Staking your digital currencies has become one of the newest and often the most rewarding ways to earn passive income on your idle sitting cryptocurrencies. It also helps to secure a Proof of Stake blockchain network like Solana and Ethereum. This guide unleashes a new yet more efficient way of staking-liquid staking. We will be focused on liquid staking on Solana specifically.
Unlike normal or native staking in which your cryptocurrencies are locked with a validator for a certain period of time, liquid staking allows you to trade, lend or transfer your cryptocurrencies while also staking them with a validator to earn staking rewards.
As said, this guide is focused on “Liquid Staking on Solana”. We will dive deep in the concept, but will start from the basics of what staking is, what liquid staking is and then jump straight to liquid staking on Solana, its pros and cons and the top DeFi protocols which enable this specialized category of staking on Solana.
Table of Contents
What is Solana and SOL?
Solana is a high performance blockchain platform. It is way faster than other blockchain platforms including Ethereum and Bitcoin in processing transactions. It can process up to 65000 transactions per second (TPS).
SOL is the native cryptocurrency of the Solana blockchain.
The Solana blockchain platform was launched on 16th March 2020. Solana was founded by Anatoly Yakovenko and Greg Fitzgerald.
What is Solana Staking?
To better understand ‘Solana Staking’, we first need to understand the concepts of validators and delegators in Solana or blockchain in general.
Currently the returns on Solana staking vary between 6-8%. In order to stake you need to choose a validator (currently 1300+). Let us check the mechanics in a bit more detail.
Validators and Delegators
Validators are the full nodes in Solana (or blockchains which follow Proof of Stake consensus mechanism), who can participate in the Proof of Stake consensus mechanism and hence verify and add the next block of transactions in the Solana blockchain. Hence, validators help to maintain the speed, security and censorship resistance of the Solana network. Running a validator node requires high throughput computer systems. You can check the complete specifications here.
A delegator on the other hand is simply any other node in the Solana network (like you and me), which helps one or more validator nodes to compete against other similar validator nodes. We can provide our voting power to these Validators to have an upper hand on other Validators. This is achieved by staking SOL tokens by delegators to validators.
As you might be knowing, Solana is a Proof of Stake (PoS) consensus blockchain platform. The probability of verifying and adding the next block in Solana blockchain is dependent on the amount of SOL staked by the validator node. Apart from the SOL tokens. owned and staked by the validator nodes, the validator nodes also allow delegators to delegate their SOL tokens to them. This increases the total SOL tokens being staked by the validator nodes and hence help them to win the competition against other validator nodes. Hence, delegators stake SOL tokens with validators who then compete with other validators to add the next block in the blockchain.
Note: Technically delegators do not give access and control to their SOL balance to the validators. Delegators just give their voting rights to the validators, while the access and control to the SOL balance remains with the delegator.
What is Solana Staking?
Staking in Solana refers to the phenomena in which delegator nodes stake SOL (native token of Solana) at the validator nodes to help them compete against other similar validator nodes for adding the next block in the Solana blockchain. The validator earns rewards in SOL if it wins the chance to add the next block in the Solana blockchain. A percentage of this reward is returned to the delegators which delegated their SOL tokens to the validator.
This is similar to a savings account in traditional finance, in which you get a percentage interest on the amount of money put in the savings account.
What is liquid staking?
In normal or native staking in a Proof of Stake (PoS) blockchain network (like Solana), your tokens are locked or inaccessible until they are staked (or delegated with a validator). You cannot use these staked tokens for other purposed like trading or staking in a DeFi protocol.
On the contrary in liquid staking your staked tokens are not locked and are kept in an escrow account. The tokens are not locked or inaccessible as they would be in native staking. You can use them in DeFi protocols like Liquidity Pools or lend/borrow protocols. Just remember you will need to return the received amount of stake tokens to retrieve your original token deposit once you are done.
Liquid Staking on Solana
Liquid staking in Solana takes place in the following manner.
- You stake your SOL tokens to a Liquid Staking Protocol (LSP) like Lido or Marinade.
- In return the LSP mints a derivative of the staked SOL tokens. You get tokenized version of your SOL tokens. mSOL from Marinade and stSOL from Lido.
- The LSP stakes your SOL tokens to the PoS smart contract of Solana. You get a percentage reward on the SOL tokens you have staked.
- Additionally, you also have access to the tokenized SOL (mSOL or stSOL). You can use these tokenized SOL tokens (mSOL or stSOL), just as you would have traded SOL tokens for. For tokenized SOL tokens you can use them in DeFi Liquidity Pools or lend/borrow protocols. Or you can simply stake the mSOL tokens in an exchange like FTX to further earn staking rewards.
