Original author: YASH AGARWAL

Original compilation: Deep Chao TechFlow

introduce

Solana DeFi is performing extremely well, with both total value locked (TVL) and daily DEX trading volume exceeding $4 billion. Led by premium DeFi 1.0 protocols such as Marinade, Phoenix, Jito, MarginFi, Kamino, BlazeStake, Solend, Jupiter, Meteora, Orca, Raydium, Lifinity, Sanctum and Drift, the Solana DeFi team is firing on all cylinders. These teams have weathered the FTX crash, built through the troughs of the bear market, and are now in their harvest season.

However, the performance of new teams entering the Solana DeFi ecosystem has been somewhat lackluster, in part due to a lack of new narratives and fewer teams focusing on Solana’s new Only Maybe (OPOS) mechanism.

Now is the time to focus on new DeFi concepts and encourage more teams to build in the DeFi field, thereby driving Solana’s economic activity.

This article attempts to present the top 10 topics, each with relevant ideas worth exploring. While we focus on Solana, some of these topics can be applied to other high-performance chains as well.

In this article we will discuss:

• DeFi Stablecoin

• LST, MEV and re-pledge

• currency market

• interest rate derivatives

• RWA and DeFi composability

• Perpetual Contracts and Derivatives

• DeFi infrastructure

• MemeFi and Social DeFi

• Protocols tend to become platforms

• Interface (UX Aggregator)

Topic 1: DeFi stablecoin mechanisms will become more diverse

We need more DeFi native stablecoins as DeFi currencies to form liquidity pairs in DEX and lending projects. Primarily, their utility is driven by yield. . DeFi stablecoins lack utility as a medium of exchange (i.e. used for transactions).

Stablecoins or synthetic dollars can broadly be divided into the following categories:

1. Stable coins supported by fiat currencies, such as USDC, USDT and EURC.M 0 is another upcoming stablecoin player on Ethereum.

2. CDP stablecoins such as DAI and Frax.

3. Stable coins supported by LST, including:

• CDP structures such as Lybra’s eUSD and Prisma’s mkUSD.

• Delta neutral projects like Ethena and Resolv Labs (UXD on Solana is a pioneer).

4. Stablecoins supported by RWA, such as USDV, USDY, USDM and ISC.

5. Perpetual DEXs that offer their synthetic versions, such as Synthetix (sUSD) and Aevo (aUSD).

6. Algorithmic stablecoins, such asGyroscope, using segregated treasury reserves to reduce associated risks, and implementing a dynamic stabilization mechanism that utilizes the diminishing bond curve for redemptions.

On Solana, two LST-backed stablecoins are emerging: MarginFi’s YBX and Jupiter’s SUSD, as well as very early-stage projects like Surge Finance.

Alpha suggestions for Builders:

• Updated design mechanism, drawing inspiration from Ethereum stablecoins.

• Market Entry Strategy: Most stablecoins struggle with initial liquidity and traction; since the primary utility is yield, this can be an interesting play. For example, increasing DAIs Enhanced DAI Savings Rate (EDSR) resulted in an increase in the circulation of DAI, which increased DAI deposits by approximately $1.5 billion (approximately 30% of the total DAI supply). USDV provides yields to verified miners such as DeFi projects to increase circulation, which can then also provide rewards to their users (think how Arbritrum DAO provides ARB to projects that distribute ARB to users).

• The most popular Ethereum stablecoin, Ethena (with over $1.3 billion in circulation), is also coming to Solana. One could also build a Solena with Ethena-like mechanics but using SOL. However, the CEX listing of Solana LST and the depth of the SOL perpetual contract are a major hurdle but will surely be reached slowly.

The case of on-chain foreign exchange (FX) market

The foreign exchange market is huge, with daily trading volume exceeding $6 trillion. The emergence of fiat-backed stablecoins with sufficient liquidity may pave the way for spot foreign exchange markets to be developed on-chain through order books and automated market makers (AMMs). Imagine merchants could accept payments in USDX and instantly convert them to YENX, routing transactions to multiple liquidity venues through Jupiter. Sooner or later, someone will build a spot FX trading platform on Solana.

