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13 min read · Feb 19, 2024
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Introduction
Liquid staking is a big concept in the world of crypto, Solana allows individuals or entities — known as “stakers” — to lock up a certain amount of SOL or any other token supported by Solana directly with validators as collateral to support its consensus mechanism. This process is referred to as “staking.”
In return for their participation, stakers can earn yield on their staked SOL, in addition to staking rewards. Staking rewards are typically distributed in the form of additional tokens. The amount of rewards you earn may depend on factors such as the duration of your staking and the amount of SOL you’ve staked.
Let’s explore the concept of liquidity staking. However, for the sake of Newbies in Crypto space, let me give a brief overview of Solana ecosystem.
Solana Ecosystem?
Solana is a fast, secure, and censorship-resistant blockchain providing the open infrastructure required for global adoption. It’s designed for fast processing times with high throughput, making it an attractive option for decentralized applications.
It was founded in 2017 by Anatoly Yakavenko, Solana is a decentralized, fast-growing layer-1 blockchain known for speed. Designed to offer a similar experience to Ethereum while offering a few key improvements, Solana offers near-instant transactions and low fees( approximately less than $0.01 per transaction).
The native token of Solana is SOL. It’s used to transfer value and pay for transaction fees (gas fees) throughout the Solana ecosystem. Solana is home to thousands of powerful and user-friendly web3 apps ranging from payments, NFTs, Decentralized Finance (DeFi), and games.
With this brief understanding of what Solana Ecosystem, let’s now introduce the general concepts of liquid staking using solBlaze as our reference for a good staking platform on Solana
Understanding Liquid Staking
Staking involves locking up a certain amount of cryptocurrency tokens (bSOL) to support the operations and security of a blockchain network.
Liquid staking is a protocol that allows users to stake their tokens and earn staking rewards without locking up their assets. This process involves depositing your SOL into a smart contract, which in turn, mints an equivalent amount of staking tokens (bSOL) or points.
Liquid staking essentially transforms your staked assets into a fungible token that you can trade, use as collateral, or even lend out. This is a huge advantage over traditional staking, where your assets are often locked up and illiquid until the end of the staking period.
Here, when a user stakes their assets, they receive a token in return that represents their staked assets and any potential rewards. These tokens are liquid, meaning they can be traded, lent out, or put to use in other decentralized finance (DeFi) protocols. In the context of Solana, users can stake their SOL tokens and receive bSOL (staked SOL) tokens in return when they staked on SolBlaze, which they can use within the Solana ecosystem.
From my research, there are basically four types of staking, i want to highlight this for the sake of Crypto Enthusiast. These includes
Liquidity Staking
Pool staking
Exchange staking
Delegated Staking… click here to learn more about staking types
I will be introducing several staking platforms as we proceed, especially for the benefit of newcomers in the space.
Solana Liquid Staking in Practice
Several platforms enable liquid staking on Solana, including solBlaze.org, Marinade Finance, Meteora, Marginfi, Kamino Finance and others. When a user stakes SOL through these platforms, they receive the native version of the staked SOL in terms of solBlaze, they receive bSOL tokens but for other protocols such as Kamino, Marginfi and others, they will receive points which will be converted to the native token of that protocol.
These tokens represent the user’s staked SOL and can be freely moved and used in DeFi applications, thus allowing users to earn yield from staking and DeFi simultaneously.
Staking in practice involves
Liquid staking is quite simple. Most staking pools have a web interface that allows you to deposit SOL in exchange for a liquid stake token. Let’s explore it using solBlaze.
First, go to solBlaze’s Staking page and connect your wallet (any Solana wallet such as Phantom, Solflare and other Solana supported extensions etc)
Enter the amount of SOL you wish to stake, then you will receive the equivalent amount of bSOL. Initially, 1 bSOL cost 1 SOL, Since the value of staked SOL increases over time, the price of bSOL has increased, so our 1 SOL is only yielding about 0.9 bSOL(according to the image below)
Click “Stake” and confirm the transaction in your wallet:
Once the transaction is confirmed, you should see your bSOL balance in your wallet as a liquid SPL token!
