Liquid Staking: Disrupting Asset Management in PoS Networks

Liquid staking is fundamentally changing the way asset management works in PoS networks. It transforms traditionally illiquid staked assets into tradable liquid assets, providing users with greater flexibility. Staking typically requires locking up cryptocurrency to support the security and operation of the blockchain, rendering these assets unusable during the staking period. However, liquid staking allows users to trade, use in DeFi applications, or serve as collateral without waiting for the staking period to end by issuing liquid staking tokens (LST) that represent the staked assets and accumulated rewards.

The EigenLayer protocol on the Ethereum network further advances this concept. It allows users to perform restaking by depositing LST into its smart contracts, thereby obtaining liquid staking tokens (LRT). These LRT not only encapsulate the value of the staking tokens and the staking rewards but also include additional rewards from EigenLayer operations, providing users with greater profit potential.

The total locked value of liquid staking ( TVL ) has surged from 30 million dollars to over 57 billion dollars in less than four years, with a certain trading platform accounting for approximately 35 billion dollars of staked assets.

Despite rapid growth, there are still differences in staking ratios across different networks. For example, Solana's staking ratio exceeds 70%, far higher than Ethereum's 27%. However, LST only accounts for 6% of Solana's staking supply, while it exceeds 40% on Ethereum.

This provides a huge market opportunity for Sanctum in the Solana ecosystem. By introducing innovative re-staking options and fostering a competitive environment, Sanctum can offer more flexibility, increased liquidity, and additional profit opportunities for Solana stakers. This not only meets the demands of the growing DeFi movement but also caters to the need for more efficient and diversified staking solutions, helping to prevent Solana from being dominated by a single staking protocol.

Sanctum Protocol Analysis

Sanctum's Infinite Pool

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

When purchasing LST with SOL, the amount of LST obtained may be slightly less than one, as LST appreciates over time by accumulating stake 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 utilizes Solana's staking pool data to accurately price LST. Unlike traditional AMMs that may be inefficient in low liquidity or large trades, Infinity's approach ensures accurate pricing regardless of liquidity, as it uses reliable on-chain data.

When users deposit LST into the Infinity pool, they will receive 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 the balance of the pool by dynamically adjusting swap fees, encouraging trades that help maintain a good mix of different LSTs, ensuring that both new and old tokens can grow and provide good returns.

The allocation strategy of the Infinity pool encourages the creation of new LSTs, reserving 20% of the pool for new, approved LSTs. Each new LST requires at least 1000 SOL and is adjusted based on its holding value and recent earnings. The remaining 80% of the pool is used for a mix of existing LSTs and trading rewards, aimed at achieving diversified yields and high trading volume, with allocations based on the holding value of each LST. Future adjustments will consider earnings and support for smaller LSTs.

Validator LST

Validator LST is a token that represents the staking relationship between users and specific validators. These tokens appreciate as staking rewards accumulate, providing a flexible and efficient staking method.

When staking SOL traditionally, it is necessary to create a staking account and delegate it to a validator. Unstaking requires deactivating the account, which takes some time. In the liquid staking version, when SOL is deposited into the validator's LST pool, the system will create and delegate a staking account for the user and issue validator LST that represents the stake.

Advantages of Validator LST:

• Help validators stand out by issuing their own tokens and providing unique rewards.
• Allow stakers to participate in a wider range of DeFi space, providing more reward opportunities.
• Reduce the demand for creating liquidity pools, allowing new and smaller validators to compete with large validators.
• Simplify the staking process, provide instant exchange, and avoid the long waiting period for unstaking in traditional methods.

The Reserve( Reserve Pool)

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

Users typically have two ways to redeem LST:

1. Disable the stake account and wait 2-4 days to receive SOL
2. Trade LST on the DEX immediately to obtain Liquidity

The Sanctum reserve pool simplifies this process, allowing users to immediately exchange LST for SOL. The reserve pool then deactivates the stake account and retrieves SOL after the cooling period. It operates by accepting staked SOL and returning SOL, then unstaking the SOL at the end of each epoch to replenish the reserves.

The reserve pool also supports various DeFi protocols, allowing them to accept any LST as collateral, enhancing the utility and adoption rate of LST.

More importantly, the reserve pool helps smaller validators compete more easily with larger validators by providing a shared source of Liquidity, promoting the decentralization of the network. This democratizes staking, offering users more choices and higher returns.

The Router( Router)

The Router of Sanctum is a tool that simplifies the exchange between different LSTs on the Solana blockchain.