Topic 2: (Re)Staking and LST—The Monetity of SOL

Solana’s LST scene is now consolidated into three major players: Jito, Solblaze, and Marinade. Sanctum is another interesting player in the LST space, solving the liquidity problem and building LST as a service. However, the number of LSTs is still very small, and more LSTs would also be good for network decentralization. Additionally, LST is a major contributor to DeFi, and increasing their deposit volume in the lending/borrowing market or LP pool will increase the total on-chain value locked (TVL).

Alpha suggestions for Builders:

More LSTs: Backed by token issuance hype and incentives, there is still a chance for new LSTs to enter the market and capture a significant share of LSTs. For example, Solblaze grew from $30,000 SOL to $3 million SOL in just 8 months by leveraging BLZE incentives and focusing on DeFi integration.

• Another strategy is to follow new design mechanics. For example, follow the dual-token model of Frax Ether (over $1B TVL), which has two tokens:

• frxETH: It is linked to ETH 1:1 and does not accumulate staking income.

• sfrxETH: Accumulated staking income.

• This enables higher yields on staked ETH while ensuring frxETH has deep liquidity and full ecosystem integration. frxETH also has a higher DeFi TVL due to Fraxlend integration and liquidity incentives compared to peers like rETH.

1. Validators launching LST: As MEV and priority fees increase, we will likely see validators launching their own LST and sharing more rewards with stakers to attract stakers. Sanctum is a key project driving this change.

2. LST return maximizer: For example, Kamino Multiply offers a one-click treasury product designed for leveraged returns on LST through a cycle (staking LST and lending SOL → stake SOL for LST → repeat). There can be a huge number of products in this space (more on that later).

3. SOL re-staking: Solana also has the opportunity to adopt a shared security/re-staking layer similar to Ethereum, allowing projects to further increase their returns through re-staking and access the best validators. Unlike Ethereum, where AVS is a rollup/chain/bridge that requires economic security, Solana has yet to adopt modularity.

• However, this is still worth exploring, as AVS on Solana could be a Clockwork-style Keeper network, a Python-style application chain, or any network like DePIN that requires economical security, SOL alignment. Additionally, if the Rollapp/AppChain perspective on Solana is taken hold, the SOL re-staking narrative could be huge!

4. Regarding MEV: Recently, Jito Labs suspended the mempool service provided by Jito Block Engine due to an increase in sandwich attacks. The decision has sparked mixed reactions within the community, with some appreciating Jitos proactive approach, while critics believe it could lead to side deals and the possible development of new, private mempools in response.

As DeFi activity increases, MEV will only increase, and projects (and LST) can take full advantage of this.

The amount of SOL in LST is still unsatisfactory (<5%) compared to Ethereum, and this needs to be addressed. Overall, now is the time to increase the monetization of SOL and ensure that increases in SOL price are also captured by the DeFi ecosystem.

Topic 3: Next Generation Money Market

While core currency markets (lending) such as Solend ($300 million), MarginFi ($800 million) and Kamino ($1.1 billion) are already established, it is time to innovate on the design mechanisms to make them more efficient. For example, MarginFi still lacks eMode to improve capital efficiency (a feature of Aave v3).

Focus on higher capital efficiency: As blue chip lending/borrowing like MarginFi and Kamino consume their points and issue tokens; users will want higher capital efficiency, especially for the liquid staking market.

Alpha suggestions for Builders:

New design mechanisms: For example, some interesting mechanisms explored by the EVM project are:

• AlchemixSelf-paying loans are offered, allowing you to leverage a range of tokens without the risk of liquidation.

• Euler v2The modular architecture consists of ERC-4626 credit libraries (lending pools) connected through the Ethereum Vault Connector (EVC) contract. This also enables Builders to create and activate lending vaults with various configurations without permissions, such as selecting any collateral, selecting oracle settings TVL, interest rates, etc. This can create network effects and compound liquidity, as shares of one vault can be used as collateral for any other vault within the Euler ecosystem.

• Morpho BlueImprove capital efficiency.

It doesn’t hurt to get inspired by upcoming Ethereum protocols and innovative designs. Better than just creating an Aave v3 branch.

Optimizer for existing money markets: Taking MarginFi’s SOL market as an example, there is a considerable gap between lending and borrowing returns, and this situation applies to almost all markets. This is because of the liquidity pool mechanism and insufficient pool utilization, resulting in lower yields: [Supply rate = Borrowing rate * Utilization rate].