Finally, you should see your bSOL balance reflected on solBlaze Unstake page. The underlying staked assets still contribute to the consensus mechanism of the blockchain network, ensuring the security and decentralization of the network.
Why You Should Liquid Stake Your SOL.
What do you think about Liquid Staking, is there any advantage attached to this, Let’s find out.
In traditional staking methods, your assets are locked for a certain period, during which you cannot access or utilize them. This can be particularly inconvenient in a volatile market where asset values can fluctuate widely. But with the help of Liquid staking, the problems are solved by giving you tokens that represent your stake, allowing you to freely trade or transact with them. This is not all but the tip of the iceberg.
Here, our major Liquidity staking protocol is solBlaze, so lemme just highlight why you need to stake your SOL on solBlaze Platform.
Maintaining Liquidity: Unlike traditional staking, where your tokens are typically locked up and not easily accessible, liquid staking provides a way to maintain liquidity. This means you can still use or trade your staked SOL while earning rewards. It offers flexibility and the ability to participate in various decentralized finance (DeFi) activities. is this not amazing, anyways that’s not all..
Diversification: Liquid staking pools allow you to stake your SOL across a set of validators. This is important for users who want to diversify their staking risk.
Community and Network Engagement: Joining a stake pool allows you to become part of a community of like-minded individuals who share an interest in supporting the Solana network. It’s an opportunity to engage with other community members, learn more about blockchain technology, and stay informed about network developments.
Enhanced Security and Consensus: By staking with a stake pool, you contribute to the security and consensus mechanisms of the Solana network. Stake pools are groups of validators working together, and your staked tokens help secure transactions and maintain the integrity of the blockchain. Because many liquid staking pools stake across a set of validators, liquid staking can support network decentralization and overall network security.
SolBlaze Stake Pool Delegation Strategies
Stake pool delegation in solBlaze presents a unique opportunity for holders of bSOL to participate in network governance and earn rewards. Rather than validating transactions and creating blocks themselves, these holders can delegate to a solBlaze pool, which performs the work on their behalf.
This model is prominent in Proof of Stake (PoS) blockchain systems like Ethereum 2.0, Polkadot and others. The main advantage of stake pool delegation is that it allows holders who lack the technical expertise or equipment to participate in the consensus process and earn rewards. The pool, in turn, takes a small commission from these rewards as compensation for their service.
There are lots of validators in solBlaze where one can stake their bSOL (about 280), User-controlled delegation systems provide users with the autonomy to choose the stake pools they want to delegate their bSOL to. This system encourages competition among stake pools, as they must offer attractive conditions to win over delegates.
SolBlaze’s delegation strategy focuses on supporting the decentralization efforts within the Solana network while ensuring optimal staking rewards to users.
Exploring the Use of Liquid Staked Tokens in the DeFi Ecosystem
Liquid staked tokens, are tokens that represent a staked position in a Proof-of-Stake (PoS) blockchain protocol. There are three different ways liquid staked tokens are used within the DeFi ecosystem.
Staking and Yield Farming
Staking is the process of participating in a PoS consensus protocol by locking up tokens and helping to validate new transactions. bSOL allow users to leverage their staked position in different ways. One of these is through yield farming. Yield farming involves lending out your tokens to earn a return on them. By using liquid staked tokens, you can stake your tokens in solBlaze and still use them to earn yields in DeFi protocols such as Kamino, Meteora, marginfi and others that are associated with bSOL.
Some of these protocols are shown in the image below
Collateralization in DeFi Lending Protocols
Another common use of liquid staked tokens is as collateral in DeFi lending protocols. Normally, when you stake tokens in traditional stake pools, they are locked up and can’t be used for anything else. However, with liquid staked tokens like bSOL, you can mint new tokens that represent your staked position using some of the protocols in the image above. These new tokens can be used as collateral to take out loans on DeFi lending protocols. This allows users to leverage their staked tokens, increasing their capital efficiency. Some of the protocols are also in the image above
Airdrop Strategies and Incentives Mechanism
Airdrop strategies and incentive mechanisms are key components that engage and reward participants in the liquid staking ecosystem. These strategies aim to attract and retain users, fostering a vibrant and participatory community.
