Author: Severin & Ian, MT Capital

"Jito has performed exceptionally well in this round of Solana's recovery wave. As the first LSD protocol on Solana that combines MEV earnings with staking rewards, Jito is expected to reshape the competitive landscape of Solana's LSD market."

TL;DR

• Jito is the first liquid staking protocol on Solana that combines MEV earnings with staking rewards. In the past 30 days, its TVL has increased by nearly 70%, and it is poised to reshape the staking market landscape on Solana.

• Jito is about to launch its governance token JTO. The early market circulation of JTO is limited, with the main selling pressure coming from airdrop users. The use cases for JTO are relatively limited, and its value capture ability is weak. Jito needs new incentive measures and ecosystem expansion to stimulate the continuous growth of Jito's TVL, thereby alleviating the selling pressure from airdrop users to some extent and maintaining the stability of JTO's value.

• Supported by the influx of new assets and users into Solana, as well as the rise in trading volume, and Solana's extremely low liquid staking ratio, LSD protocols represented by Jito are expected to capture higher staking TVL. The potential enormous MEV value on Solana gives Jito greater imaginative space.

• Compared to Marinade, the gap in ecosystem composition, degree of decentralization, and single staking model will continue to narrow as Jito develops. Meanwhile, Jito's core competitive advantage in capturing and distributing MEV value will expand with the prosperity of the Solana network. Therefore, we hold a very optimistic future expectation for Jito. Jito is expected to replace Marinade as the largest LSD protocol in the Solana ecosystem.

• The steady improvement of Jito's fundamentals will also drive the rise in the secondary token price of JTO. Referring to the price trends of LSD protocol tokens over the past month, we believe JTO will also have a stronger performance in the secondary market.

Jito: The First Liquid Staking Protocol with MEV Earnings on Solana

Deeply Engaged in Solana MEV Field: Jito Labs

Jito Network was launched by the Jito Labs team. The Jito Labs team has been early pioneers in the infrastructure field of Solana MEV. In July 2022, Jito Labs launched the Solana MEV Dashboard, which conducted MEV classification analysis on over 36 billion transactions on Solana since January 2022. Subsequently, in August 2022, Jito Labs announced the completion of a $10 million Series A funding round led by Multicoin Capital and Framework Ventures, with the funds intended to continue building optimized MEV infrastructure.

Following that, Jito Labs successively launched products and services such as the Jito-Solana validator client and Jito Block Engine, becoming another important infrastructure service provider in the Solana MEV field. The Jito Block Engine connects relayers, searchers, and validators in the network through off-chain auctions to address the MEV issue.

• First, the Jito Block Engine receives transaction orders from relayers and forwards them to searchers.

• Then, searchers submit transaction bundles containing bids.

• Finally, the Jito Block Engine simulates each transaction combination, finds the optimal transaction bundle, and forwards it to validators for processing.

According to the Validator Health Report: October 2023 released by the Solana Foundation, approximately 31.45% of Solana validator nodes have chosen to use the Jito-Solana validator client, which also indirectly showcases Jito Labs' technical level in the MEV field.

As the Jito-Solana validator client continues to be adopted, the MEV rewards captured based on Jito-Solana are also increasing, laying a solid foundation for Jito to launch an LSD module with MEV rewards.

The First Solana LSD with MEV Earnings

Timing Issues Led to Long-Term Challenges for JitoSOL: In November 2022, just before the FTX collapse, witnessing the booming development of LSD protocols, Jito Labs officially announced the launch of Jito staking services. Similar to the liquidity staking logic of other LSD protocols, users who delegate SOL to validator nodes receive JitoSOL as a liquidity certificate. The price of JitoSOL would continuously rise to reflect the validator rewards obtained. Thanks to Jito Labs' early layout in the Solana MEV field, Jito was also able to distribute MEV earnings to stakers, further enhancing users' staking rewards. Unfortunately, just as Jito announced the launch of its LSD staking service, FTX collapsed due to the misappropriation of customer funds. Solana, closely related to FTX, also could not escape the disaster, experiencing a massive loss of liquidity. Therefore, after launching the staking module, Jito's TVL remained lukewarm due to a lack of sufficient market confidence and liquidity demand.