A possible solution is to construct something likeMorpho OptimizerSomething like this where the liquidity provided is matched dynamically as borrowers come and go (effectively 100% utilization). For matched liquidity, the lender’s rate of return is the same as the borrower’s rate: matched lenders do not share interest. In the event that liquidity is not matched, it will connect to the underlying lending pool, such as MarginFi or Kamino. Altitude is also a good reference. Flexlend and JuicerFi are great for building this.

Fixed-rate loans: Most current P2P lending protocols (such as MarginFi and Solend) follow floating (variable) interest rates, with low utilization leading to high spreads, essentially creating a TradFi-like banking system with high spreads but with The pool acts as an intermediary. Fixed-rate loans are one way to solve this problem.

DeFi’s fixed rate market share is less than 1%, while TradFi’s fixed rate dominance is around 98%, due to several reasons:

• Passive: The peer-to-pool model has no expiration date and therefore requires much less maintenance.

• Lindy Effect: Floating rates are battle-tested, which results in a Lindy effect like sticky TVL.

likeDelphiAccording to the report, fixed-rate loans in DeFi still don’t exist. Yield protocol shutdown, Notional Finances v2 shutdown (it started with $1B TVL and is now down to $17M) shows lack of demand. Notional Finances v3 launch moves to variable loans and leveraged vaults. Exactly Finance built some momentum and brought new ideas, but was heavily incentivized using OP incentives and native token emissions. Term Finance is another project worth keeping an eye on. A team that solves all the pain points (like maintaining a loan easily) and launches it with incentives can win over a potentially large market here.

Lulo Finance(the same team as Flexlend) have been trying to solve this problem on Solana but havent seen any significant traction. While fixed rates have their problems and were ahead of their time, its worth exploring them.

Solana’s Gearbox:Gearboxis a composable leverage protocol (leverage gained through borrowing and lending, but with ecosystem-wide integration). Solana is highly composable in nature and can be integrated with multiple protocols such as AMM and LST. Assuming a bullish market, more projects will launch high APY incentive programs that can be integrated into this protocol for leveraged liquidity staking.

A close idea could also be corporate debt, where companies generating revenue on-chain could start issuing bonds to raise capital. Think of it as revenue-based financing (RBF), but on-chain and fully transparent. This ensures that profitable on-chain companies raise funds without diluting their tokens.

Topic 4: Interest Rate Derivatives – Uncharted Territory

Interest rate derivatives (IRDs) are the second largest market after foreign exchange, with a nominal value of $450-600 trillion. The absolute number comparison with TradFi may not be directly relevant. However, the emerging nature of the DeFi market, and Solana in particular, offers significant opportunities. In addition to generating money market (loans/borrowing) returns through asset management contracts, this can also facilitate the generation of organic returns.

Alpha suggestions for Builders:

Taking inspiration from TradFi, there are some interesting ideas to explore:

• Interest rate swap for LST: This is a forward contract that typically allows parties to exchange a fixed rate for a floating rate and vice versa. In short, if you want a fixed staking rate, you sign an agreement with someone who is prepared to take the risk of a variable staking rate.

This will be very attractive to a new class of institutional and retail clients looking to gain DeFi exposure without much speculation. In TradFi, the swap is between two financial institutions, while in DeFi it will be peer-to-peer. People can choose to pay a fixed benefit or receive a fixed benefit. LSTs like JitoSOL or mSOL are the best target assets through Dividend Rate Swaps (SRS) as they are considered the “risk-free rate” of SOL in DeFi.

• ERC-4626 It is the yield token vault standard on Ethereum, ensuring the composability of all yield vaults with a TVL of over $10 billion. Building on Solana and ensuring its adoption may be key. This can open up a range of vault products such as Sommelier

• For Solana’s Earnings Peel (Pendle): Earnings Peeling is a cash flow discounting game. Users can obtain predictable returns on the future value of the instrument, while speculators can obtain future assets at a discount. It involves separating a bonds interest payments from its principal payments. Pendle’s revenue tokenization is an implementation of this.

