The rain gods have showered their blessings upon us, and it looks like a great day to write. But do you know what form rain takes? Liquid.
Reminds you of something else? Yes, liquid staking.
What did you think? A crypto bro cherishing nature and all? Nah!
Today, I have a rather interesting topic at hand. Of late, I have been thinking about how liquid staking is becoming the norm on all PoS blockchains. After all, it is all about liquidity in the end. Somehow, everyone agrees that all assets on PoS chains will be staked eventually.
But what is the future of liquid staking then? Will we have plethora of protocols enabling it on every chain? One protocol expanding horizontally? Or something else?
Today, I wish to dive into this very aspect. This can probably help an investor to build a long-term view of this niche of DeFi. And if you are not that, it is still going to be fun!
LFG.
Liquid Staking on Ethereum Vs Solana:
In order to understand what all is happening in liquid staking ecosystem, let us compare two giants. Actually, one giant and its noisy neighbour.
The liquid staking on both these cities differs widely due to cultural and functional distinctions.
Another reason to compare them is to establish that no matter what type of blockchain, liquid staking is here to stay and grow for a significant period of time.
But before that, a few numbers.
The adoption of liquid staking is much higher on Ethereum compared to Solana. Around 65% of staked ETH is liquid staked, whereas only around 6.9% of staked SOL is liquid staked on Solana as of May 2024. This indicates a significant growth opportunity for liquid staking solutions on Solana to catch up to Ethereum’s level of adoption.
This key difference arises because of how these blockchains handle their staking mechanisms.
On Ethereum, stakers are required to launch a minimum of 32ETH. In contrast, Solana uses a different staking mechanism that allows staking any amount of SOL tokens without a minimum requirement.
So, if you are someone who is simply looking to earn yield on your dormant tokens, Solana is a much better place. You do not need a third party to enable it for you. In fact, most wallets have this feature natively.
Another argument here is the DeFi maturity. Ethereum’s DeFi ecosystem is more mature and has a wider range of applications that can utilize liquid staked tokens like stETH. In contrast, Solana’s DeFi ecosystem is still emerging, which could impact the utility and demand for liquid staked SOL tokens in the short term.
So, if we solve for maturity (with time), liquid staking is likely to become a norm on Solana as well.
Is this the Final Frontier of Liquid Staking?
Well, my guess is extremely cliched for someone who has been around in crypto for a while.
Yes.
We are still very early.
Specially on Blockchains like Solana where there are no constraints on setting up a validator, liquid staking can be enabled by individual protocols. In such a scenario, you will see every protocol that crosses a respectable TVL becomes a validator.
On top of that, Solana’s recent move to a “stake-weighted quality-of-service implementation feature”, which allows validators with larger stakes to prioritize transactions they proxy to the network leaders (block producers) shifts the dynamics in the favour of protocols.
This change incentivizes infrastructure providers like Helius (RPC provider) and Jupiter (DEX) to run their own validators and accumulate more stake, as it allows them to provide faster transaction processing for their services.
Both Helius and Jupiter have launched their own liquid staking tokens (hSOL and JupSOL) to attract more stake delegation to their respective validators, taking advantage of this QoS prioritization mechanism
So with that, how many other shapes and forms can liquid staking can take? Here’s an overview of how different entities are trying to capitalize on liquid staking:
Staking Service Providers:
Protocols like Marinade Finance, Socean, and Jito are at the forefront of providing liquid staking services on Solana. They operate stake pools where users can deposit their SOL and receive LSTs in return, enabling them to earn staking rewards while retaining liquidity. These protocols compete by offering attractive yields, user-friendly interfaces, and additional features to attract stakers.
Infrastructure Providers:
As discussed above, projects like Helius (RPC provider) and Jupiter (DEX) have launched their own LSTs (hSOL and JupSOL, respectively) to incentivize users to stake with their validators.
By accumulating more stake, they can improve their performance and prioritize transactions, benefiting their core services.
DeFi Protocols:
DeFi protocols on Solana can leverage LSTs to attract liquidity and enable new use cases. For example, lending platforms could accept LSTs as collateral, allowing users to borrow against their staked assets without unstaking. Yield aggregators could integrate LSTs, enabling users to compound their staking rewards.
NFT Projects:
NFT projects can issue LSTs to incentivize users to stake their SOL and earn rewards while holding the NFTs. This creates a new revenue stream for the projects and provides additional utility to NFT holders.
Meme Coins/Tokens:
Similar to NFT projects, meme coins like Bonk can launch their own LSTs (bonkSOL) to incentivize holding and staking. Holders can earn staking rewards in addition to the native token rewards, creating a compelling value proposition.
Public Goods Funding:
Projects like Cubik’s iceSOL demonstrate how LSTs can be used to fund public goods on Solana. By staking SOL as iceSOL, users can contribute to funding public goods while still earning staking rewards.
Personal/Social LSTs:
Influential individuals (Not $MOTHER Iggy) or communities could launch their own LSTs, offering exclusive perks or access to holders while generating yield from staking rewards. This could create new models for monetization and community engagement.
Gamification:
Protocols could gamify LSTs by introducing lotteries, challenges, or other incentives for holders. For example, a project like Tensor could accept bids in a tensorSOL token and distribute accumulated yield as prizes or rewards.
What Happens Next?
Overall, liquid staking on Solana is enabling a wide range of innovative use cases and business models, unlocking new value streams for various stakeholders in the ecosystem. As the adoption of LSTs grows, we can expect to see even more creative applications and integrations emerge.
On top of that, if someone is concerned about framentation of liquidity due to so many LSTs popping up, we have a solution for that as well. But that’s a topic for another day.
Until then, let the fact sink in that what used to be a novel tech implementation on other chains could simply be democratized commodity on Solana.
See ya later, aligator!
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Until next time..