Airdrop Strategies in Liquid Staking
Airdrops represent a popular method of distributing tokens to the community, and they have a crucial role in liquid staking protocols. The strategy behind an airdrop can significantly impact the success of a liquid staking protocol.
A well-executed airdrop strategy can foster decentralization, increase community engagement, and stimulate network security. Common strategies include distributing tokens proportionally to the stake size, rewarding early adopters, or focusing on users who actively participate in the network’s security.
Some of the airdrop strategies include
Protocol Launch Airdrops: When a new liquid staking protocol or platform is launched on Solana, developers often distribute free tokens (airdrops) to early adopters and participants.
Users may be required to stake a certain amount of tokens or engage in specific activities within the protocol to qualify for these airdrops. Protocol launch airdrops not only reward early supporters but also serve as a promotional strategy to encourage broader adoption.
Community Engagement Airdrops: Some projects conduct airdrops as a way to reward and foster engagement within their community. Users might be eligible for airdrops based on their level of participation in the project, such as active staking, governance involvement, or holding a minimum amount of tokens.
Referral Program Airdrops: To stimulate growth, some projects implement referral programs where existing users are rewarded with airdrops for bringing in new participants. This strategy leverages the network effect, incentivizing users to spread the word and increase the overall user base. solBlaze incorporates this as part of their reward strategies because any individual that stakes on solBlaze pool has a referral code which can be used to invite another person to participate in the contest.
Rewards and Incentives Mechanisms in Liquid Staking
Rewards and incentive mechanisms are important in liquid staking to motivate stakeholders to participate actively in securing the network. These mechanisms can range from staking rewards, where stakeholders receive a proportion of newly minted tokens, to incentive programs that reward stakeholders for participating in governance decisions. solBlaze has a reward for participants though it is coming soon
Loyalty Programs: Some platforms introduce loyalty programs where users earn additional rewards for continued participation in liquid staking. Users may progress through tiers, unlocking progressively higher rewards based on the duration or consistency of their staking.
Governance Token Distribution
Active Participation: Users engaging in governance activities, such as voting on proposals, may receive governance tokens as rewards.
Encouraging Early Liquidity: This strategy aims to boost liquidity and participation from the outset.
Participation in Ecosystem Development: Participants contributing to the development or improvement of the liquid staking ecosystem may receive additional rewards.
Economic Implications of Liquid Staking Protocols for Validator Operators
Liquid staking has significant economic implications for validator operators. On the positive side, it can attract more stakeholders to the network, increasing the pool of staked tokens and thereby enhancing network security. However, it also introduces new challenges. As stakes become liquid, validators may face increased competition, as stakeholders can easily switch to other validators.
Let’s explore the economic implications of liquid staking protocols specifically from the perspective of these key network participants.
Increased Token Liquidity: Validator operators traditionally face a liquidity challenge as their staked tokens are often locked up for a specific period. Liquid staking protocols introduce the advantage of increased token liquidity, enabling validator operators to trade or use their staked tokens more freely.
Optimizing Operational Efficiency: Liquid staking allows validator operators to allocate their capital more efficiently. Instead of having a significant portion of tokens locked in staking, they can use liquid staked tokens to cover operational costs or invest in additional infrastructure to enhance their performance. Validators can potentially reduce opportunity costs associated with having tokens locked for extended periods, contributing to overall operational efficiency.
Delegator Attraction and Competition: As liquid staking introduces more flexibility and liquidity, validator operators may find themselves in increased competition to attract delegations. The ability to offer a user-friendly and customizable liquid staking experience becomes a competitive advantage.
Operators may differentiate themselves by implementing unique features, user-friendly interfaces, or competitive fee structures to attract and retain delegators in a more dynamic environment.
Risk Management Strategies: Validator operators can actively manage their exposure to market risks with liquid staking. The ability to trade or use staked tokens in response to market conditions allows for more dynamic risk management strategies.
