Liquid staking and liquid restaking is becoming popular in the DeFi area. A lot already has been written on this issue. But untill recently the attention was mostly on its use in the Ethereum ecosystem and the growing number of liquid restaking protocols
in this area. But that is changing now that also Solana has entered the arena. Long time dominated by Ethereum, Solana’s liquid staking and restaking landscape is growing and diversifying at an astonishing rate.
In this blog we will explore in short what liquid staking and liquid restaking is, describe the Solana restaking ecosystem system in general, the various Solana liquid staking and restaking protocols, new noteworthy projects that are entering the Solana
stage and what this will mean for DeFi.
Understanding liquid staking and restaking
Although the focus in this blog will be on Solona’s restaking and liquid restaking activities it is good to give some background of their origin. We should go back to 2022 when Ethereum changed from Proof of Work (PoW) to Proof of Stake (PoS) blockchain,
when staking was introduced.
Staking has emerged as a cornerstone practice in the DeFi Sector by allowing participants to lock up their tokens ETH or SOL to support PoS network security and receive rewards in return. Staking thereby serves as the backbone of its validation process and
consensus mechanism. However, traditional staking often requires tokens to be locked up and illiquid until the end of the staking period, limiting their liquidity and usability.
This is where liquid staking comes into play, offering a flexible alternative. Liquid staking is aiming to enhance capital efficiency: instead of just locking SOL in a staking contract. Liquid staking essentially transforms staked assets into a fungible
token. Stakers get a liquid staking token (LST) that one can trade, use as collateral, or even lend out, to further deploy in DeFi protocols for additional yield―hence the name liquid. In the context of Solana, users can stake their SOL tokens and receive
(staked SOL) tokens in return when they staked, which they can use within the Solana ecosystem.
This was followed by the concept of restaking, aimed to maximize blockchain investments further. Restaking not only boosts the utility of staked assets but also amplifies potential rewards. Liquid restaking is a step further. At its core it allows stakers
to earn additional rewards by reusing their staked assets across different protocols. Liquid restaking allows users to stake their LSTs, receiving a second “layer” of tokens (Liquid Restaking Tokens) that can also be used in DeFi. This process, which involves
locking up staked assets in actively validated services (AVSs), enhances capital efficiency and offers new avenues for earning yield.
Shift from Ethereum to Solana
Restaking and liquid restaking was initially popularized on the Ethereum blockchain through innovative platforms like EigenLayer, Symbiotic, Enzo, Ether.Fi and others. On Ethereum, restaking transformed how assets could be leveraged, allowing staked ETH
to secure multiple protocols, thereby enhancing capital efficiency and network security.
But the focus has since shifted to Solana, with a number of notable projects seeing the light. Solana is a high-performance layer-1 blockchain renowned for its exceptional speed and scalability. Designed to support decentralized apps and crypto-currencies,
Solana leverages innovative technologies.
Beyond the traditional Solana staking, like staking SOL in Phantom wallet, where assets are locked into a single protocol to maintain network integrity and earn rewards, Solana liquid staking and recently also liquid restaking leverage already staked assets
to secure multiple protocols simultaneously, enhancing capital efficiency and security while offering higher potential returns across the network.
Validators, who play a crucial role in network security, can now utilize a portion of their staked SOL to secure other protocols or earn additional rewards. Smart contracts manage these assets under the umbrella of liquid staking and liquid restaking agreements.
Solana’s liquid staking and liquid restaking ecosystem
Solana is home to thousands of powerful and user-friendly web3 apps ranging from payments, NFTs to Decentralized Finance (DeFi). Designed to offer a similar experience to Ethereum while offering a few key improvements, Solana offers near-instant transactions
and low fees. SOL, the native token of Solana, is used to transfer value and pay for transaction fees throughout the Solana ecosystem.
Though liquid staking and liquid restaking are still developing concepts, Solana is increasingly emerging as a major force in the liquid staking and restaking market in recent months, gradually turning into a significant player of this game.
Solana’s ecosystem has seen a significant development as many projects have emerged in different verticals across Web3 including liquid staking and liquidity restaking protocols.
