The landscape of liquidity staking in Solana is about to undergo a transformation

In the PoS chain's liquid staking market, the mainstream narrative tends to depict a monopolistic outcome, where one or two dominant liquid staking solutions ultimately prevail over all other competitors. This monopolistic or winner-takes-all characteristic can be seen in Lido on Ethereum and the Jito and Marinade protocols on Solana. These market leaders have generated strong network effects due to their competitive advantages, raising the barriers for other players to enter the liquid staking market and further consolidating the existing competitive landscape.

However, not all liquid staking mechanisms are the same. For Solana, some design nuances may reveal an interesting shift. This article will delve into the evolution and current state of liquid staking on Solana, focusing on how it is gradually diverging from traditional monopolistic models and showcasing different development trends.

Currently, liquid staking on Solana accounts for only 5.3% of all staking supply

|----------------------------|---------|-------------| | LST | % Staked Percentage | Staked Amount | | Total Stake (Native + LST) | 100.0% | 380,242,188 | | Native Stake | 94.7% | 360,222,250 | | jitoSOL | 2.5% | 9,592,064 | | mSOL | 1.7% | 6,334,947 | | bSOL | 0.7% | 2,751,086 | | mrgnLST | 0.2% | 722,218 | | jSOL | 0.1% | 336,781 | | stSOL | 0.0% | 133,798 | | compassSOL | 0.0% | 72,546 | | jucySOL | 0.0% | 47,921 | | bonkSOL | 0.0% | 12,907 |

Source: https://dune.com/ilemi/solana-staking

Compared to Ethereum, liquid staking is not yet widely adopted on Solana, primarily due to fundamental differences in staking mechanisms and the value propositions of liquid staking assets. On Ethereum, the complete lock-up of staked ETH before the Shanghai upgrade, combined with the need to queue for withdrawals after the merge, has created a demand for liquid staking, allowing investors to trade with these locked assets. Additionally, the 32 ETH minimum staking requirement and the slashing risks associated with poorly performing validators have made staking pools an attractive and necessary option for many users.

In contrast, Solana's delegated PoS model supports instant liquidity, with a staking unbonding period of about two days, no minimum staking amount, and no slashing penalties, which reduces the demand for liquid staking. Solana users can effortlessly choose validators without taking on significant risks, leading to a reduced reliance on staking pools. While platforms like Jito and Marinade attempt to provide better services by optimizing validator selection, the deterministic performance of Solana validators means that complex delegation strategies do not offer significant advantages. Although Solana's staking pools provide features like tokenization of staked assets and validator monitoring, the appeal of these features is gradually diminishing as more user-centric solutions emerge in the market.

Why the winner-takes-all pattern frequently appears in the liquid staking space

Across various blockchains, including Solana, the liquid staking space often exhibits a winner-takes-all pattern, largely due to the fragmentation of liquidity between different pools and platforms. Each staking pool, operating on platforms like Saber, Raydium, or Orca, competes fiercely for liquidity, viewing it as a key moat to defeat rivals. This competition is intense, reminiscent of the Curve War on Ethereum, where protocols like Marinade and Lido invest heavily in their weekly token releases to incentivize users to deposit into liquidity pools. This situation significantly increases the competitive difficulty for smaller liquid staking protocols, as they must possess sufficient liquidity to prevent their tokens from de-pegging, effectively marginalizing potentially viable validator liquid staking protocols.

The winner-takes-all phenomenon in the liquid staking space is further reinforced by strong network effects, which favor established liquid staking solutions and platforms. These network effects specifically include a focus on security—users tend to choose platforms with stable operational histories, audited protocols, and lower risks of smart contract vulnerabilities or security breaches.

At the same time, liquidity plays a crucial role—deep trading liquidity means users can quickly adjust their positions without significantly impacting market prices, which is vital for the utility of LSTs in token trading. Additionally, the degree of integration of LSTs with other protocols also affects their attractiveness, as users prefer to use their assets freely across different DeFi platforms. However, smaller liquid staking solutions often fall short in this regard, limiting their appeal.

Finally, the "monetary" nature of LSTs is also a key factor—tokens like stETH effectively serve as a currency. Brand value and the Lindy effect (the future life expectancy of a technology or idea is proportional to its current existence) play significant roles in this process. Over time, these factors accumulate, favoring solutions that excel in security, liquidity, and integration, leading to a winner-takes-all scenario in the liquid staking space.

Long-tail LSTs are about to emerge in large numbers

The introduction of long-tail LSTs brings numerous benefits to the blockchain ecosystem, with Solana's recent exploration of validator LSTs serving as a testament. It cleverly combines the advantages of native staking (such as zero fees and freedom to choose validators) with the unique benefits of liquid staking (like instant liquidity and ease of using staked assets within the Solana ecosystem). This combination not only optimizes traditional native staking methods but also provides a practical alternative to traditional staking pools. However, the value of LSTs does not stop there. They can also serve as an innovative tool, offering additional yield opportunities to holders, allowing projects to provide annual percentage yields (APY) that far exceed those of native staking.

For example, individual validators can distribute block rewards, MEV income, and priority fees to LST holders—significantly increasing APY and attracting more staking funds.

