The New Star of Liquid Staking on Solana: Analyzing the Sanctum Protocol

Liquid staking has fundamentally changed the asset management approach in PoS networks by transforming traditional illiquid staked assets into tradable tokens. Stakers can obtain liquid staking tokens (LST) that represent their staked assets and accumulated rewards, allowing them to flexibly use these assets during the staking period.

EigenLayer, as a decentralized re-staking protocol on Ethereum, further develops this concept. Users can deposit LST into EigenLayer to obtain the liquid staking token (LRT), which encapsulates the value of staked tokens, staking rewards, and additional rewards, providing greater flexibility and profit potential.

The total locked value of liquid staking ( TVL ) has surged from 30 million USD to over 57 billion USD in less than four years. However, there are still differences in staking ratios across different networks. For example, Solana's staking rate exceeds 70%, much higher than Ethereum's 27%. However, Solana's LST only accounts for 6% of the staking supply, while Ethereum exceeds 40%.

This presents a tremendous opportunity for Sanctum within the Solana ecosystem. By introducing innovative re-staking options and fostering a competitive environment, Sanctum can offer Solana stakers greater flexibility, liquidity, and profit opportunities. This not only meets the growing demand for DeFi but also caters to the need for more efficient and diversified staking solutions, preventing Solana from being monopolized by a single dominant protocol.

Sanctum's Infinite Pool

Sanctum Infinity is an innovative liquidity pool designed to simplify the trading and staking of LSTs on Solana. It can be seen as a large flexible pool that supports seamless exchanges of various LSTs.

When purchasing LST with SOL, the amount of LST received may be slightly less than one. This is because LST appreciates over time by accumulating staking rewards. For example, the price of JitoSOL is higher than SOL because it has been collecting rewards since its launch, showing a return of about 11%.

Sanctum Infinity uses Solana's staking pool data to accurately price LST. Traditional AMMs may become less efficient in low liquidity or large trades, but the Infinity approach ensures accurate pricing as it relies on reliable on-chain data.

Depositing LST into the Infinity pool can earn INF tokens as a reward. These tokens not only earn staking rewards from all LST in the pool but also collect transaction fees, providing an additional source of income.

Infinity maintains balance by dynamically adjusting exchange fees. This encourages trades that help maintain a good mix of LST in the pool, ensuring that both new and old tokens can grow and provide good returns.

The Infinity pool allocation strategy supports the creation of new LSTs, reserving 20% of the pool for newly approved LSTs. Each new LST requires at least 1000 SOL and is adjusted based on its holding value and recent returns. The remaining 80% is used for a combination of existing LSTs and trading returns, aimed at achieving diversified yields and high trading volumes.

Validator LST

Validator LST represents the staking with a specific validator, appreciating in value as staking rewards accumulate, providing a flexible and efficient staking method. Traditional staking requires creating and delegating a staking account, and unstaking takes a certain amount of time. In liquid staking, depositing into the validator LST pool automatically creates and delegates a staking account, and users receive the validator LST representing their stake.

Advantages of Validator LST:

• Help validators differentiate themselves by issuing tokens and providing unique rewards.
• Allow stakers to participate in a broader DeFi space, providing more opportunities for rewards.
• Reduce the demand for creating liquidity pools, allowing new small validators to compete with large validators and increasing decentralization.
• Simplify the staking process, provide instant exchanges, and avoid the long waiting period of traditional unstaking.

The Reserve( Reserve Pool)

The Sanctum reserve pool provides deep liquidity for all LSTs on Solana, addressing key challenges in the staking ecosystem.

Users usually have two ways to redeem LST:

1. Stop using and wait 2-4 days to obtain SOL
2. Trade LST for liquidity instantly on DEX.

The Sanctum reserve pool allows users to instantly exchange LST for SOL. The reserve pool then deactivates the staking account and retrieves SOL after a cooling period. It operates by accepting staked SOL and returning SOL, un-staking the SOL at the end of each epoch to replenish the reserve.

The reserve pool also supports various DeFi protocols to accept any LST as collateral, enhancing the utility and adoption rate of LST. More importantly, the reserve pool helps small validators compete more easily with large validators by providing a shared source of liquidity, promoting decentralization of the network. This democratizes staking, offering users more choices and higher returns.