Some examples of Solana earnings that can be traded include: Liquidity-staking SOL, Lifinity earnings, Meteora Pool earnings, Kamino_Finance kTokens, and Solend Protocol’s cTokens (yield deposit receipts).

A person namedExponentEarly projects are exploring this direction, starting with MarginFi’s loan yield trading and then expanding to other yield derivatives. Solana DEX is also exploring “Pendle for Solana”.

Topic 5: Making RWA and DeFi composable

As more RWA comes on-chain, especially liquid and yield-bearing assets like Treasury bonds. Logically, all RWAs are permissioned due to KYC and regulatory restrictions. However, Ondo’s launch of USDY (a tokenized treasury bond) and making it permissionless opens up a whole new design space. Ondo also demonstrated an interesting mechanism for tokenizing stocks that, if implemented correctly, could spark another wave of DeFi composability.

Alpha suggestions for Builders:

• Token Scaling: There are many opportunities when it comes to RWA, especially leveraging token scaling.Our article delves into these details.

• TradFi Giants: With giants like Franklin Templeton, BlackRock, and Fidelity looking to pilot RWA on Solana, this could unlock huge opportunities over the next 1-2 years. At first, these could be permissioned, but building permissionless wrappers and more DeFi integrations (such as Flux Finance for lending) could be a significant opportunity. For example, holders may have the opportunity to earn higher yields by tokenizing U.S. Treasuries, offering them as collateral on the DeFi lending market, borrowing stablecoins, purchasing more Treasuries, and repeating the cycle.

BlackRock funds and USDC could allegedly be combined.

Topic 6: The era of derivatives has arrived!

During the last bull market, structured products and on-chain derivatives (excluding perpetual contracts) were all the rage. Especially for Solana, before the bear market, the TVL of DeFi Options Vault (DOV) surged by more than $500 million through protocols such as Ribbon, Katana, and Friktion. However, as the bull market returns and demand for yield increases, its no surprise that these products are making a comeback.

Alpha suggestions for Builders:

• Vertical Perpetual Contracts or Prediction Markets: Just like Parcl allows one to go long/short, one can build perpetual contracts for different market segments such as commodities. This is a highly category-creating game and Parcl is creating hype and amassing over $100 million in TVL.

• Power Perpetual Contracts: This is what Paradigm is proposing in 2021an idea, didn’t really take off in the last cycle due to timing issues, but it’s worth a try in this cycle. pictureExponentsSeveral such protocols are trying this on Berachain. Another adjacent idea is to exploreperpetual option(Think what perpetual contracts are to futures, this is to options) This was proposed by SBF.

• Perpetual contract aggregators: Just like we have aggregators for lending and spot DEX, building a perpetual contract aggregator is a big enough opportunity despite the challenges posed by different design mechanisms. With something likeRage TradeandMUXWith the emergence of such perpetual contract aggregators, a similar trend may emerge with Solana, especially with designs like Flash and Jupiter.

• Perpetual contracts on the Solana app chain: In the EVM world, most order book-based perpetual DEXs, especially ones like Aevo, dYdX, and Hyperliquid, are transitioning to their own app chains. In the future, the Solana perpetual DEX can also build its own chain, which may provide several benefits:

• Protected from any mainnet congestion

• Provide users with an improved trading experience (transactions can be gas-free for traders)

In fact,ZetaDevelopments in this direction have already begun.

• Structured product: Build a Friktion-like product. Actually,Friktion codeStill available for anyone to fork and use. An asset management protocol like Investin (a previous project by the Flash team) might also be a good idea for revival. Order books like Phoenix or Drift need to actively provide liquidity, which can be achieved through market-making vaults. This ensures decentralized market making, otherwise all liquidity would be controlled by market makers (we witnessed what happened with Alameda after the FTX crash).

• On-chain options: Protocols like Ribbon, Ava, and Gravity Markets serve as examples of existing on-chain options trading platforms. One can also construct binary options like Decalls (where the price goes up or down), but it is important to gain traction and build a moat.

• HXRO: As the base layer for Solana derivatives and liquidity staking, builders can build on top of:

• Dexterity, Hxro’s derivatives protocol, provides the basic building blocks of derivatives (whether traditional DEX interfaces, advanced trading terminals, APIs, etc.) for on-chain expiration, perpetual and zero-day expiration futures as well as other margin-based derivatives The market provides all necessary risk and exchange infrastructure.