Lending Markets (PORT, Mango, Larix, Solend)
AMMs (ORCA, Raydium, Aldrin, Atrix, Step)
Leverage Farms (Tulip, Francium)
Covered Calls (Friktion)
Hence, liquid staking if done diligently can amplify your staking returns. For instance, lets say you staked your SOL tokens to Marinade LSP. You earn a staking reward of 6.7%. Then you stake mSOL to FTX exchange. You get additional 8% yield. In total you accumulate a yield of (6.7 + 8)=approx. 14% returns)
Liquid Staking on Solana-Pros and Cons
Liquid staking on Solana has quite a few advantages over the traditional native staking. Let’s try and outline these advantages of liquid staking over native staking.
- Enhanced yield: The first and the foremost advantage of liquid staking over traditional staking is the enhanced yield that liquid staking offers. This is obviously because, liquid staking provides you derivative or synthetic tokens (like mSOL, stSOL), once you stake SOL tokens in a Liquid Staking Protocol like Marinade or Lido. This derivative token (mSOL or stSOL) can be further deposited in Liquidity Pools in DEX or traded in a lending/borrowing DeFi protocol to earn enhanced interest.
- Eliminates the risk of Validator Slashing: One of the prominent risks in native staking is slashing of Validators due to some malicious practices on their part. If such a slashing happens you fall into the risk of loosing all your staked SOL tokens with the slashed validator. Liquid staking mitigates such a risk, because in liquid staking the SOL tokens are staked by the LSP to multiple validators. Hence, it diversifies your staked SOL tokens which lessens the chances of loosing all your staked SOL tokens due to a slashing.
- Saves you from the hassle and time taken to select the right validator: As we know in liquid staking the Liquid Staking Protocol has the responsibility to stake your SOL tokens to multiple validators of their choice (basis their R&D). You do not need to spend time and effort choosing the right validator to stake SOL tokens.
- Instant unstaking: In native/traditional staking there is a time for which the SOL tokens are locked, before a user wants to unstake it. Generally this time is until the end of the epoch, which may end up to three days. Whereas in liquid staking, a user can instantly unstake, by swapping the staked/derivative SOL (like mSOL or stSOL) for regular SOL via an exchange.
- Benefits for the network: Liquid staking not only is beneficial to the user but also to the network as a whole. First and foremost, Liquid Staking Protocols like Lido, stake your SOL tokens to multiple validators, hence bolstering the decentralization of the Solana blockchain. Second, by allowing users to trade the derivatives of the staked SOL tokens, it enhances the liquidity in the Solana ecosystem hence growing the financial activities in it which compounds with time.
Now there are few drawbacks of liquid staking also outlined below:
- Smart Contract Risks: There can be bugs in the LSP smart contract which can effect your staked SOL tokens. With native staking, you can delegate your SOL tokens directly to a validator, earn the quoted % APR and you don’t have to worry about any additional smart contract risk. It is simple, effective and the APR is very reasonable.
- Tax Liabilities: Check for the tax liabilities in your country.
Top Liquid Staking Protocols for Solana
Some of the top Liquid Staking Protocols for staking SOL tokens are:
Staking has evolved as one of the most sought after crypto investment tool over the past few years. It started with native staking or non-liquid staking in which your crypto assets (like Solana or Ethereum) are locked for a fixed time, until you can unstake them to sell, transfer, trade or use them in another investment tool like DeFi Liquidity Pool.
Here enters the liquid staking protocols. These protocols like Lido, Marinade, Socean, etc. provide you derivative tokens in return of the staked crypto tokens. These derivative tokens provide you the liquidity to trade, swap in an exchange or invest them in a DeFi protocol like lending/borrowing, or Liquidity Pools.
Liquidity staking is gaining traction in Solana with the advent of Liquidity Staking Protocols like Marinade, Lido, Socean, Parrot, Jpool, DAOPool and eSOL. It offers enhanced returns than normal non liquid staking, diversifies your SOL tokens to a number of validators (hence eliminating risk of validator slashing) and allows instant unstaking by swapping your derivative tokens for SOL tokens in an exchange.
However liquid staking on Solana and other cryptocurrencies like Ethereum do carry the risk of bugs in the smart contracts of the Liquid Staking Protocol. Please invest your time in conducting proper research before getting into liquid or non-liquid staking.
This guide is not an investment advice. It is my personal opinion. Please undergo proper research before investing in cryptocurrencies.Disclaimer
If you are sincerely looking forward to invest in cryptocurrency space and hold the investments for long, use a hardware wallet like Ledger or Trezor. These wallets store your cryptocurrencies (keys to cryptocurrencies) in an offline environment which is therefore cannot be the victim of an online hack or malware practice. Storing your digital assets in an Exchange or software wallet often attract online attacks and malwares.Word of Advice