This guide provides a deep dive into liquid staking on the Solana blockchain. You will learn what it is, how it works, why it matters, and how you can participate.
Please note: This article is for educational purposes only and is not intended as investment advice.
Understanding Staking on Solana
Before discussing liquid staking, it's important to understand traditional staking. In a Delegated Proof-of-Stake (DPoS) network like Solana, staking involves delegating your tokens to a validator who is responsible for verifying transactions on the network. Validators are incentivized to act honestly; if they fail to do so, they face penalties.
When you perform "native" staking, you select a specific validator and delegate your tokens to them. This can be done through various wallet interfaces or via the Solana command line.
Since its mainnet beta launch in February 2020, Solana has followed a defined inflation schedule. As of early 2024, the inflation rate is approximately 5%. The SOL tokens generated by this inflation are distributed to stakers. This means that each epoch, stakers increase their relative ownership of the total SOL supply at the expense of non-stakers. This mechanism has led to a high staking rate on Solana, with roughly two-thirds of all SOL currently being staked.
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Liquid Staked Tokens (LSTs) and Duration Risk
The primary incentive for staking is to avoid dilution from inflation. However, a key drawback of native staking is that it locks your capital for the duration of an epoch. Liquid staking solves this problem.
With liquid staking, you deposit your tokens into a staking pool that manages validator delegation. In return, you receive a new tokenized asset that represents your claim on the staked SOL in that pool. This Liquid Staked Token (LST) can often be used as a functional equivalent of SOL itself across the ecosystem.
The most popular LSTs on Solana are "reward-bearing" tokens. Nearly all the SOL in the pool is delegated to validators chosen by the pool's operators. The rewards from staking—paid in more SOL—accumulate in the pool. Consequently, the value of each LST token increases over time relative to SOL.
A Solana epoch lasts approximately 2.5 days. To retrieve your original staked SOL, you must submit an unstaking request and wait for the epoch to end before you can redeem your LSTs. This introduces what is known in traditional finance as duration risk. You are betting that the reward for locking your capital for 2.5 days will outweigh the risk of needing immediate access to it.
If an LST holder wants to access the underlying SOL immediately, they have two options:
- Wait for the epoch to end for the pool to undelegate the funds.
- Trade their LST for SOL on the open market via a decentralized exchange (DEX).
The second option highlights a key aspect of LSTs: their liquidity is inherently lower than that of native SOL. If a holder tries to sell a very large amount of an LST at once, it can cause the LST's price to temporarily "depeg" from SOL due to the market impact on the liquidity pool. This was observed in a notable event involving mSOL in December 2023, where a large sell order caused its price to drop briefly before arbitrage bots quickly corrected it.
The lesson is that while LSTs carry some duration risk similar to natively staked SOL, this risk is only pronounced when market liquidity is insufficient. The larger and more liquid an LST's market becomes, the smaller the impact of this duration risk. For most users with smaller holdings, this risk is negligible, but it's crucial to be aware of it.
Leading LST Protocols and Their Value Propositions
Three liquid staking protocols on Solana have each achieved over $100 million in Total Value Locked (TVL), each with a distinct approach and value proposition: Jito (jitoSOL), Marinade (mSOL), and BlazeStake (bSOL).
1. Jito (jitoSOL)
Jito's key differentiator is its integration with Maximal Extractable Value (MEV). MEV refers to profits that can be made by reordering, including, or excluding transactions within a block.
Jito's modified validator client creates a more orderly and accessible market for MEV on Solana. A portion of the profits from this MEV is distributed to users who delegate SOL to the Jito staking pool. This allows jitoSOL holders to earn not only standard staking rewards but also additional MEV rewards.
2. Marinade (mSOL)
As the first liquid staking protocol on Solana, Marinade has pioneered many best practices. Its primary value proposition is decentralization and automated validator selection. Instead of choosing a single validator, users' stakes are automatically distributed across a wide set of high-performing validators, reducing risk.
Marinade's governance is managed by the MNDE token. Holders can vote on protocol decisions. Marinade also features "directed staking," allowing stakers to support specific validators for additional incentives.
3. BlazeStake (bSOL)
BlazeStake's main differentiator is closely tied to its BLZE governance token. Similar to MNDE, BLZE is used for governance voting. However, BlazeStake employs a "stake gauge" system, allowing for more continuous and granular control over incentives. Users can vote to direct extra staking rewards to specific validators or allocate more BLZE rewards to specific liquidity pools in DeFi.
BLZE rewards are distributed bi-weekly to users based on a "SolBlaze score," which increases when bSOL is used in supported DeFi applications, aligning rewards with the level of risk taken.
BlazeStake also offers helpful features like a SOL faucet to cover transaction fees for users who have locked all their SOL and a simple SPL token minting interface.
All three protocols contribute significantly to the health and decentralization of the Solana network by distributing stake across a broad set of validators.
Sanctum and the Future of Infinite Liquidity
A significant innovation in the Solana LST space is Sanctum. Its mission is to solve the liquidity bootstrapping problem for all LSTs, not just the largest ones.
Sanctum creates a massive liquidity pool that accepts numerous different LSTs and allows for near-instant swaps between them and SOL. By providing this huge buffer, Sanctum effectively socializes and minimizes the duration risk for all supported LSTs. This enables smaller and newer liquid staking protocols to be immediately liquid, fostering greater experimentation and diversity in the ecosystem.