Incentive Programs Boost Jito's Recovery: With the recovery of the Solana ecosystem in the second half of this year, Jito's TVL has also begun to gradually grow. Additionally, in August this year, Jito launched its own points incentive program to promote the widespread adoption of JitoSOL. Users can earn points by participating in Jito staking, holding JitoSOL, engaging in DeFi activities with JitoSOL, and inviting friends. Points represent users' contributions to the Jito community and are seen as an important criterion for future airdrops. The introduction of the points incentive program has made the growth curve of Jito's TVL significantly steeper.

Lido Exits, Jito Seizes Market Share from Lido Solana: Meanwhile, in October this year, Lido DAO decided through community voting to no longer support new SOL staking, and node operators will gradually exit the SOL staking market starting in November. Lido's exit means that nearly $6M worth of stSOL needs to find new staking venues. Jito, which combines staking and MEV rewards and also has points incentives, has successfully absorbed a large amount of stSOL, further skyrocketing Jito's TVL, making it one of the top two LSD protocols on Solana.

A More Decentralized Jito - StarkNet

To make the underlying validator pool and the management process of staking pool amount changes more decentralized, Jito proposed the future development plan of Jito StarkNet. Jito StarkNet is a self-sustaining, transparent, and decentralized smart management protocol for validator pools. Jito StarkNet mainly consists of three modules: Keepers, Validator History Program, and Steward Program.

• The Validator History Program stores historical data records of each validator node for nearly three years, including participation and correctness data in the consensus process, commission rates, MEV extraction value, total staking value, and staking rankings.

• The Steward Program calculates scores and appropriate staking delegation amounts for each validator node based on their on-chain historical data records.

• The Keepers Network executes the distribution of staking delegation amounts based on the calculations from the Steward Program.

In the Jito StarkNet network, the historical behavior of validator nodes will serve as the sole reference standard for distributing staking delegation amounts, encouraging healthy competition among underlying validator nodes to provide users with a better staking experience. Meanwhile, the management of staking delegation funds will no longer rely on centralized management by the protocol but will be automatically executed by the Steward Program and Keepers Network, making the operational process more decentralized.

Token Economics

On November 28, the Jito Foundation announced the launch of the governance token JTO. The launch of JTO is an important part of Jito's development, and JTO will be used as a reward for early contributors and grant users governance capabilities over the protocol.

Token Distribution: The total supply of JTO is 1 billion tokens, of which:

• 10% will be airdropped to early users;

• 24.3% will be controlled by DAO governance for community growth;

• 24.5% and 16.2% of the tokens will belong to the Jito team and early investors, respectively. This portion of tokens will have a one-year lock-up period and a three-year unlocking period;

• 25% of the tokens will be used for ecosystem development;

Token Utility: JTO holders can make decisions on important parameters and governance measures of the protocol, including but not limited to:

• Setting fees for the JitoSOL staking pool;

• Adjusting key parameters of Jito StarkNet to allocate staking fund delegation strategies;

• Managing the JTO tokens held by the DAO and the fees captured by JitoSOL;

Token Airdrop Incentives: Early adopters of Jito will have the opportunity to receive JTO token airdrops. Among them,

• 80% of the tokens will be airdropped to JitoSOL holders and users;

• 15% of the tokens will be airdropped to validator nodes running the Jito-Solana client;

• 5% of the tokens will be airdropped to Jito MEV searchers;

From the token distribution situation of JTO, the early market circulation of JTO is limited, with the main selling pressure coming from airdrop users. In terms of token empowerment, the use cases for JTO are relatively limited, and its value capture ability is weak. Jito needs new incentive measures and ecosystem expansion to stimulate the continuous growth of Jito's TVL, thereby alleviating the selling pressure from airdrop users to some extent and maintaining the stability of JTO's value.

Future Expectations for Jito

Explosive Growth of Solana

After the bankruptcy of FTX, the long-dormant Solana has finally welcomed a recovery. Since September, the TVL on Solana has begun to grow significantly, currently nearing $700M. In this round of rising cycle, the monthly growth rate of TVL for the top ten public chains is only 14.8%, while Solana's TVL has a monthly growth rate of 85%, far exceeding other public chains. From the asset side, the influx of assets is expected to drive an increase in SOL staking demand.

In addition to the significant increase in TVL, the daily transaction volume on Solana has also reached a peak of nearly 400M. The rise in transaction volume can drive the growth of Solana network fees and promote the increase in MEV fees, which will boost staking demand represented by Jito.

Moreover, the number of new users and reactivated users on Solana continues to recover, further broadening the audience for LSD protocols represented by Jito.

