Interpretation of Sanctum: The Solana liquidity staking aggregator led by Dragonfly, liberating fragmented liquidity of SOL

Author: Deep Tide TechFlow

Currently, Solana seems to have successfully earned the label of "Meme Paradise."

Every day, thousands of meme coins are emerging, and the market's attention is entirely focused on memes. Meanwhile, the narrative of liquid staking, which was previously thriving in the Ethereum ecosystem, has not made much noise in the Solana ecosystem.

While chasing meme coin profits is certainly exciting, some funds are still looking for more stable and consistent returns. Liquid staking is an important part of generating relatively stable returns, and in this regard, Solana does seem to be lagging behind.

As a result, projects targeting the gap in liquid staking demand within the Solana ecosystem are beginning to emerge, which may become new alpha projects.

Sanctum is one of them, and it is developing a liquid staking aggregation service on Solana, allowing users who stake native SOL or use liquid staking tokens (LST) to leverage a powerful unified liquidity layer.

If you ask why such a project is needed, the answer is quite simple:

SOL can certainly be used to chase meme coins, but users also want to use their SOL in various ways within the economy: DeFi, NFTs, payments, etc.; holding LST tokens allows for more complex operations and seeking more yield opportunities.

However, in the current Solana ecosystem, using LST for complex operations is actually quite difficult.

Fragmented Liquid Staking Pools and PVP

What is the current state of liquid staking in Solana?

Despite the many advantages of liquid staking, after nearly three years of operation, less than 5% of staked SOL in Solana is liquid staking.

If everyone thinks liquid staking is good, why hasn't it taken off on Solana?

It’s a double-edged sword of liquidity.

Liquid staking on Ethereum is essentially a super PvP mindset: giants like Lido dominate, each liquid staking pool operates independently, each pool competes for liquidity and attention, and everyone wants to use liquidity as a moat to eliminate competition.

Due to Ethereum's early start, large user base, and high acceptance, this winner-takes-all environment doesn't seem to have any issues; users can freely choose leading service providers like Lido, while smaller providers are left to compete for survival.

But for a newcomer like Solana, if service providers trying to replicate Ethereum's liquid staking business are also in PvP mode, fighting alone without forming a synergy, it will only lead to an already limited liquidity becoming even more fragmented and dispersed.

For example, there is an stSOL-SOL pool on Sabre, an mSOL-SOL pool on Raydium, and an scnSOL-SOL pool on Orca, all of which are completely independent.

In this situation, smaller projects find it very hard to survive, and it’s impossible to have smaller LSTs.

To establish their own staking pools, operators need to put up millions of dollars in liquidity to start playing; otherwise, their LSTs can easily decouple due to insufficient liquidity.

As a result, liquid staking pools on Solana are fragmented, and attention is diverted; the consequence for users is that smaller LST pools have insufficient liquidity, leading to very high slippage when exchanging assets, which can easily result in asset losses and restrict asset liquidity and transaction execution.

The following image illustrates the awkward predicament of LST tokens on Jupiter when exchanging for SOL; due to insufficient liquidity, exchanging for larger amounts of SOL incurs extremely high price impacts, leading users to simply choose not to exchange; and not exchanging further limits asset liquidity…

Over time, users naturally develop a sense of insecurity regarding LSTs on Solana, as they cannot be sure whether they will lose money when exchanging LST back to SOL, let alone engaging in various complex operations based on LSTs.

Therefore, the core idea of Sanctum is to transform PvP into PvE, not to let a specific liquid staking project win, but to help the entire Solana ecosystem's liquid staking services form a synergy to revitalize the fragmented liquidity in SOL staking, allowing every LST to hold value.

Understanding Sanctum's Mechanism

So how does Sanctum specifically operate?

In broad terms, it collaborates with Jupiter to extend aggregation into the liquid staking domain; specifically, Sanctum's products can be divided into the following parts.

1. Infinity: Multi-LST Liquidity Pool, Aggregating Fragmented Liquidity

Generally, LP pools only consist of two types of assets (e.g., USDC-SOL). Some LPs, like Curve's stable swap pools, support three to four types of assets (e.g., USDC-USDT-DAI).

Sanctum has created a multi-LST liquidity pool called Infinity to aggregate liquidity from different trading pair pools.

Currently, Infinity supports all whitelisted LSTs (e.g., SOL-bSOL-bonkSOL-cgntSOL-compassSOL-driftSOL-…).

Thus, Infinity is also the only liquidity pool on Solana that can natively support millions of different LSTs. Since all LSTs can be converted into staking accounts, the fair price of each LST can be calculated by looking at the SOL contained in the staking account. This allows Infinity to support exchanges between any two LSTs of any size without relying on any constant product.

In other words, there is no limit to the number of LSTs that Infinity can support—hence its name.

• Validator LST: Enhancing the Native SOL Staking Experience

Solana has a considerable number of staking accounts, to the extent that the network temporarily halts at the beginning of each epoch to calculate the staking rewards for each account.

(Note: An epoch is a fixed period in the Solana blockchain used to reselect validators (nodes), update network status, and allocate rewards; it is the basic time unit for its consensus mechanism and network maintenance.)

The existence of LSTs can significantly reduce the number of staking accounts, thus making Solana faster.

With LSTs, projects can run multiple validators under one LST (e.g., Bonk1 and Bonk2 validators), enhancing security and decentralization without dispersing or confusing their staking holders.