Moreover, LSTs bring unprecedented opportunities to the ecosystem, such as granting holders access to exclusive NFT minting events or serving as keys to obtain passes for private communities and other premium services. This versatility and practicality showcase the limitless potential of LSTs, marking a new chapter in blockchain network participation and reward mechanisms.

Ultimately, the diversification of LSTs significantly propels Solana toward deeper decentralization. By increasing the variety of LST options, it ensures that power and influence within the network are more evenly distributed among various validators and projects. This democratization process can foster a healthier competitive atmosphere, prompting validators and project teams to continuously enhance service quality, strengthen security measures, and introduce more attractive incentives to win and retain user loyalty. Thus, this competition not only reduces the risks of excessive centralization and enhances the network's security and resilience but also spurs innovation, providing users with broader choices and better returns on staked assets.

Why projects want to launch their own LSTs

Under the staking volume-based Quality of Service (QoS) mechanism adopted by Solana, validators have a strong incentive to increase their total staked amount to enhance their transaction processing priority. This mechanism ensures that validators with larger staking volumes enjoy priority in the processing queue, effectively reducing transaction delays and improving operational efficiency. During periods of network congestion, this priority mechanism becomes particularly crucial, allowing validators to maintain high levels of performance and stability for their clients. By increasing their staking volume, validators can not only boost their transaction throughput but also attract users and applications seeking fast and reliable transaction processing. This, in turn, can increase validator rewards and establish a stronger reputation within the Solana ecosystem, creating a positive feedback loop that incentivizes validators to continually increase their staking investments. As well-known protocols like Jupiter, Drift, and Margin launch their own LSTs to attract more staking, this trend is becoming increasingly evident.

How to solve the liquidity problem

To ensure the survival of long-tail LSTs, addressing the liquidity challenge is key. The Sanctum protocol on Solana is an example, aiming to break down the monopolistic market barriers by building underlying infrastructure to create a more friendly ecosystem for long-tail LSTs.

Sanctum has launched innovative solutions targeting the liquidity challenges faced by long-tail LSTs on Solana, which not only lower the entry barriers for new LSTs but also enhance their usability within the DeFi ecosystem. Its reserve pool acts as a universal liquidity provider, allowing any LST to be instantly converted to SOL, regardless of the LST's scale, ensuring that even smaller LSTs can provide immediate liquidity to their holders, making them a viable option for collateral integration in DeFi protocols. Developed in collaboration with Jupiter, the Sanctum router serves as a key infrastructure component, enabling seamless conversion between different LSTs, even in the absence of direct liquidity paths. This connectivity leverages the liquidity of larger LSTs, enhancing the liquidity of smaller LSTs.

Additionally, the Infinity multi-LST liquidity pool breaks through the traditional limitation of only trading two assets by supporting transactions between any LSTs within the pool, improving capital efficiency. It relies on on-chain oracles for real-time LST value assessments, ensuring accurate and secure transactions within an infinite array of LSTs. These mechanisms collectively ensure that emerging and smaller LSTs can continue to thrive in Solana's DeFi ecosystem by providing the necessary liquidity and interoperability.

Examples of emerging LSTs

|------------|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------| | Name | Description | APY | Total Staked Amount | | CompassSOL | Solana Compass is a single validator operating independently in a data center in Madrid, Spain, since 2021, located outside the active staking area. Their liquid staking service launched through compassSOL not only eliminates any commission fees but also shares priority fees, MEV income, and staking rewards, providing users with an annual percentage yield of 14.62% | 14.62% | 72,546.22 SOL | | BonkSOL | BonkSOL rewards its supporters through BONK tokens and is backed by BONK validators. The rewards for validators are used to reduce the supply of BONK to enhance token value. At the same time, bonkSOL is planning to achieve tighter integration within the ecosystem, indicating potential future new uses and partnerships that will enhance its value and utility for users | 9.08% | 12,907.74 SOL | | laineSOL | Laine is one of the earliest and most outstanding pioneers in the Solana staking space and the first single validator LST. They can provide investors with an attractive high annual percentage yield by redistributing 10% of all block rewards and priority fees on top of staking rewards and MEV income | 11.1% | 148,642.12 SOL | | jucySOL | Juicy distributes 50% of all block rewards and priority fees to users' wallets in SOL form each epoch and offers additional BSKT for a limited time to provide high annual percentage yields | 9.4% | 47,921.72 SOL | | LST | LST is issued by one of the most renowned DeFi platforms on Solana, marginfi, which is specifically delegated to mrgn validators running Jito MEV clients, zero commissions, and maximizing returns. Additionally, holding LST may also yield extra airdrop rewards | 9.67% | 722,218.28 SOL |

Source: https://app.sanctum.so/lsts

Conclusion

With a significant increase in user participation and Solana's unique staking-weighted QoS mechanism, it is foreseeable that major projects on Solana will urgently need to increase their staking volumes, likely by launching their own distinctive LSTs to achieve this goal. In this emerging paradigm, the overall scale of the LST market is expected to far exceed the current 5.3% of all staked SOL. Unlike the winner-takes-all paradigm in Ethereum, we are likely to see a more diverse LST ecosystem on Solana. In this context, projects like Sanctum that help unify the liquidity of LSTs within the Solana ecosystem will be particularly important.