In the liquidity staking market of PoS chains, the mainstream narrative tends to depict a monopolistic outcome, where one or two dominant liquidity staking schemes will eventually win out over all other competitors. This monopolistic or winner-takes-all nature can be seen in Lido on Ethereum and Jito and Marinade protocols on Solana. These market leaders have generated strong network effects due to their competitive advantages, thereby raising the barrier to entry for other players in 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 some design nuances that may allow us to see an interesting change. This article will take a deep dive into the evolution and current status of liquidity staking on Solana, and focus on how it has gradually deviated from the traditional monopoly model and shown different development trends.
Liquidity staking on Solana currently only accounts for 5.3% of all staked supply
Compared to Ethereum, liquidity staking is not widely used on Solana at present, mainly due to the fundamental differences in the staking mechanism and the value proposition of the liquidity staked assets. On Ethereum, the fact that the staked ETH is fully locked before the Shanghai upgrade and the need to queue for withdrawal after the merger has created a demand for liquidity staking so that investors can trade with these locked assets. In addition, faced with Ethereums 32 ETH minimum stake and the risk of slashing due to poor validator performance, staking pools have become a safe and necessary option for many users. In contrast, Solanas delegated PoS model supports instant liquidity, only takes about two days to unstake, does not require a minimum stake, and does not have a slashing penalty, which reduces the need for liquidity staking. Solana users can effortlessly select validators without taking on significant risks, so they are much less dependent on staking pools. Although platforms such as Jito and Marinade have tried to provide better services by optimizing validator selection, complex delegation strategies have not brought significant advantages due to the deterministic performance of Solana validators. Although Solana’s staking pool provides features such as tokenization of staked assets and validator monitoring, the appeal of these features is gradually diminishing as more and more solutions that better meet user needs emerge on the market.
Why does the winner-takes-all pattern frequently occur in the field of liquidity staking?
In the past, the liquidity staking space has tended to be a winner-take-all landscape across blockchains, including Solana, largely due to the fragmentation of liquidity between different pools and platforms. Each staking pool, operating on platforms such as Saber, Raydium, or Orca, competes fiercely for liquidity as a key moat to beat their competitors. The competition is fierce and reminiscent of the Curve Wars on Ethereum, with protocols like Marinade and Lido investing huge sums of money in their weekly token releases to incentivize users to deposit into liquidity pools. This situation greatly increases the competition for small liquidity staking protocols, as they must have enough liquidity to prevent their tokens from depegging in order to enter the competition, which essentially marginalizes those potential validator liquidity staking protocols.
The winner-take-all dynamic in the liquidity staking space is further reinforced by strong network effects that favor established liquidity staking solutions and platforms. Network effects specifically include a focus on security - users tend to prefer platforms with a history of stable operations, audited protocols, and low risk of smart contract bugs or security vulnerabilities. Liquidity also plays a key role - deep trading liquidity means users can quickly adjust positions without significantly affecting market prices, which is critical to the utility of LST in areas such as token trading. The level of integration of LST with other protocols also affects its appeal, as users want the freedom to use their assets across different DeFi platforms. However, small liquidity staking solutions often lack in this regard and have limited appeal. Finally, the monetaryness of LST is also a key factor - LST tokens such as stETH are actually acting as money. Brand value and the Lindy effect (the expected future life of a technology or idea is proportional to its current existence) play an important role in this process. Over time, these factors gradually accumulate, favoring solutions that excel in security, liquidity, and integration, leading to a winner-take-all situation in the liquidity staking space.
Long-tail LSTs are about to emerge in large numbers
The introduction of long-tail LST has brought 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 the freedom to choose validators) with the unique advantages of liquidity staking (such as instant liquidity and the convenience of using staked assets in the Solana ecosystem). This combination not only greatly optimizes traditional native staking methods, but also provides a practical alternative to traditional staking pools. But the value of LST does not stop there. It can also serve as an innovative tool to provide holders with additional income opportunities, allowing projects to provide LST holders with an annualized rate of return (APY) far exceeding native staking.
For example, a single validator could distribute block rewards, MEV revenue, and priority fees to LST holders — significantly increasing the APY and thereby attracting more staking capital.
In addition, LST brings unprecedented opportunities within the ecosystem, such as giving holders the privilege of participating in exclusive NFT minting events, or becoming the key to premium service passes such as private communities. This versatility and practicality demonstrates the unlimited potential of LST and marks a new chapter in blockchain network participation and reward mechanisms.
Ultimately, the diversification of LST has greatly advanced Solana towards deeper decentralization. By adding more diverse LST options, it ensures that power and influence within the network is more evenly distributed among validators and projects. This democratization process can stimulate a healthier competition atmosphere, prompting validators and projects to continuously improve service quality, strengthen security, and introduce more attractive incentives to win and maintain user loyalty. Therefore, such competition not only reduces the risk of over-centralization and enhances the security and resilience of the network, but also breeds innovation, bringing users a wider range of choices and better returns on staked assets.
Why the project wants to launch its own LST
Under Solana’s stake-based Quality of Service (QoS) mechanism, validators have a strong incentive to increase their stake to increase their transaction priority. This mechanism ensures that validators with larger stakes are given priority in the processing queue, effectively reducing transaction latency and improving operational efficiency. This priority mechanism is particularly critical during periods of network congestion, allowing validators to maintain high levels of performance and stability for their customers. By increasing their stake, validators not only increase their own transaction throughput, but also attract users and applications that seek fast and reliable transaction processing. This in turn can increase validator rewards and establish a stronger reputation in the Solana ecosystem, creating a positive feedback loop that incentivizes validators to continuously increase their stake investment. This trend has become increasingly prominent as well-known protocols on Solana such as Jupiter, Drift, and Margin have launched their own LST to attract more stake.
How to solve liquidity problems
To ensure the survival of long-tail LST, the key is to solve the liquidity problem. The Sanctum protocol on Solana is an example. By building the underlying infrastructure, it aims to break the barriers of the monopoly market and create an ecosystem that is more friendly to long-tail LST.
Sanctum has introduced innovative solutions to the liquidity challenges faced by long-tail LSTs on Solana, which not only lower the entry barrier for new LSTs, but also improve their usability in the DeFi ecosystem. Its reserve pool acts as a universal liquidity provider, allowing any LST to be instantly converted to SOL, regardless of the size of the LST, ensuring that even smaller LSTs can provide immediate liquidity to their holders, making them a viable option for DeFi protocols to integrate as collateral. The Sanctum router, co-developed with Jupiter, is a key infrastructure component that enables seamless conversion between different LSTs, even in the absence of direct liquidity paths. This connectivity leverages the liquidity of large LSTs and improves the liquidity of small LSTs. In addition, Infinity, a multi-LST liquidity pool, breaks through the traditional limitation of only being able to trade two assets by supporting trades between any LST in the pool, improving capital efficiency. It relies on on-chain oracles to perform real-time LST value assessments, ensuring accurate and secure trading in an infinite array of LSTs. Together, these mechanisms ensure that emerging and small LSTs continue to grow in Solana’s DeFi ecosystem by providing the necessary liquidity and interoperability.
Examples of emerging LSTs
in conclusion
With the significant growth in user participation and Solanas unique staking weight QoS mechanism, it is foreseeable that major projects on Solana will be eager to increase staking and will most likely achieve this goal by launching LST with their own characteristics. In this emerging paradigm, the overall size 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 in Solana. In this case, it will be particularly important for projects like Sanctum to help unify the liquidity of LST in the Solana ecosystem.