• HxrosparimutuelThe protocol is the backbone of on-chain betting applications, through which the network"intelligent"AMM enables event betting with continuous liquidity. The protocol can support a variety of on-chain betting markets for gaming, sports betting, cryptocurrencies and other active markets.

Topic 7: Building infrastructure and tools for DeFi protocols

With many billion-dollar DeFi protocols emerging on Solana, now is the perfect time to build the infrastructure and tools for these DeFi protocols.

Alpha suggestions for Builders:

• OEV: A subset of MEV, Oracle Extractable Value (OEV) is when an application relies on Oracle updates so that arbitrageurs or liquidators can exploit this state inconsistency. likemulticoinAs stated, there is an opportunity for applications to capture OEV.

• DeFi Infrastructure as a Service: Several protocols like Aave/Compound have been forked multiple times; the same is true for Solana, where the protocol forked Solana Lab’s reference implementation. There are considerable costs in terms of development, auditing and maintenance. Can standardize and build a sustainable development company that provides a “plug and play DeFi protocol” – also think of it as the “Metaplex of DeFi”,Rari Capital(now defunct) had a similar vision and created the vault infrastructure. One of the results is building ERC-4626 equivalent infrastructure for Solana and taking full advantage of Solanas yield hype by providing services to DeFi projects.

• Risk Management Organization: This could be structured as a risk DAO or advisory board to conduct research and risk analysis for DeFi protocols. These entities can publish public “risk analysis dashboards” with key metrics for the Solana ecosystem and provide paid research, risk assessment frameworks, and risk rating services to DeFi projects.

• Bribing aggregators or marketplaces: In EVM,Curve FinanceLet their token holders decide how much token incentive is allocated to each of their pools. This creates a dynamic where projects bribe token holders to vote for pools containing their tokens.Votium ProtocolThese bribes are aggregated and automatically represent token holders’ voting power to maximize the incentives received. Having an aggregator makes it easier to coordinate activities between bribers and voters and leads to greater market efficiency. On Solana, this can be applied to:

• LST transfers equity directly to validators through governance tokens

• Jupiter LFG Launchpad, where projects can bribe their voters and offer token distributions in return

• Privacy in DeFi: Privacy finds product-market fit in unexpected places, like airdrops. For example, centralized exchanges are also used by large traders to anonymize their transactions, so things likeElusivSuch protocols are therefore widely used.

Topic 8: MemeFi and Making DEX are more vertical

Meme currency is a financial culture. Their value comes purely from attention and social consensus. We may be in a meme coin super cycle with Solana at the forefront.

In addition, DeFi applications will also become more social. Were already seeing some early trends:

• Buy through Telegram bots like Bonkbot with a daily trading volume of $250 million!

• Projects like Zeta or Kamino have public points leaderboards.

The next front-end for a DEX will most likely not be a Jupiter-style exchange interface, but a live streaming platform where creators and viewers place bets together, a social feed with trading integration, or other network presence.

UI layer composability: Telegram bot makes the DEX’s UI composable. Previously, people would learn information somewhere on the internet (X, Reddit, News, Telegram, etc.) and then navigate to a separate UI to trade (e.g., Drift, Binance, Coinbase, etc.). Telegram bots bring transactions to Telegram, where people are already gathering, socializing, and exchanging information.

Alpha suggestions for Builders:

• Continuous prediction market powered by Meme coins:

Existing prediction markets such asPolymarketIt is binary and discrete, so the room for upside is very limited. Most people want continuous, unlimited upside. A native crypto prediction market could actually be a meme coin (e.g., $BIDEN, $TRUMP). One could build a niche platform dedicated to trading meme coins (for example, a political platform that trades all political meme coins and predicts who will win). Actually,MetaDAOis an example of a vertical and continuous prediction market, but only for governance.

• Meme coin frontend: The user experience for trading meme coins is still not optimal: one needs to discover the meme coin, check all its details on Birdeye or DEXscreener, and then trade on Jupiter, and for many early meme coins, the wallet did not even have basic support. One could simply make a site like Birdeye, but dedicated to meme coins, more social, where bloggers could also praise each other and copy trades.Pump.funis another interesting platform where people can join meme coins very early (until $69k market cap). Another adjacent idea worth exploring is a DEX specifically suited for meme coins (currently Raydium, but the experience is not optimal).