While Solana’s liquid staking ecosystem continues to grow and generate interest from major players in the industry, liquid restaking protocols are gaining growing popularity in the Solana ecosystem. They combine contributions to network consensus security
with financial flexibility, making them an attractive option for savvy investors looking to maximise their profits.
Liquid staking and liquid restaking protocols on Solana
The Solano network has already attracted a number of prominent liquidity staking and liquid restaking protocols. This year recent names like Jito, Solayer, and Picasso entered the Solana market, and this number is expected to further grow in the coming months.
These protocols are not just enhancing the value and utility of the SOL token but are also crucial in driving forward the innovation and security of the Solana blockchain. Their contributions help shape a more interconnected and robust ecosystem, paving
the way for new applications and greater adoption.
The potential use cases of liquid staking and liquid restaking are vast and transformative. For one, it could facilitate cross-chain DeFi activities. Users could potentially use their staked assets from one blockchain to participate in DeFi protocols on
another chain.
Liquid staking could further 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.
Jito
Jito is at the forefront of Solana’s restaking and liquid restaking innovation, working to establish a robust service. Jito is the largest Solana liquid staking protocol that allows users to stake their SOL tokens and receive liquid staked tokens in return.
With a focus on performance and scalability, Jito has quickly become a prominent player in the Solana staking ecosystem.
Jito’s platform is designed to optimize yield generation while maintaining the security and decentralization of the Solana network. Jito distributes both staking and MEV (maximum extractable value) rewards to holders through its liquid staking token (LST)
JitoSOL, commanding around 50% of the Solana market with its LST.
JitoSOL is widely integrated into Solana’s DeFi ecosystem, being a popular asset for lending, borrowing, and leveraged strategies. Their deep integration with Solana’s infrastructure makes them a pivotal player in the ecosystem.
In late July, Jito introduced Jito Restaking, a multi-asset service consisting of two key components: the Vault Program and the Restaking Program. Vaults are designed for operations with liquid restaking tokens (VRTs) by Node Consensus Operators (NCN), including
their minting, burning and delegation across operators, as well as customizing slashing conditions for risk management. By allowing SOL holders to restake their assets, Jito not only boosts the economic utility of the SOL token but also reinforces the network’s
overall security.
The Restaking Program, on the other hand, serves as a unified interface for a wide range of operations. It supports both staking and restaking, allowing users to manage NCNs, enhance token utility, establish insurance funds, and scale base layers. Essentially,
it’s a one-stop shop for maximizing the efficiency of AVSs while improving staking versatility.
Having recently pioneered Liquid Restaking services on the network, Jito is establishing itself as the market leader in yet another niche of Solana DeFi. Through its growing number of partnerships with Enzo and Fragmentric, Jito is establishing itself as
the first port of call for liquid restaking on Solana. This represents a significant growth opportunity for the protocol.
Solayer
Solayer, launched in May, is another Solana-native restaking protocol, focusing on creating a network of app-chains secured through Solana’s economic security. Similar to Jito, Solayer has enjoyed consistent growth in recent months.
Solayer facilitates efficient workload distribution and customized service delivery, especially useful as Solana’s ecosystem expands with Layer 2 solutions and appchains.
Their innovative approach includes actively validated services (AVSs) that enhance the security of Solana’s infrastructure, including strategies around MEV (Maximal Extractable Value), distributed computing, and oracle networks.
Endogenous Actively Validated Services (AVSs), or endoAVS, allows a Solana-native dapp to optimize network operations according to its stake size, ensuring faster and more reliable user transactions. By doing so, Solayer Labs enhances the scalability and
efficiency of the Solana network, catering to the needs of sophisticated dApp developers and institutional players.
By operating as the decentralized cloud infrastructure, Solayer enables application developers to achieve higher degrees of consensus and blockspace customization, facilitating sophisticated applications with greater scalability.
As Solana aims to become the backbone of future decentralized networks, Solayer is poised to be a pivotal platform supporting the growth and complexity of next-generation web applications.
Picasso
Initially targeting the Solana-Cosmos bridge, Picasso is now evolving into a restaking hub. Unlike EigenLayer, Picasso has been striving to build a “generalized” restaking service, which allows for restaking assets across multiple chains.