In a rapidly changing crypto landscape, operators may adapt their strategies more effectively with liquid staking, responding to market trends and adjusting their operational approach accordingly.
Impact of Liquid Staking on Solana
The growth trajectory of the liquid staking on Solana is marked by various milestones, trends, and transformative dynamics that shape the landscape has seen significant growth in the last few months. They have a 341.2M TVL. (as at Feb 2024)
Pioneering Initiatives and Protocols: In the initial stages, pioneering projects and protocols laid the foundation for liquid staking on Solana. Early initiatives like BlazeStake and bSOL Custom Liquid Staking paved the way, introducing users to the concept of staking flexibility.
Diversification of Liquid Staking Solutions: Over time, the Solana ecosystem witnessed a diversification of liquid staking solutions. Multiple protocols and platforms emerged, offering users a range of options for staking their SOL tokens in a liquid form. This diversity provided users with choices that align with their preferences and risk tolerance.
Enhancements in User Experience: The growth of the liquid staking ecosystem on Solana is closely tied to the integration of user-centric features. Platforms introduced customizable staking parameters, user-controlled delegation systems, and other functionalities to enhance the overall experience for stakers.
Incentive Mechanisms and Rewards Programs: Evolution of Incentives: To attract and retain users, liquid staking protocols implemented evolving incentive mechanisms. These may include airdrop strategies, bonus rewards, and loyalty programs designed to encourage ongoing participation and engagement. They are issuing an aggressive liquidity mining program for people who stake and use bSOL in DeFI This will continue for the next couple months and will continue to incentivize growth.
Liquid Staking’s Impact on Solana Defi Protocol
using solBlaze our case study
Solana ecosystem has seen tremendous growth in liquid staking over the past few months, from the image bellow.
This breakthrough has increased the overall liquidity in Solana’s DeFi ecosystem, enabling more users to take part in lending, borrowing, yield farming and other DeFi activities. This symbiotic relationship between staking and DeFi has boosted the utility and value proposition of Solana.
lets narrow this down to BlazeSatke which is major product from SolBlaze. this is one of the major platform on solana that facilitates Liquid staking and DeFi activities. From Defillama analysis, they are the current 3rd largest liquid staking protocol on Solana.
Let’s analyse how Blazestake turn out to be one of the highest liquid protocol on Solana.
The TVL growth has been very strong for 6 consecutive months, their APY (Annual Percentage Yield) is currently one of the highest among the top contenders. The number of validators in their protocol is greater than the number of validators on other top contenders.
The impact of BlazeStaked cannot be over emphasised because its exponential growth is already a testament to their thriving community.
The second phase of the community which is the stakers, can engage in governance activities within DeFi protocols. By staking and providing input on protocol decisions, users may receive governance tokens, influencing the direction of the DeFi ecosystem on Solana.
Potential Use Cases of Liquid Staking
The potential use cases of liquid staking are vast and transformative. For one, it could facilitate cross-chain DeFi activities. With liquid staking, users could potentially use their staked assets from one blockchain to participate in DeFi protocols on another chain.
Liquid staking could enable new financial products such as staking derivatives, which allow users to trade future staking rewards. Furthermore, liquid staking could underpin the development of insurance products within the DeFi space, providing coverage for staked assets against slashing risks.
Summary
This article explained the numerous advantages of staking your SOL in solBlaze.org. Don’t merely let your SOL sit idle in your wallet without generating any profit. Instead, opt to stake it in solBlaze, where your SOL will accrue additional value over an extended period. By actively participating in the staking process, you can maximize the potential returns on your investment and ensure long-term financial growth.
Do not procrastinate, the time is now click HERE to get started
Reference
https://www.quicknode.com/guides/solana-development/getting-started/liquid-staking
https://twitter.com/airtightfish/status/1737925583621800022
https://www.coingecko.com/en/coins/blazestake-staked-sol
https://defillama.com/protocols/Liquid%20Staking/Solana
Solana Blockchain.com Meteora