• Vertical DEX: More experimentation in DEX design for use cases like Meme coins or LST

Vertical DEX: More experiments in DEX design targeting specific use cases like meme coins or LST. For example, Sanctum’s Infinity is essentially an automated market maker for LST.

Cross-chain aggregators for high-performance chains: As activity is increasingly dispersed across different L1 chains, such as Aptos and Sui, building cross-chain aggregators is a great opportunity with significant first-mover advantage. Intent-based DEXs (leaning towards order books) are also an interesting direction to provide users with better quotes.

Theme 9: Protocols tend to become platforms

Platforms enable the creation of new products. Amazon is a platform, and a brand on Amazon is a product. The launch of Uniswap v4 hooks marks DeFi’s first platform moment, allowing builders to launch their products on top of these protocols. Not just Uniswap, but all blue chip DeFi protocols like Jupiter are starting to build ecosystems on top of their protocols.

Project Serum (now Openbook) serves as a platform that exemplifies ecosystem building, with more than 30 projects developed on it. The platforming of Solana DeFi projects is still in its early stages, but is expected to surge in the coming months. It is advantageous for builders to identify such protocols, position themselves strategically and become early players in the ecosystem.

Alpha suggestions for Builders:

Some noteworthy projects include:

• Jupiter: Originally an aggregator, Jupiter is quickly evolving into an ecosystem.Adrasteais a great example of this, which provides leveraged gains on JLP.

• Drift: The largest sustainable DEX on Solana.Circuit tradeProviding market-making vault functionality for Drift DEX, similar products can be developed around DLP.

• Phoenix: Although it’s still early days, as an order book,PhoenixHas the potential to develop into a comprehensive ecosystem. For example, Root Exchange, built on Phoenix, offers enhanced limit orders.

Structured products and strategy vaults provide clear opportunities for the development of additional products on these platforms. While converting to a platform is a long-term endeavor, it greatly benefits value accumulation (which is why Layer 1/Layer 2 solutions have significantly higher value than applications) and shifts revenue generation responsibilities to build applications on it. This also benefits token holders of the platform protocol.

Topic 10: Interfaces (UX aggregators) will become more powerful

In crypto, attention is scarce, and aggregators command it. Whether it’s a DEX aggregator (like Jupiter/1inch), a bridge aggregator (like Jumper/Bungee), or a chain aggregator (like Polygon), they have become a new and attractive narrative.

The principle is simple: aggregators control demand and capture user attention. While they dont currently accumulate much value (most dont charge a fee), its likely that the underlying protocols they abstract from will soon offer them a fee or share to gain priority or remain featured (similar to how brands pay Amazon for advertising ).

Interfaces add additional value on top of the on-chain protocols they enable. With additional tools like UniswapX or Jupiter’s DCA tools, interfaces can win the customer acquisition battle and capture value.

In fact, Solana has one of the most powerful aggregators, with Jupiter leading the way;FlexlendWait for other aggregators to aggregate the revenue.

Alpha suggestions for Builders:

Opportunities for aggregation include:

• revenue aggregator

• Persistent aggregator

• Meme coin aggregator

• An everything DeFi aggregator like Instadapp for leveraging, refinancing and migrating positions

While there seems to be a blurry line between “platform” and “aggregator,” the difference is that an aggregator is the front end, while a platform is the foundation upon which a product is built. A protocol can be both at the same time, Jupiter is an example of this.

Conclusion: It’s time to seed Solana DeFi 3.0

Now is the time to build a new protocol on Solana. While the EVM does serve as an inspiration, protocols should focus on core design innovation, participate in research discussions, and build real OPOS like Sanctum or Phoenix. We will make Solana DeFi even more different from Ethereum, taking inspiration from TradFi and seeing what can be built on-chain to take advantage of high capital turnover and speculation.

Infrastructure has finally reached a point where it can withstand large-scale activity. A lot of DeFi that failed before due to premature timing is now viable again. It will be exciting to see how this develops over the next few years.