Validators can run incentive or loyalty programs. For example, validator Laine airdrops block rewards and priority fees to laineSOL holders, resulting in an annual yield of over 100% for laineSOL holders. With LSTs, validators can easily airdrop tokens or NFTs to those holding sufficient LSTs.

LSTs provide a better user experience than native staking accounts. Users can easily use Sanctum or Jupiter to instantly convert from any token to SVT and vice versa (USDC ←→ xSOL).

The key is that when you exchange back and forth, you do not have to disable your staking account, wait for an epoch, or remember to claim it later.

• Reserve: "Deposit Reserve" Account for Unstaking

Reserve, also known as the Sanctum Reserve Pool, can be viewed as a pool of idle SOL, providing deep liquidity for all liquid staking tokens on Solana.

This pool accepts staked SOL and provides SOL as a return from its pool. Currently, it holds over 210,000 SOL.

The reserve pool is different from any other LST-SOL liquidity pool. Each LST can utilize the reserves in this pool, whether it is a large LST with substantial deposits like jitoSOL or bSOL, or a smaller emerging LST; The Reserve's liquidity can serve them.

From a business perspective, the reserve pool may be difficult for general users to perceive, and it does not accept public deposits; it primarily serves liquid staking projects. This reserve provides the foundation for deep, instant liquidity for staked SOL.

You can think of it as analogous to the "reserve requirement" system in traditional finance.

When you want to "unstake," the existence of the reserve requirement makes your unstaking operation smoother—no waiting or any other processes are needed; the SOL in the reserve pool can meet your withdrawal needs, regardless of the current liquidity of the LST.

• Router: Pathway for Any LST Exchange

The Router allows two LSTs that typically have no path to convert with each other. By enabling smaller LSTs to access the liquidity of larger LSTs, it achieves a unification of LST liquidity.

Previously, the usage of each LST was limited to the amounts they could raise in Orca/Raydium liquidity pools (also known as xSOL/SOL pools). If the pools were too shallow, their liquidity (i.e., the ability of LST to convert to SOL immediately) would be too weak, rendering them ineffective as LSTs, and other DeFi protocols would not integrate LSTs because, fundamentally, your LST could not safely liquidate assets.

This is also the key reason why the complex operations mentioned earlier cannot take off—if the repayment effectiveness of your LST is in question, how can you conduct business based on LSTs?

But Sanctum, through its routing mechanism, can connect LSTs of all sizes, unlocking a unified liquidity network. Like claws, Sanctum's router can tear off and put on different liquidity wrappers (whether you call it aSOL or bSOL), depositing and withdrawing staking accounts into different LSTs.

For example:

• A user deposits SOL and receives 1 jitoSOL—this is essentially the liquidity wrapper for the user's own staking account;

• When the user exchanges through the Sanctum Router, what happens in the backend is that the staking account is extracted from jitoSOL and deposited into the jSOL pool, providing them with JuicySOL.

This means liquidity is no longer a real issue for new LSTs. If you need to convert LST to SOL, the Sanctum Router can quickly extract your staking account from the LST and deposit it into any LST with deep liquidity.

All LST liquidity is now unlocked and shared by everyone.

According to data released by Sanctum's official Twitter, as of the end of March, the trading volume brought by the routing service has reached 500 million USD, highlighting the demand for exchanges between different LSTs on Solana.

Overall, Sanctum is effectively optimizing the fragmented liquid staking situation in the Solana ecosystem, connecting various liquid staking pools, allowing any LST in the ecosystem to have deeper liquidity support, thus providing backing for more gameplay with different LSTs.

Insufficient liquidity is no longer a potential psychological anxiety preventing LSTs from being realized; the more complex operations with LSTs can run more reassuringly.

From Native Staking to LST

In fact, Sanctum did not emerge suddenly; its predecessor can be traced back to the native staking protocol Socean Finance on Solana.

Socean Finance is a decentralized algorithmic staking project that enhances the security of the Solana network and provides users with risk-free returns. The project launched on the mainnet back in September 2021 and raised 5.75 million in seed funding that same year, led by Dragonfly, with participation from Redpoint and Jump.

At that time, Solana was not as popular as it is today, and the collapse of the FTX empire left Solana in a long period of neglect.

However, with the market warming up and Solana making a comeback, new narratives and gameplay have emerged.

Socean Finance naturally realized that relying solely on the previous native Solana staking pools could not effectively address the current liquidity pain points in the Solana ecosystem.

Therefore, over the past year and a half, Socean has been dedicated to developing Sanctum, transitioning from native staking to liquid staking aggregation, achieving the vision of making all SOL more liquid in a different way.

For some projects, switching to whichever track is hot feels more like a form of opportunistic realism;

Whereas Sanctum's evolution feels more like a continuous accumulation of business; since they have already engaged in native SOL staking, moving to liquid staking aggregation seems natural, as they have both the capability and the demand.

Given that there are currently no similar projects in the Solana ecosystem to aggregate LST liquidity, Sanctum remains a non-consensus project worth paying attention to, beyond the trends of AI, Depin, and MEME.

However, how far Sanctum can go ultimately depends on the overall market environment and risk changes.

In a bull market, liquidity aggregation serves as a lubricant for many business Lego blocks, and everyone desires better liquidity; while in a bear market, liquidity depletion can render even the best liquidity aggregation merely a facade.

Whether Sanctum can seize favorable moments across cycles remains to be seen.