A comprehensive interpretation of the Solana stake market, nurturing new DeFi opportunities

Article Title: A comprehensive interpretation of the Solana stake market, nurturing brand new DeFi opportunities

Original author: tradetheflow_

Source of the original text:

Repost: Tom, MarsBit

Editor’s note: Currently, Ethereum is the main battlefield for stake, but with the rapid development of Solana in this bull market, its low cost, high throughput, and strong network effects make it a potential hot track for stake. The author discusses the market opportunities for Solana’s stake, including its ecological maturity, innovation potential, network expansion capabilities, and optimization of capital efficiency for DeFi.

The following is the original content (slightly edited for better understanding):

Restaking is a simple but impactful concept: it allows already staked assets to be reused in multiple decentralized services, or what Jito refers to as Node Consensus Networks (NCNs).

This method brings multiple advantages. The most significant one is that it enhances the security and integrity of decentralized services, allowing them to leverage the economic security of L1 without having to spend a lot of resources designing their own security models (which are often more fragile). For stakers, it also improves capital efficiency, as a single asset can provide security for multiple decentralized services at the same time, potentially yielding higher returns on capital.

In fact, many top experts in the industry consider stake to be a disruptive innovation that can build a more secure, flexible, and scalable blockchain environment, accelerating industry development. This has also attracted high market attention, making stake one of the largest tracks in terms of TVL on Ethereum.

However, so far, stake has mainly focused on Ethereum because it is considered the most secure and widely adopted PoS blockchain in the current economic security. But with Solana’s strong growth in this bull market, especially in contrast to the relatively stagnant activity on the Ethereum mainnet and the migration of a large amount of liquidity to L2 (such as Base), a new question arises: Does Solana have enough reasons to support stake?

In this article, we will explore the potential for re-staking on Solana from multiple perspectives and analyze the feasibility of this market opportunity. Let’s take a closer look.

Solana’s maturity is sufficient to support further stake

For stake, the underlying public chain must have strong economic security. This is exactly the advantage of Ethereum: currently, the Ethereum mainnet has a total of 34.3 million ETH stake (valued at about 124 billion US dollars), 4701 block validators, six consensus clients, and as one of the oldest and most reliable public chains for application development, it has a very high industry reputation. Therefore, Ethereum has become the preferred platform for stake.

However, humans tend to extrapolate the present into the future, assuming that Ethereum will always maintain its dominant position. But history tells us that technological revolutions are often driven by creative destruction. For example, there was a time when Yahoo was considered the dominant force in the search engine field, but later it was surpassed by Google. Similarly, IBM was once seen as the ultimate winner in the personal computer field, but eventually it was replaced by Apple.

So, are we witnessing a similar moment in Ethereum’s history? Is it still necessary to have the entire stake stack rely on Ethereum? Especially as the trend of new asset issuance on the Ethereum mainnet is shifting towards Solana, L1, or Base L2, and with the increasing uncertainty in the direction of Ethereum’s development, we need to rethink this question.

If we consider that stake is indeed a game-changing technology, then we should consider expanding it to other L1s, not just limited to Ethereum. This will allow developers to freely choose which consensus layer to trust.

In this context, Solana is undoubtedly a strong candidate for stake. Since the current bull market, Solana has become the fastest growing L1, and its economic security and ecological maturity have significantly improved. As of now, about 65% of the circulating supply of SOL is staked, with a total value of about 730 billion US dollars (compared to only 240 billion US dollars a year ago). In addition, Solana has nearly 1400 block producer nodes and supports two existing client validators, with future additions of new clients such as Firedancer, Sig, and Agave.

More importantly, Solana is known for its extremely low transaction costs and fast transaction speeds, and its adoption rate continues to rise among users and developers. Solana is currently the fastest application development public chain in the cryptocurrency industry, not only achieving true organic growth, but also successfully overcoming the cold start problem and establishing a strong network effect. All of this indicates that Solana’s ecosystem is mature enough and staking on Solana is practical.

Staking on Solana has more potential than Ethereum

Ethereum is a pioneer in smart contracts, but its high Gas fees limit the development scope of on-chain applications. Solana’s architecture allows developers to create richer application forms at the L1 level. Therefore, we can consider that there is a greater design space for stake on Solana than on Ethereum.