A staking account is a locked SOL account that users delegate to validators. When staking SOL or depositing it into LST, a staking account managed by the pool is created. Previously, the liquidity of LST was limited to its specific pool, and shallow pools made it difficult to quickly convert LST into SOL, reducing its effectiveness in DeFi.

Sanctum's router enables seamless exchanges between any LST by moving staking accounts between pools, unifying the liquidity of all LSTs. Sanctum charges a fixed fee of 0.01% for every LST to SOL exchange made through the router.

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

Comparison of Sanctum and Mainstream Platforms

Sanctum vs Lido

A certain trading platform has become a dominant force in the Ethereum staking ecosystem. Currently, 27% of ETH is staked, with nearly 30% deposited into this platform, amounting to a total locked value of approximately $35.5 billion ( TVL ), far exceeding the second largest staking protocol's $4.6 billion. The platform's TVL accounts for over half of the total staking value in Ethereum, and nearly one third of the total TVL in all on-chain DeFi.

The platform's liquid staking tokens have become a key element of the Ethereum ecosystem, regarded as the "dollar of staking assets." Their high liquidity has attracted a large number of users, enhancing its dominance. However, this concentration of power has also raised concerns, as the platform controls approximately 30% of staked Ethereum, which could have a significant impact on the network's decentralization.

In contrast, Sanctum has taken a different approach on Solana. They recognize that LSTs are essentially interchangeable, merely a packaging of staking accounts. This insight has shifted their strategy towards fostering a multi-LST environment, rather than 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 fostering collaboration, Sanctum hopes to establish a more decentralized and inclusive staking environment on Solana, with the potential to surpass the staking landscape of Ethereum in terms of innovation and participation.

Sanctum vs Jito

Jito is a Solana native protocol that gained significant attention through an airdrop in 2023. Since then, it has utilized its governance token JTO to incentivize liquidity and integration with other major Solana protocols, thereby dominating Solana's LST market.

Main features of Jito:

• JitoSOL is the leading LST on Solana, with the highest APY, TVL, and trading volume in a certain liquidity vault.
• Collaboration with multiple top-tier protocols enhances its ecosystem presence. Through a certain cross-chain bridge, Jito is expanding its influence to other chains, increasing the utility of JitoSOL.
• Jito excels in maximizing extractable value ( MEV ) through its innovative Solana client and blockchain engine, and this technological advantage allows it to offer higher stake rewards and optimize transaction ordering.

Although Jito's growth is similar to that of a certain platform on Ethereum, it has also raised concerns about how its dominance might 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 aggregates liquidity from various trading pairs, enhancing liquidity and reducing slippage risk.
• The reserve pool and router facilitate instant unstaking services and efficient LST token exchanges, supporting liquidity and stability.

Investment Analysis of Sanctum

Bullish Factors

1. Sanctum's unique reserve and router approach offers users a capital-efficient way to redeem and exchange LST, enhancing liquidity and user appeal.

2. The Sanctum reserve pool has over 200,000 SOL( with a liquidity of approximately 30 million USD), ensuring instant redemption for LST holders and reducing slippage, making it an attractive option for users.

3. By lowering the threshold for creating LSTs, Sanctum enables smaller validators to issue their own tokens, promoting decentralization and increasing validator competition within the Solana network.

4. Sanctum's TVL has grown to over $700 million, making it the fourth largest protocol on Solana, indicating strong market acceptance and trust.

Bearish Factors

1. Despite the innovation, Sanctum faces fierce competition from established players like Jito, which has dominated the LST market on Solana.

2. The success of Sanctum is closely related to the growth and stability of the Solana ecosystem, which has experienced fluctuations and infrastructure challenges.

3. Although Solana currently does not implement cuts, the potential introduction in the future may pose risks to validators and stakers, affecting the attractiveness of staking and LST.

4. The unique mechanisms of Sanctum's reserves and routers, while innovative, may face challenges in user understanding and adoption compared to simpler staking solutions.

5. Like all crypto protocols, Sanctum also faces regulatory scrutiny and potential legislative changes that may impact its operations and the broader liquid staking environment.

Future Outlook

In the upcoming follow-up research report, we will delve into all liquid staking tokens within the Sanctum ecosystem. We will provide a concise comparison, analyzing the risks and potential staking advantages of each LST. Additionally, we will share insights and opinions on the future of this innovative project.

Our research will delve into how innovative features like the Sanctum router operate within a broader blockchain environment, and the potential impact they may have on the Solana ecosystem and the entire cryptocurrency industry.

![SANCTUM Project Research (1): New Stars of Staking and Re-staking on Solana](