The Router( Router)

The Router of Sanctum simplifies the exchange between different LSTs on Solana. Previously, the liquidity of LSTs was limited to specific pools, and shallow pools made it difficult to quickly convert LSTs to SOL, reducing their effectiveness in DeFi.

The Sanctum router enables seamless exchanges between any LST by moving stake accounts between pools, unifying the liquidity of all LSTs. Sanctum charges a fixed fee of 0.01% for each LST to SOL exchange conducted through the router.

Essentially, Sanctum's router unlocks the full potential of liquid staking on Solana by enabling efficient exchanges between LSTs, enhancing liquidity and usability in the DeFi ecosystem.

Sanctum vs Lido

Lido has become the dominant force in the staking ecosystem on Ethereum. 27% of ETH is staked, with nearly 30% deposited in Lido, amounting to approximately $35.5 billion in TVL, far exceeding the $4.6 billion of the second-largest staking protocol, RocketPool. Lido's TVL accounts for more than half of the total staking value on Ethereum, making up about one-third of the total TVL across all on-chain DeFi.

Lido's stETH has become a key element of the Ethereum ecosystem, with its liquidity and widespread acceptance making it the "dollar of staking assets." However, this concentration of power has also raised concerns. Lido DAO controls about 30% of staked Ethereum, which could have a significant impact on the network.

In contrast, Sanctum has taken a different approach on Solana. They recognize that LSTs are essentially interchangeable, just a wrapper for stake accounts. This insight led them to foster a multi-LST environment instead of directly competing with other staking pools.

The philosophy of Sanctum is collaboration rather than competition. They aim to create infrastructure that supports various LSTs, focusing on expanding the overall stake market rather than dominating it. By supporting multiple LSTs and promoting collaboration, Sanctum hopes to establish a more decentralized and inclusive staking ecosystem on Solana.

Sanctum vs Jito

Jito is a Solana native protocol that gained significant attention through an airdrop in 2023. It utilizes the governance token JTO to incentivize liquidity and integration with major Solana protocols, dominating the LST market of Solana.

Main features of Jito:

• JitoSOL is the leading LST on Solana, with the highest APY, TVL, and trading volume in the Kamino liquidity vault.
• Collaborate with top protocols such as Solend, Drift, Jupiter, and marginfi.
• Expand influence to Arbitrum through Wormhole, increasing the utility of JitoSOL.
• Excels in maximizing extractable value ( MEV ), offering higher staking rewards and optimizing transaction ordering.

Although Jito's growth is similar to Lido's performance on Ethereum, it has also raised concerns about how its dominance could affect the health of the Solana ecosystem.

Sanctum focuses on providing robust infrastructure support to ensure the stability and security of the Solana ecosystem. Key features of Sanctum include:

• The Infinity Multi-LST liquidity pool gathers liquidity from various trading pairs, enhancing liquidity and reducing slippage risk.
• The reserve pool and router facilitate instant unstaking services and efficient LST exchanges, supporting liquidity and stability.

Advantages of Sanctum

1. The unique reserve and router approach provides users with a capital-efficient way to redeem and exchange LSTs.
2. The reserve pool has over 200,000 SOL( with approximately 30 million dollars) in liquidity, ensuring that LST holders can redeem instantly and reduce slippage.
3. Lower the threshold for creating LST, allowing small validators to issue their own tokens, promoting decentralization and increasing network competition.
4. TVL has grown to over $700 million, making it the fourth largest protocol on Solana, demonstrating market acceptance and trust.

Challenges Faced by Sanctum

1. Facing fierce competition from established players like Jito
2. Success is closely related to the growth and stability of the Solana ecosystem.
3. Solana may introduce a reduction mechanism in the future, affecting the attractiveness of staking and liquid staking.
4. The innovation of reserve and router mechanisms may face challenges in user understanding and adoption.
5. Facing potential regulatory scrutiny and legislative change risks

In the future, we will delve into all liquid staking tokens in the Sanctum ecosystem, comparing and analyzing the risks and potential advantages of each LST, and sharing insights on the future of this innovative project.