Solana LSD Still Has Huge Development Space

Although the current staking rate of SOL has reached 70.07%, the proportion of liquid staking is only 3%-4%, indicating that liquid staking still has significant development space. Compared to other staking methods, liquid staking allows users to enjoy staking rewards while participating in other DeFi activities through liquidity token certificates, resulting in higher capital efficiency. As shown in the figure below, with the gradual recovery of the Solana ecosystem, liquid staking has also experienced explosive growth. We expect that liquid staking on Solana will replace a larger-scale general staking market due to its higher capital efficiency in DeFi activities.

Solana MEV Value Space is Huge

Since Jito distributes MEV rewards to JitoSOL holders, the higher the MEV value in Solana, the more staking rewards will be distributed to JitoSOL. The increase in APR will further enhance the attractiveness of JitoSOL to users. Over the past year, Solana's MEV profit has reached $14M, indicating a huge space for optimizing MEV value.

As the Solana network thrives, the cumulative MEV value captured by Jito is also continuously increasing. We expect this trend to continue, with Jito accumulating more MEV value during the surge of network activity on Solana and distributing it to JitoSOL holders.

Compared to Marinade, Jito Has Unique Competitive Advantages

Marinade is one of the earliest LSD protocols in the Solana ecosystem, with a peak TVL of $1.7B, and is one of Jito's biggest competitors. The main competitive disadvantages of Jito compared to Marinade are as follows:

1. The ecosystem network of Marinade LST is richer than that of Jito LST;

2. Marinade has more validator nodes, with a higher degree of decentralization than Jito;

3. Marinade can also provide other staking options besides LSD.

For competitive disadvantage 1, as shown in the figure below, JitoSOL is continuously expanding its ecosystem use cases and is currently integrated with over 10 mainstream DeFi protocols. Moreover, Jito has the support of Multicoin, which is deeply engaged in the Solana ecosystem, making it easier to expand more ecosystem partners in the future.

For competitive disadvantage 2, Marinade currently has about twice the number of nodes as Jito, with a significantly higher degree of decentralization, which is something Jito will find difficult to surpass in the short term. However, Jito is also transitioning towards Jito-StarkNet, and the degree of decentralization of the protocol is expected to improve further in the future.

In addition to competitive disadvantages, Jito also has competitive advantages compared to Marinade:

1. JitoSOL can capture additional MEV rewards, with staking rewards slightly higher than Marinade;

2. Under the same incentive program, Jito can capture more active users during this round of Solana's recovery wave;

Jito's ability to capture and distribute MEV value is its core competitive strength in long-term competition. The more active the Solana network, the greater the MEV value, and the more apparent this competitive advantage of Jito will be. Jito's ability to capture more active users also indicates that Marinade has not yet formed a monopoly in the LSD market, and similar LSD protocols like Jito still have significant development space.

In summary, compared to Marinade, the gap in ecosystem composition and degree of decentralization will continue to narrow as Jito develops. Meanwhile, Jito's core competitive advantage in capturing and distributing MEV value will continue to expand with the prosperity of the Solana network. Therefore, we hold a very optimistic future expectation for Jito. Jito is expected to replace Marinade as the largest LSD protocol in the Solana ecosystem.

The steady improvement of Jito's fundamentals will also drive the rise in the secondary token price of JTO. Referring to the price trends of LSD protocol tokens over the past month, we believe JTO will also have a stronger performance in the secondary market.

Reference

1. https://www.jito.network/docs/jitosol/overview/
2. https://www.jito.network/blog/
3. https://solana.com/news/validator-health-report-october-2023
4. https://foresightnews.pro/article/detail/48090
5. https://www.techflowpost.com/article/detail_14335.html

MT Capital

MT Capital, headquartered in Silicon Valley, is a crypto-native fund focused on Web3 and related technologies. We have a global team, and our diverse cultural backgrounds and perspectives give us a deep understanding of global markets and the ability to seize investment opportunities in different regions. MT Capital's vision is to become a leading blockchain investment company globally, focusing on supporting early-stage technology companies that can generate significant value. Since 2016, our investment portfolio has covered various fields, including Infra, L1/L2, DeFi, NFT, and GameFi. We are not just investors; we are the driving force behind the founding teams.

Official website: https://mt.capital/

Twitter: https://twitter.com/MTCapital_US

Medium: https://medium.com/@MTCapital_US