Breakpoint 2023: Water from a Stone: Liquid Staking on Solana

Summary

As blockchain technology continues to evolve, one of the emerging trends on the Solana network is liquid staking. In a recent panel discussion featuring Solana experts from Marinade, Laine, and SwissBorg, the transformative potential of liquid staking was extensively examined. Contributors discussed the challenges inherent to traditional native staking, the benefits offered by liquid staking, and the unique products individual companies have developed. Additionally, insights into the future of liquid staking were shared, revealing the expectation of increased adoption and the critical role it plays in decentralization and network security.

Key Points:

The Transition from Native to Liquid Staking

The concept of native staking involves choosing a validator from many and bearing the risks associated with their performance and network participation. Liquid staking, as introduced by Marinade, seeks to alleviate these issues, automating the delegation process across multiple high-performing validators and enhancing network decentralization. It also unlocks liquidity through the introduction of staking tokens like mSOL, allowing assets to have a dual function: earning staking rewards and participating in DeFi.

Single-Validator Liquid Staking Tokens (LSTs) and Market Fragmentation

Laine offers a unique approach with its single-validator LSTs. Rather than diversifying across many validators, single-validator LSTs allow users to maintain loyalty to a preferred validator while still benefitting from liquid assets. However, this creates challenges with liquidity fragmentation, which current developments like Sanctum and stake pool programs seek to address, aiming for a future where every validator operates via an LST.

Scaling DeFi Integration and Risk Assessment

From SwissBorg's perspective, the advent of liquid staking tokens enables the creation of new, diverse financial products. These products can combine the security and instant liquidity of LSTs, allowing for innovative wealth management strategies tailored to user risk profiles. Nicholas from SwissBorg emphasized the simplicity and safety LSTs provide on Solana, which is crucial for consumer-facing platforms.

Facts + Figures

• Marinade is the leading stake optimization platform on Solana, with a total value locked (TVL) of more than $300 million.
• Marinade helped decentralize the network by distributing close to 9 million SOL across numerous validators.
• Lane has been a Solana validator since August 2021 and has developed unique products like its own LST, Lane SOL.
• SwissBorg, boasting 800,000 users, explores leveraging LSTs to offer their customers a variety of DeFi strategies.
• Despite the rise of liquid staking, only about 2% of all staked SOL is currently in liquid form.
• Marinade recently introduced Marinade Native, allowing stakers to avoid smart contract risks while still decentralizing their stakes.
• The importance of a high Nakamoto coefficient was discussed, highlighting the focus on the network's resilience and decentralization.
• Sanctum was mentioned as a protocol providing a unified liquidity layer for Solana, helping address liquidity fragmentation.

Top quotes

• "Marinade is a stake optimization platform on Solana that delegates not to one but to hundreds of the best performing validators."
• "The 2nd biggest value prop of liquid staking is that you unlock the liquidity."
• "Liquidity fragmentation is a real issue... That's where a unified liquidity layer, that Sanctum is building and other solutions will be really important."
• "Complexity is the enemy of security."
• "If you have Lane SOL... and want to swap that for SOL or USDC... you get a really bad exchange rate, possibly not even have any liquidity to exchange it at all."
• "More than 50% of mSOL is just sitting on wallets."
• "Each epoch, Marinade can find the best hundred validators. It's like an index of the top performers that change over time."
• "We believe that Marinade introduced mSOL and liquid staking to represent both... capital efficiency and a decentralized way of staking."

Questions Answered

What is liquid staking on Solana?

Liquid staking on Solana refers to the process where users can stake their SOL tokens in a manner that doesn't lock them up, unlike native staking. Platforms like Marinade offer this service by automatically delegating staked SOL across a diversified group of high-performing validators, improving decentralization and allowing the staked SOL to remain liquid for use in other DeFi applications.

How does liquid staking improve upon native staking on Solana?

Liquid staking improves upon native staking by automating the choice of validators and spreading the stake across many to reduce risk. It eliminates the need for users to constantly monitor validators and worry about their performance. Additionally, it allows for the staked assets to be used in DeFi platforms, which is not possible with traditional native staking.

What challenges do single-validator LSTs face?

Single-validator LSTs face the challenge of liquidity fragmentation. Since each validator's LST can theoretically have its own unique market, it could result in less liquidity and efficiency when users want to exchange their tokens. To address this, protocols like Sanctum are working on unified liquidity layers to make the exchange of these tokens more seamless.

How does SwissBorg utilize LSTs?

SwissBorg utilizes LSTs to enable a broader range of investment strategies for their users. They consider the security and liquidity of these tokens crucial, as they allow users to participate in DeFi with reduced risks. SwissBorg is also looking at including LSTs in asset bundles, hence facilitating complex strategies that benefit from yield while still maintaining trading flexibility.

What future developments are expected for LSTs on Solana?

In the future, it is expected that the use of LSTs on Solana will grow, with more validators likely to launch their own LSTs. This will lead to new yield strategies and greater participation in DeFi. The chain might even transition to a system where each validator operates through an LST, depending on how solutions to current challenges like liquidity fragmentation are developed and adopted.