The Rise of Solana LST: How Sanctum Can Close the Gap with Ethereum?

Original author: Sonya Kim

Original translation: TechFlow

Background (LSTs on Solana and Ethereum)

Liquidity Staking Tokens (LSTs) on Solana have never been as successful as on Ethereum. For example, Lido tried to expand on Solana, but withdrew in October 2023 due to lack of user traction. LSTs on Ethereum have a higher market share, accounting for 32% of all ETH staked. Ethereum's staking ratio is about 28%, so LSTs account for less than 10% of ETH's total market value. In contrast, Solana has a higher staking ratio of 67%, but LSTs only account for about 6% of the market share, accounting for a little more than 4% of SOL's total market value.

Source: Dune Analytics (hildobby_, andrewhong5297, 21shares)

The lower market share of LSTs on Solana may be due to the following reasons:

1. The native staking process on Solana has less friction:On Ethereum, the existence of staking and withdrawal queues makes liquidity and LSTs very valuable because the timing of staking and withdrawal is uncertain. In contrast, Solana's native staking has an activation/deactivation cycle of about 2.5 days, so there is less friction, which makes the advantage of LSTs over regular staking potentially less obvious.

2. Solana’s lending market is not mature enough: Although Ethereum’s market cap is 3.8 times that of Solana, the total locked value (TVL) of Aave, the largest lending protocol on Ethereum, is 8.5 times that of Kamino, the largest lending protocol on Solana. The relative immaturity of lending protocols on Solana means that leveraged staking via LSTs is not as widely used on Solana as it is on Ethereum.

LSTs on Solana

· Although LSTs on Solana have lagged behind Ethereum, they are still growing from a low base.

· Since Q1 2023, LST’s market share has increased from less than 2% of total stake to over 6.5% today.

· Much of this growth has been driven by Jito, which has grown rapidly from zero market share two years ago to nearly 50% today. In contrast, former market leader mSOL (Marinade) has lost some market share.

Source: Dune Analytics (21shares)

Source: Dune Analytics (21shares)

· What is not immediately apparent from the above chart is that Sanctum has grown its market share of LSTs from 0 to over 16% since the protocol launched in Q1 2024. Sanctum is a liquidity staking protocol that enables the creation, trading, and management of LSTs.

· Currently, Sanctum has launched about 20 LSTs, including LSTs related to major Solana projects such as Jupiter (jupSOL), Helius (hSOL), Bonk (bonkSOL), and dogwif (wifSOL). This week, Binance (BNSOL), Bybit (BBSOL), and Bitget (BGSOL) each announced plans to launch their own SOL LSTs through Sanctum.

· According to DefiLlama, Sanctum ranks among the top 6 protocols on Solana with more than $700 million in total locked value (TVL). With Sanctum LSTs on top centralized exchanges (CEX) coming soon, I expect TVL to continue to grow. It is worth noting that Binance is the fourth largest staking service provider on Ethereum (after Lido, Coinbase, and EtherFi) with a market share of about 4%.

Source: Dune Analytics (21shares)

What is Sanctum?

Sanctum is a protocol designed to simplify launching LSTs on Solana. It envisions an “infinite LST future” with thousands of LSTs.

Through three different products, Sanctum solves the liquidity challenges faced by LSTs, allowing any LST (regardless of size) to interact with other LSTs or SOL with low friction.

· Reserve Pool: This is an idle pool of ~400,000 SOL that allows users to instantly convert LST to SOL for a small fee, bypassing the one epoch waiting period. This provides a safety net for DeFi protocols to integrate any LST, large or small, as collateral. Since July 2022, the total amount of SOL unstaked through the reserve pool is 2.5 million, with an average daily usage of less than 1%.

Source: https://dune.com/sanctum/sanctum

· Router: This is a tool that enables zero-slippage LST-to-LST interactions, leveraging Solana's Stake Account design. When a user stakes, a Stake Account is created and delegated to a validator for staking rewards. Solana's LSTs are actually SPL token wrappers around this Stake Account. Behind the scenes, when a user interacts from one LST to another, the Sanctum router automatically undelegates and unwraps an active Stake Account, then rewraps and re-delegates the account to a new validator. This mechanism makes it possible to achieve LST-to-LST interactions without the need for liquidity pools. The Sanctum router has been integrated into Jupiter.

Solana's LSTs are actually a liquid version of the user's staking account. This means that LSTs on Solana are semi-fungible.

