In the liquidity staking market on the PoS chain, the mainstream narrative tends to depict a monopolistic outcome, where one or two dominant liquidity staking schemes will ultimately prevail, surpassing 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 liquidity staking market and further consolidating the existing market competition. However, not all liquidity staking mechanisms are the same, and for Solana, there are subtle design differences that may lead to an interesting change. This article will delve into the evolution and current status of liquidity staking on Solana, focusing on how it is gradually moving away from the traditional monopolistic pattern and showing different development trends.

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

LST

% Staked

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, liquidity staking on Solana is not widely used at present, mainly due to fundamental differences in their staking mechanisms and the value proposition of liquidity staking assets. On Ethereum, the need for liquidity staking is driven by the fact that staked ETH is completely locked before the Shanghai upgrade and requires queuing for unlocking and withdrawal after the merge, allowing investors to use these locked assets for trading. Additionally, facing the minimum staking amount of 32 ETH required by Ethereum and the risk of slashing for poorly performing validators, stake pools have become a secure and necessary choice for many users. In contrast, Solana's delegated PoS model supports instant liquidity, with unstaking taking only about two days, no minimum staking amount, and no slashing penalties, reducing the demand for liquidity staking. Solana users can effortlessly choose validators without significant risks, thus reducing the reliance on stake pools. While platforms like Jito and Marinade attempt to provide better services by optimizing validator selection, the deterministic performance of Solana validators has not brought significant advantages to complex delegation strategies. Although Solana's stake pools offer features such as tokenization of staked assets and validator monitoring, the attractiveness of these features is gradually diminishing as more solutions tailored to user needs emerge in the market.

Why does the winner-takes-all pattern frequently appear in the liquidity staking field

In the past, including Solana, the liquidity staking field 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 crucial moat to defeat competitors. This intense competition, reminiscent of the Curve War on Ethereum, sees protocols like Marinade and Lido investing substantial funds in their weekly token releases to incentivize users to deposit into liquidity pools. This situation greatly increases the difficulty for small liquidity staking protocols to compete, as they must have sufficient liquidity to prevent their tokens from becoming unanchored in this competition, effectively marginalizing potential validator liquidity staking protocols.

The winner-takes-all phenomenon in the liquidity staking field is further consolidated by strong network effects, which favor established liquidity staking solutions and platforms. Network effects specifically include a focus on security—users tend to choose platforms with stable operational histories, audited protocols, and low risks of smart contract vulnerabilities. Additionally, liquidity plays a crucial role—deep trading liquidity means users can quickly adjust positions without significantly affecting market prices, which is essential for the practicality of LST in token trading and other aspects. Furthermore, the integration of LST with other protocols also affects its attractiveness, as users want to freely use their assets across different DeFi platforms. However, small liquidity staking solutions often fall short in this regard, limiting their appeal. Finally, the "currency-like" nature of LST is also a key factor—for example, LST tokens like stETH actually function as a currency. Brand value and Lindy effect (the future life expectancy of a technology or concept is proportional to its current age) play important roles in this process. Over time, these factors accumulate, favoring solutions that excel in security, liquidity, and integration, leading to a winner-takes-all situation in the liquidity staking field.

A large number of long-tail LST tokens are about to emerge

The introduction of long-tail LST tokens brings many benefits to the blockchain ecosystem, as evidenced by Solana's recent exploration of validator LST. It cleverly combines the advantages of native staking, such as zero commissions and freedom to choose validators, with the unique benefits of liquidity staking, such as instant liquidity and the convenience of using staked assets within the Solana ecosystem. This combination not only greatly optimizes traditional native staking but also provides a practical alternative choice for traditional staking pools. However, the value of LST does not stop there. It also serves as an innovative tool, providing additional earning opportunities to holders, allowing projects to offer LST holders significantly higher annualized percentage yields (APY) than traditional staking.

For example, individual validators can allocate block rewards, MEV income, and priority fees to LST holders, significantly increasing APY to attract more staked funds.

In addition, LST brings unprecedented opportunities to the ecosystem, such as granting holders the privilege to participate in exclusive NFT minting activities or to obtain keys to access premium services like private communities. This versatility and practicality demonstrate the unlimited potential of LST, marking a new chapter in blockchain network participation and reward mechanisms.

