

As Sanctum prepares to launch its token, FP Lee's approach to tokenomics development stands out. By openly sharing draft proposals and actively seeking community input, Sanctum is embracing a collaborative model of protocol development. This approach aligns with the ethos of decentralization and community governance that underpins many blockchain projects.

The success of this model could set a new standard for how DeFi protocols engage with their communities and develop their economic models. It represents a shift towards more transparent and participatory protocol development, potentially leading to more robust and community-aligned projects.

Conclusion: The Evolving Landscape of Liquid Staking on Solana

The conversation with FP Lee provides a comprehensive overview of the current state and future potential of liquid staking on Solana. From the architectural advantages of Solana's staking model to innovative products like Infinity and the vision of a SOL economy, it's clear that liquid staking is poised to play a central role in Solana's DeFi ecosystem.

As the percentage of liquid staked SOL continues to grow, addressing challenges around liquidity, decentralization, and market stability will be crucial. The potential for LSTs to facilitate new funding models, improve user experience, and create novel economic systems presents exciting opportunities for innovation.

The evolving role of validators, the potential involvement of blockchain foundations in market operations, and the emphasis on community-driven development all point to a dynamic and rapidly evolving landscape. As Sanctum and other projects continue to push the boundaries of what's possible with liquid staking, the Solana ecosystem is well-positioned to lead innovation in this space.

The future of liquid staking on Solana looks bright, with the potential to not only enhance the efficiency and accessibility of staking but also to create entirely new paradigms for value creation and exchange in the blockchain world.

Facts + Figures

• Liquid staking on Solana began development in February 2021, with John Cinkey from Solana Labs leading the initial contract development.
• The chronology of liquid staking deployments on Solana saw Marinade and Lido entering first, followed by Socean as the first SPL-deployed staking pool.
• Solana's native protocol delegation allows for flexible staking, unlike Ethereum which requires exactly 32 ETH to stake.
• Solana's liquid staking implementation allows instant access to stake accounts upon withdrawal, unlike Ethereum's withdrawal queue system.
• Sanctum's Unstake It (now Sanctum Reserve) provides instant unstaking for any LST or stake account, with fees based on utilization rate.
• The Sanctum Router enables direct swaps between different liquid staking tokens without traditional liquidity pools.
• Infinity, Sanctum's latest product, is the first "LST of LSTs," holding a diverse range of liquid staking tokens.
• The percentage of liquid staked SOL has grown from less than 4% to around 6%, driven by Sanctum and other innovations.
• Sanctum is preparing to launch its own token, with tokenomics proposals open for community feedback.
• FP Lee envisions a "SOL economy" where SOL is actively used for various transactions beyond speculation.
• During the FTX collapse, Lido's staked ETH saw a 7% to 10% price divergence from ETH due to liquidity issues.
• Sanctum is currently running a user experience program to engage the community in innovative ways.
• The concept of individual LSTs could allow staking rewards to be directed to specific individuals or entities.
• Pathfinder SOL is an example of an NFT-linked LST, aiming to create "unruggable" NFTs backed by staked SOL.
• The podcast discusses the potential role of blockchain foundations as buyers of last resort during market crises.

Questions Answered

What are the main differences between liquid staking on Solana and Ethereum?

Solana's liquid staking differs significantly from Ethereum's due to its native protocol delegation for staking. On Solana, users can create stake accounts and attach them to validators flexibly, while Ethereum requires exactly 32 ET

H to stake. Additionally, Solana allows instant access to stake accounts upon withdrawal, unlike Ethereum's withdrawal queue system. These differences lead to a more diverse and efficient liquid staking ecosystem on Solana.

How does Sanctum's Unstake It (now Sanctum Reserve) work?

Sanctum Reserve is a pool of unstaked SOL that provides instant unstaking services for any LST or stake account. Users pay a fee based on the utilization rate of the reserve pool when they want to unstake. This approach eliminates the need for fragmented liquidity pools for individual LST pairs, aggregating liquidity from various sources into a single, efficient mechanism. It allows users to instantly access their SOL without waiting for unbonding periods.

What is Infinity, and how does it differ from other liquid staking products?

Infinity is Sanctum's latest innovation, described as the first "LST of LSTs" or basket of LSTs. It holds a diverse range of liquid staking tokens, including B-SOL, J-SOL, and others, allowing users to gain exposure to a broad spectrum of the Solana staking ecosystem through a single token. Infinity not only provides users with the average staking yields from various LSTs but also generates additional returns through trading fees accrued from swaps between the underlying tokens, offering a unique value proposition for diversified exposure to Solana's staking landscape.

How might blockchain foundations like the Solana Foundation help maintain market stability?

The podcast discusses the potential role of blockchain foundations as buyers of last resort during market crises, similar to how central banks operate in traditional finance. The idea is that foundations could maintain reserves of unstaked tokens to intervene during extreme market events, potentially preventing "death spirals" in liquid staking token prices. However, this concept raises questions about the appropriate role of foundations and potential regulatory implications. The discussion suggests that such interventions could be ethically and pragmatically justified in certain situations to maintain ecosystem health.

What is the vision for a "SOL economy" and how might it be achieved?

FP Lee envisions a "SOL economy" where SOL is not just held for speculation but actively used in various transactions and economic activities within the Solana ecosystem. This includes using SOL for everyday purchases, supporting creators, and engaging in various DeFi activities. The development of diverse liquid staking products, improved user experiences, and innovative funding models through LSTs are seen as key steps towards realizing this vision. The goal is to create a circular economy where value is created and transferred within the Solana ecosystem, potentially revolutionizing how users interact with the blockchain and its native token.