· Infinity is a liquidity pool of Sanctum-approved LSTs that allows interaction between any included tokens in the pool. Liquidity providers can deposit LSTs into the pool in exchange for INF Tokens. INF Token itself is also an LST, which means it can be used in combination with DeFi and is able to accumulate staking rewards for underlying LSTs and transaction fees in the pool. Currently, INF's annualized yield (APY) is 7.63%, slightly higher than JitoSOL's 7.59% and the estimated annualized yield of 7.34% for the entire network.

Source: Sanctum

Why launch Sanctum LST?

Through Reserve, Router, and Infinity, Sanctum has built a unified liquidity layer that lowers liquidity barriers for long-tail LSTs. So why would someone want to launch Sanctum LST?

Possible motivations include:

· Increased Revenue:LSTs can choose to charge commissions on staked Total Value Locked (TVL) or staking rewards.

· Staking Weighted Quality of Service (SwQoS):SwQoS is an anti-Sybil attack mechanism currently being discussed in the Solana ecosystem. It combines staking weights with transaction quality of service. If implemented, validators with 1% stake will be entitled to send up to 1% of data packets to the leader, giving validators with high stakes a better chance of being included in transactions. This model incentivizes projects with high transaction volume (such as Jupiter) to accumulate more stakes through LST to improve the quality of service for their users.

· Identifying communities, users, and fans:Sanctum is developing a second version called Sanctum Profiles, which aims to build a "composable social and loyalty layer" on Solana. The idea is to allow anyone, including individuals, projects, and businesses, to launch personalized LSTs. These LSTs are actually similar to NFTs (or social tokens), which can provide access to limited features, rewards, or subscriptions. This design space is very broad. As JamesleyHanley explained in the post, staking rewards can be fed back to the issuer of LST to provide specific services or products to holders.

Source: JamesleyHanley

Value Accumulation Path for Sanctum ($CLOUD)

· The project is still in its early stages and is primarily focused on increasing the total value locked (TVL) of Sanctum LSTs. Recent collaborations with Tier 1 centralized exchanges (CEXs) indicate a good fit in the DeFi and CeFi markets.

· Intuitively, future value accumulation strategies could include: 1) monetizing liquidity interaction features (including Reserve, Router, and Infinity) by turning on fee switches, and/or 2) charging a small commission on LSTs. The first strategy relies on LST interaction volume (i.e. has unlimited upside), while the second relies on the total TVL of Sanctum LSTs (i.e. is limited by the market cap of SOL).

· TVL Model:If LST market share on Solana reaches Ethereum levels, and Sanctum LSTs reach Lido levels, Sanctum’s TVL could expand from its current 1% of SOL supply to 6%, a 6x increase. If V2’s personalized LSTs gain more acceptance as a concept for a social and loyalty layer, the potential for value-added could be even greater.

· Interaction Volume Model: While the interaction volume of LSTs is difficult to model accurately, we can get some inspiration from Lido’s stETH. stETH’s annualized 90-day on-chain transaction volume is $50.6 billion, about 1.9x its current TVL. Using this ratio as a guide, Sanctum could have an annualized volume of around $9 billion in a base case scenario, and around $34 billion in a bull case scenario. Next, we can estimate the potential interaction fees that the protocol could earn by assuming that Sanctum’s product charges an interaction fee of 1, 5, or 10 basis points on LST-to-SOL or LST-to-LST interactions.

Source: Artemis.xyz, Dune Analytics

$CLOUD is currently trading at $0.265, which equates to a $48M market cap (MC) or $265M fully diluted valuation (FDV). Given the expected TVL growth from the recently announced Tier 1 CEX LSTs, and the mature monetization strategy of DEXs, I believe Sanctum is an attractive liquidity investment option at current valuations.

Conclusion

· Sanctum is driving adoption of LST on Solana through a unique approach that is very different from Ethereum. Sanctum leverages Solana’s staking account architecture to aggregate liquidity for the long tail of LSTs, in stark contrast to the winner-take-all situation in the Ethereum LST market that has been created through the liquidity moats of leaders such as Lido.

· Recent partnerships with Tier 1 CEXs suggest that TVL for Sanctum and the broader Solana LST market could increase significantly.

· The upcoming V2 Sanctum Profiles will further expand the application potential of LST. Personalized LST has broad application prospects, especially in the customizability of staking rewards.

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