Why didn’t Solana take off with the liquidity staked by over 70% of SOL?

Author: Aleks Gilbert, DL News; Translation: Felix, LianGuaiNews

Liquidity staking is Ethereum’s largest sub-track, accounting for the largest proportion, and the share of collateral used in DeFi protocols on other blockchains is growing rapidly.

In the Solana ecosystem, developers and investors also hope for the same.

Ethereum, Solana, and other blockchain platforms that rely on proof-of-stake technology allow users to lock (or stake) their tokens to achieve certain returns.

These tokens are necessary for the complex but critical transaction ordering and verification work on blockchains that use proof-of-stake technology.

Although the staked tokens are actually locked, liquidity staking protocols issue redeemable synthetic tokens in a 1:1 ratio, allowing users to leverage the staking yield of the blockchain (5% for Ethereum, 7% for Solana) while using them in other DeFi protocols to gain additional profits. This is called “Liquidity Staking Derivatives” (LSD), but the term is not actively mentioned by project teams afterwards, possibly due to concerns about regulatory scrutiny.

Over 70% of SOL tokens on Solana are delegated to individuals, companies, and protocols, which use them for transaction ordering and verification. However, less than 3% of them are delegated to liquidity staking tokens (LST) projects.

Ben Chow, the founder of Solana protocols Meteora and Jupiter, said that out of over $9 billion worth of staked SOL, only 3% are LST. “We have done a lot of work to increase the adoption of LST and unlock this funding, which will greatly increase TVL and trading volume.”

Lucas Bruder, CEO of Jito Labs, agrees with this. “This is a huge opportunity to unlock the remaining 97% of the staked funds on the network. I don’t think there is currently any LST protocol that can find the right marketing and narrative approach, and we are happy to try and find the answer.”

If this situation changes, it could greatly alter the DeFi ecosystem on Solana. But easier said than done.

Low Risk

According to data compiled by anonymous data analyst Hildobby from venture capital firm Dragonfly, about one year ago, Ethereum shifted to proof-of-stake technology (PoS), with only one-fifth of the ETH (approximately 26 million) staked.

Compared to other blockchains that have been using proof-of-stake technology from the beginning (such as Solana), this is negligible.

But the difference lies in liquidity.

On Ethereum, one-third of the tokens are delegated to the liquidity staking protocol Lido. According to data from research firm Rated by Elias Simos, nearly 40% of ETH has been deposited into many liquidity staking protocols on Ethereum.

Meanwhile, according to Solana ComLianGuaiss data, less than 3% of SOL is stored in Solana’s liquidity staking protocols.

According to data platform Spire, among Solana’s “large stakers,” 1,651 people have staked at least 5,000 SOL, and only 152 of them hold liquidity staking tokens.

In May, Solana co-founder Anatoly Yakovenko vented his frustration on Twitter (now called X). “SOL has a very small share in liquidity staking and DeFi,” he wrote. “We need industry-wide efforts to change that.”

“Additional Risks”

Alex Cerba, core contributor to the liquidity staking protocol Marinade, said that a survey of SOL stakers revealed two reasons for the relatively low usage rate.

Marinade is the largest liquidity staking protocol in the Solana ecosystem and issues the liquidity staking token mSOL.

Measured by the total value of cryptocurrency deposits, Marinade is the largest liquidity staking protocol in Solana.

The first reason is the potential tax issue with staking. When users deposit SOL and receive liquidity staking tokens, is this a taxable event? When do they owe taxes on the staking token earnings?

Secondly, Solana was built to make staking simple, efficient, and risk-free. However, stakers are not always convinced that the additional returns from Solana DeFi are worth the effort and risk, as it requires entrusting millions of dollars to third-party built protocols, which carries certain risks.

Cerba stated in the survey, “I don’t get the equivalent return in DeFi because I have to take additional risks for a 9% annualized return in mSOL. I can get a 7% annualized return just by staking, with no smart contract risk.”

Kel Eleje, research analyst at Messari, agrees with this. Eleje said that validators representing user interests are typically free. Additionally, users can withdraw their staking within two days, while those holding ETH need two weeks. “It essentially feels like slightly lower-risk liquidity staking,” Eleje said. In response, Marinade has recently launched its own version of Solana’s built-in staking service – Marinade Native. We hope those who have staked SOL can use it and eventually transition to using Marinade for liquidity staking. According to DefiLlama data, the number of new liquidity staking protocols, Jito and BlazeStake, has surged this summer.

Liquidity staking protocol Jito has seen rapid growth this summer.

Eleje attributes this growth to airdrop speculation and the popularity of its liquidity staking token on MarginFi, a lending protocol that is also gaining popularity.

But Bruder suggests that users may be attracted by innovation. “When you observe the usage of jitoSOL in DeFi, you will find that the usage rate is much higher than other LSTs.”

Ethereum “Slightly Ahead”

The BlazeStake protocol for liquid staking has been rapidly developing this summer.

If an additional 4% of staked SOL is staked through protocols like Marinade or Jito, the total value of cryptocurrencies in Solana DeFi will double. However, Cerda is uncertain if Solana is ready for this. “Some people see this as a bit naive because they only see the influx of funds into DeFi as an opportunity. Furthermore, there are relatively few places currently available on Solana to deposit a large amount of DeFi funds.” Solana DeFi needs to grow in order to handle a large amount of liquid tokens, which raises the question of whether the chicken or the egg comes first. You still need the operation of DeFi protocols and have more use cases and a larger market size in order to essentially absorb all the capital, and these are areas where Ethereum is leading.

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