This comprehensive restaking hub supports other teams and builders looking to secure their crypto projects on Solana, demonstrating a practical application of restaking in enhancing inter-blockchain security and cooperation. Picasso’s initiative is underpinned
by comprehensive security audits, ensuring the platform’s reliability and the safety of users’ investments.
Picasso is pioneering the integration of Solana with the Inter-Blockchain Communication (IBC) protocol, now connecting to the Cosmos ecosystem. Picasso’s Generalized
Restaking Layer and Inter-Blockchain Communication (IBC) enhance the utility and security of connected chains, facilitating liquidity exchange and expanding the restaking options for Solana’s native SOL token and various receipt tokens, enhancing both utility
and security across interconnected blockchains. This not only supports novel applications and facilitates liquidity exchanges across blockchains but also provides users with compounded yields from staking activities.
As Picasso continues to expand its staking solutions, it actively contributes to the growth of the DeFi ecosystem, making it a key player in Solana’s restaking landscape.
Other Noteworthy Projects
And there are a growing number of noteworthy projects focusing on liquid restaking still to be launched such as Cambrian, Fragmetric’s fragSOL and Enzo’s ezSOL
Cambrian
Cambrian is emphasizing on developing a modular restaking layer for Solana to enhance resource allocation and reduce costs, benefiting decentralized oracles and AI applications. Cambrian thereby seeks to replicate the success of Ethereum’s EigenLayer by
adapting its restaking model to Solana’s unique architecture. In this framework, SOL holders validate new software modules being developed on the network.
This approach facilitates off-chain computation and zero-knowledge proof processing, thereby expanding Solana’s utility beyond simple transaction processing. Cambrian is expected to launch its testnet version by the autumn of 2024.
With a focus on security layers for various middleware applications, Cambrian positions itself as a decentralized equivalent to major cloud service providers, such as Amazon Web Services (AWS). This approach is likely to position Cambrian as an on-chain
alternative to traditional cloud providers, offering a unique value proposition within the Solana ecosystem
Renzo ezSOL
Renzo, a prominent Ethereum-based liquid restaking protocol, has officially expanded into the Solana-focused liquid restaking space. The significance of this step is further exemplified by the recent growth in Solana’s liquid staking sector.
On August 14, Renzo announced the launch of ezSOL, a liquid restaking token (LRT) designed to enhance staking rewards and liquidity within Solana’s ecosystem. Renzo’s ezSOL liquid restaking token can be used across various Solana–based DeFi
protocols, enabling users to increase their rewards.
Renzo partners with Jito to launch the new LRT token. Renzo will thereby serve as the inaugural liquid restaking protocol on the Jito (re)staking platform. It provides users with yield generated fromJito‘s
infrastructure alongside the additional tokens generated from staking and restaking.
The ezSOL token allows users to mint ezSOL by leveraging JitoSOL, powered by Jito’s Maximum Extractable Value (MEV)-enhanced validator network. By integrating with Jito’s MEV network, ezSOL offers a unique advantage: compounding rewards from staking, restaking,
and MEV extraction. This means higher potential rewards for users, making ezSOL a powerful tool in any DeFi strategy.
By leveraging Jito’s unique restaking architecture, Renzo is creating a more capital-efficient liquid staking derivative that can serve as a building block for complex DeFi strategies on Solana. Renzo’s expansion into Solana also solidifies its position
as a major player in the liquid restaking market
Fragmetric fragSOL
A few days after Renzo launched its liquid restaking token ezSOL on Jito, Fragmetric, a Solana-native restaking protocol, announced the launch of its liquid restaking token $fragSOL, in collaboration with Jito. The new token is based on Jito’s (Re)staking
Vault Receipt Token (VRT) and aims to improve liquidity and composability for staked SOL assets.
Fragmetric’s approach to restaking is built around maximizing yield while minimizing the risks associated with slashing and reward distribution and unlock new possibilities for DeFi participants on the platform..
One of the key features of fragSOL is its use of Solana’s token extension, which enables advanced functionality such as the transfer hook, allowing Fragmetric to manage reward distribution by ensuring that rewards are allocated based on how long a user holds
their fragSOL tokens. This differs from Ethereum-based liquid restaking protocols contend with issues related to the effective distribution of AVS rewards
Via this approach fragSOL has the potential to become a cornerstone of Solana’s staking ecosystem.