Ultimately, the diversification of LST significantly promotes Solana's move towards deeper decentralization. By adding more diverse LST options, it ensures a more balanced distribution of power and influence among validators and projects within the network. This democratization process can stimulate a healthier competitive atmosphere, prompting validators and projects to continuously improve service quality, enhance security, and introduce more attractive incentive measures to win and retain user loyalty. As a result, such competition not only reduces the risk of excessive centralization but also enhances network security and resilience, while fostering innovation and providing users with a wider range of choices and better returns on staked assets.

Why do projects want to launch their own LST

In Solana's Proof of Stake (PoS) mechanism based on staking amount, validators have a strong incentive to increase their total staked amount to improve their transaction processing priority. This mechanism ensures that validators with larger staked amounts have priority in the processing queue, effectively reducing transaction latency and improving operational efficiency. During network congestion, this priority mechanism becomes crucial, allowing validators to maintain high levels of performance and stability for their clients. By increasing their staked amount, validators can not only increase 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 to encourage validators to continuously increase their staking investments. With well-known protocols on Solana such as Jupiter, Drift, and Margin introducing their own LST to attract more staking, this development trend becomes increasingly significant.

Addressing Liquidity Challenges

To ensure the survival of long-tail LST, the key lies in addressing liquidity challenges. The Sanctum protocol on Solana is an example of this, as it aims to break down barriers in the monopolistic market and create a more LST-friendly ecosystem by building underlying infrastructure.

Sanctum has introduced innovative solutions to address the liquidity challenges faced by long-tail LST on Solana, lowering the barriers for new LST and enhancing their usability in the DeFi ecosystem. Its reserve pool, as a universal liquidity provider, allows any LST to be instantly converted to SOL, ensuring that even smaller-scale LST can provide immediate liquidity to their holders, making them a viable choice for collateral in DeFi protocols. The Sanctum router, developed in collaboration with Jupiter, serves as a crucial infrastructure component, enabling seamless conversion between different LST, even in the absence of direct liquidity paths. This connectivity leverages the liquidity of large-scale LST to enhance the liquidity of small-scale LST. Additionally, the Infinity multi-LST liquidity pool breaks the traditional limitation of trading only two assets, by supporting transactions between any LST within the pool, thus improving capital efficiency. It relies on on-chain oracles for real-time evaluation of LST value, ensuring accurate and secure transactions within an infinite array of LSTs. These mechanisms collectively ensure the continuous development of emerging and small-scale LST by providing necessary liquidity and interoperability within Solana's DeFi ecosystem.

Examples of Emerging LST

Name

Description

APY

Staked Amount

CompassSOL

Solana Compass is a single validator operating independently in a data center in Madrid since 2021, located outside the active staking region. Through the liquidity staking service offered by compassSOL, they not only waive any commission fees but also share priority fees, MEV income, and staking rewards, providing users with a 14.62% annualized yield.

14.62%

72,546.22 SOL

BonkSOL

BonkSOL rewards its supporters with BONK tokens and is supported by the BONK validator. The validator's rewards are used to reduce the supply of BONK to increase the token's value. Additionally, bonkSOL is planning to achieve closer integration within the ecosystem, signaling potential new use cases and partnerships in the future, which will enhance its value and utility for users.

9.08%

12,907.74 SOL

laineSOL

Laine is one of the earliest and most prominent pioneers in the Solana staking field, serving as the first single validator LST. They can provide attractive high annualized returns to investors by distributing 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 in SOL to users' wallets in each epoch, and offers additional BSKT for a limited time to provide high annualized returns.

9.4%

47,921.72 SOL

LST

LST is issued by marginfi, one of the most famous DeFi platforms on Solana, and is specifically delegated to mrgn validators running the Jito MEV client, with zero commissions and maximized returns. Additionally, holding LST may lead to additional airdrop rewards.

9.67%

722,218.28 SOL

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

Conclusion

With the significant increase in user participation and Solana's unique staking weight Quality of Service (QoS) mechanism, it is foreseeable that major projects on Solana will urgently need to increase their staked amounts and are likely to achieve this by launching their own distinctive LST. In this emerging paradigm, the overall size of the LST market on Solana 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 scenario, projects like Sanctum that help unify the liquidity of LST within the Solana ecosystem will be particularly important.

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