As of early 2024, Sanctum supports over a dozen different LSTs, including jitoSOL, mSOL, and bSOL.
How to Participate in Liquid Staking
The process of liquid staking is straightforward. Using BlazeStake as an example:
- Navigate to
stake.solblaze.org. - Connect your Solana wallet (e.g., Phantom, Solflare).
- Enter the amount of SOL you wish to stake.
- Confirm the transaction.
You will receive bSOL in return. Remember that because bSOL is reward-bearing, you will receive less than 1 bSOL for 1 SOL. For example, you might receive 0.899 bSOL for 1 SOL. This means 1 bSOL is worth more than 1 SOL (e.g., 1 bSOL = 1.11 SOL). This ratio will increase over time as staking rewards accumulate in the pool.
Using LSTs in DeFi
The core purpose of liquid staking is to unlock the utility of your staked capital. Here are the primary ways to use LSTs within Solana's DeFi ecosystem.
Lending
Platforms like MarginFi, Solend, and Kamino allow you to deposit your LSTs as collateral. You can then borrow other assets against this collateral. These platforms only allow over-collateralized loans, meaning you must deposit more value than you borrow, which mitigates risk for the protocol.
The Annual Percentage Yield (APY) for supplying LSTs is typically modest, as the primary staking yield has already been captured. However, it can be a low-risk way to earn a little extra yield, often supplemented by additional protocol reward tokens.
Looping (Leveraged Staking)
For those seeking higher yields, "looping" or "leveraged staking" is a common strategy. This involves:
- Depositing your LST (e.g., bSOL) as collateral on a lending platform.
- Borrowing SOL against that collateral.
- Taking the borrowed SOL and staking it again to receive more LST.
- Repeating the process to a desired level of leverage.
Protocols like Kamino and Drift offer simplified, one-click products for this. The main risk here, besides smart contract risk, is the borrowing cost of SOL. If the borrowing rate exceeds the staking yield, the strategy becomes unprofitable. There is also amplified exposure to the de-peg risk mentioned earlier.
Providing Liquidity
You can provide liquidity to Liquidity Pools (LPs) on Decentralized Exchanges (DEXs) like Orca and Raydium. Common and relatively low-risk pairings include:
- SOL-LST Pools: Facilitates easy staking/unstaking and tends to have deep liquidity.
- LST-LST Pools: (e.g., jitoSOL/mSOL). Since both assets are yield-bearing and pegged to SOL's price, they are highly correlated, minimizing impermanent loss risk. You earn trading fees on top of staking rewards.
Higher-risk, higher-reward options include providing liquidity for pairs like LST-Governance Token (e.g., bSOL/BLZE). These pools are often incentivized with extra token rewards.
It is crucial to understand the mechanics of impermanent loss before providing liquidity. Some protocols like Kamino offer automated vaults that manage LP positions for you, though they charge a management fee.
Frequently Asked Questions
What is the main advantage of liquid staking over native staking?
Liquid staking removes the liquidity lock-up period associated with native staking. You receive a liquid token (LST) that represents your staked assets, which you can then use across the DeFi ecosystem to earn additional yield while still accruing staking rewards.
Is liquid staking safe?
Liquid staking introduces additional smart contract risk, as your funds are held in a programmatic pool. However, the leading protocols (Jito, Marinade, BlazeStake) have undergone extensive audits and are considered reputable. There is also the market liquidity risk (duration risk) associated with selling large amounts of an LST quickly.
What is the difference between jitoSOL, mSOL, and bSOL?
The core function—representing staked SOL—is the same. The differences lie in their value propositions:
- jitoSOL offers additional MEV rewards.
- mSOL focuses on decentralized, automated validator selection.
- bSOL is tied to an active ecosystem with a governance token (BLZE) that offers rewards for participation in DeFi.
Can I lose money by liquid staking?
You won't lose your underlying stake to inflation if you're staking. However, you could experience losses if the LST protocol has a smart contract bug, if you engage in high-risk DeFi strategies with your LST (e.g., looping, liquidity providing), or if you are forced to sell a large amount of LST during a period of low liquidity.
How do I choose which LST to use?
Consider the protocol's reputation, security, additional rewards (like MEV or governance tokens), and the depth of liquidity for its LST across DeFi. For most users, diversifying across multiple LSTs is a prudent strategy.
What is Sanctum's role?
Sanctum is a liquidity layer for LSTs. It allows for instant swaps between different LSTs and SOL, solving the liquidity problem for smaller staking protocols and making the entire ecosystem more efficient and interconnected.
Conclusion
Liquid staking on Solana is a powerful primitive that unlocks the latent capital tied up in staking. It enables users to maximize their yield potential by participating in the broader DeFi ecosystem without sacrificing staking rewards.
The landscape is diverse, with leading protocols like Jito, Marinade, and BlazeStake offering unique value propositions. Innovations like Sanctum are further bolstering the entire sector by ensuring robust liquidity for all LSTs.
The best way to understand these concepts is to start small. The low barrier to entry on Solana means you can explore these strategies with a minimal amount of capital to understand the risks and mechanics firsthand. Always conduct your own research and ensure you are comfortable with the risks involved in any DeFi activity.