Crypto exchanges entering into the Solana Liquid Staking market
Despite Jito is leading Solana’s liquid staking ecosystem, its dominance is expecting fierce competition from centralized crypto exchanges.
On 29 August, a number of top crypto exchanges such as Binance, Bybit and Bitget hinted at plans to launch their own liquid staking tokens (LST) for the Solana blockchain. With names like BNSOL (Binance), bbSOL (Bybit) and BGSOL (bitget). Sanctum, a liquid
strike layer on Solana, has suggested that these LSTs will be built on its protocol.
For these exchanges, the introduction of LSTs offers a new revenue stream as these tokens expand their product offering. Stakers earn rewards, while exchanges charge fees. These tokens will allow holders to earn returns on their Solana (SOL) holdings while
participating in decentralised finance (DeFi) activities such as lending and borrowing. They also help secure the blockchain through staking.
Binance is expected to launch its BNSOL in September 2024
As Solana continues to attract attention with its innovative staking solutions and active user community, the introduction of new LSTs by these major exchanges is set to enhance the network’s appeal further. This potentially signal a major expansion of Solana’s
liquid staking ecosystem.
Updating Solana liquid staking infrastructure
This month Solana has introduced significant updates to its liquid staking infrastructure. These aim to broaden the reach and integration of liquid staking derivatives within Solana’s growing DeFi ecosystem, thereby improving usability and expanding liquidity
options.
This update marks a new phase for Solana’s staking system, as it enables users to leverage liquid staking tokens in more advanced DeFi strategies, such as leveraged trading and collateralized lending. These updates enhance the ability of users to trade,
lend, or use their liquid staking tokens in various DeFi protocols, all while continuing to earn staking rewards. Further on they include expanded support for developers looking to build on the liquid staking framework.
This update move may attract more DeFi developers and users to its ecosystem, especially as competition with Ethereum and other blockchains may intensify. These developments indicate that Solana is not only maintaining its momentum but also laying the groundwork
for sustained growth and adoption in the rapidly evolving crypto landscape.
Strong growth potential for the Solana liquid staking market
While the Solana liquid restaking segment is still in its early stages, data from its liquid staking segment however marks a promising future. The Solana blockchain has seen substantial growth in its liquid staking sector this year, reflecting the ecosystem’s
growing demand for novel staking solutions, and highlighting the maturing of Solana’s market.
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.
The total value locked (TVL) in Solana’s liquid staking protocols has more than doubled since January 1, soaring from $1.9 billion to $4.1 billion at the time of writing. Nevertheless this is only 10%% of the USD 42,5 billion locked across all liquid staking
protocols, while Ethereum’s liquid staking ecosystem commands an 83% market share.
While still much smaller than Ethereum, Solana’s sector is showing strong growth potential.
The way forward: advancements in the DeFi space
Liquid staking and liquid restaking is becoming a critical component in the Solana DeFi space, offering solutions to the problem of illiquid staked assets.
The introduction of liquid restaking tokens like Renzo’s ezSOL and Fragmentric fragSOL marks a pivotal moment for the Solana blockchain and represents a significant advancement in the DeFi space. By introducing the first liquid restaking tokens on Solana,
these pioneers have set a new standard for liquid staking and reward optimization.
As the DeFi landscape continues to evolve, liquid restaking tokens will play an increasingly important role in optimizing staking yields and enhancing the overall efficiency of decentralized finance. Solana’s recent updates aim to make liquid staking and
restaking more attractive by providing stakers with more ways to utilize their assets without sacrificing staking rewards.
These innovative steps show Solana’s commitment to building a flexible, user-friendly DeFi ecosystem, leading to higher participation in liquid staking and restaking and more liquidity, contributing to the robustness and versatility of the Solana ecosystem.
Embracing these innovations and staying ahead of trends will be key to thriving in the dynamic world of DeFi.
By continuing to innovate and improve its liquid staking and restaking infrastructure, Solana is positioning itself well as a top contender in the DeFi market, able to compete with other major blockchains such as Ethereum.