First, Solana’s low transaction and compute costs reduce the barrier to entry for Node Consensus Networks (NCNs). Unlike Ethereum, which has high fixed costs that limit participation, Solana supports the deployment of smaller, more cost-effective, and more efficient NCNs, allowing for optimization for specific use cases. This not only allows more services to be outsourced, reducing reliance on directly on-chain applications, but also expands the interoperability of the entire ecosystem.

Secondly, NCNs on Solana can handle more complex operations and the code can be deployed with higher density without affecting the on-chain computing power, which is different from the EigenLayer design on Ethereum. This makes on-chain verifiability, on-chain reward distribution, and on-chain data publishing possible, and enhances the overall flexibility and robustness of staking. Ethereum serves as a testing ground for staking, but in the long run, the potential of Solana’s staking in real-world scenarios seems to be greater.

In addition, in terms of liquidity restaking tokens (VRTs), Solana also has significant advantages over Ethereum. On the one hand, Solana’s low cost can greatly reduce the operating costs of liquidity restaking token providers. In a business model where every basis point is crucial, this cost optimization not only improves profitability, but also promotes market competition, forms a more vibrant ecosystem, and enables different VRTs to provide diversified restaking strategies and more flexible slashing conditions.

On the other hand, the liquidity staking on Solana is more affordable for users, as the low transaction costs lower the entry barrier, allowing them to conveniently use liquidity staked tokens in various DeFi applications without constantly worrying about high fees. This is crucial for driving long-term capital inflow.

Staking again can drive innovation on the Solana network

Solana’s vision has always been to become a global computing interface, allowing everyone to build applications on it. To achieve this goal, Solana has always focused on improving the throughput of the underlying chain and reducing latency.

This is a strong and reasonable vision. However, the laws of physics cannot be violated, and we cannot increase throughput by 10 times or reduce latency by 10 times in a short period of time. To achieve an order of magnitude improvement, it requires a large amount of resources and long-term efforts. Therefore, although it cannot be achieved in the short term, people have gradually realized that not all computations must occur on L1. This is also reflected in recent discussions about network extensions.

From this perspective, further staking can bring new design possibilities for the expansion of the Solana network and the ‘network expansion’ plan. The design space is vast. Although it is currently unclear how this mechanism will be implemented, it is likely to evolve into a powerful infrastructure-level expansion tool. For example, the @SonicSVM project claims to be the first Layer 2 specifically designed for sovereign games in the Solana ecosystem, built on HyperGrid, the horizontal scaling framework of the Solana virtual machine. The project plans to enhance the security and operational efficiency of its SVM through Jito (Re)staking, supporting multi-functional applications in the Solana ecosystem, including gaming, DeFi, and other use cases.

In addition, the stake mechanism provides strong security guarantees, which can effectively enhance the reliability of the Solana network. For example, Jito TipRouter NCN is under development, aiming to decentralize MEV tip distribution and enhance its security. Another example is Nozomi, a protocol introduced by @temporal_xyz, which will utilize Jito (Re)staking to reshape the transaction microstructure of Solana and solve issues such as sandwich attacks, slippage, and transaction timeouts. These innovations align with Solana’s long-term vision, significantly optimizing user experience, making Solana not only fast and low-cost, but also more secure, stable, and user-friendly.

In addition to high performance and powerful on-chain data metrics, Solana also embodies the spirit of innovation. Over the past few years, we have witnessed a series of successful projects such as Jito, Kamino, Jupiter, and Helium rise. But this is just the beginning, as the number of projects being built in the Solana ecosystem continues to grow.

If Solana is becoming the preferred public chain for developers, then stake will undoubtedly have a place in it. It can extend Solana’s economic security to a range of key services in the ecosystem, such as oracles, cross-chain bridges, and sorters, although these components typically do not run directly on L1, they are still a critical part of the ecosystem.

Although smart contracts and their interactions benefit from Solana’s security, these peripheral components often still require independent economic security. This means that they either need to raise a lot of capital to incentivize validators or compromise on security. This can lead to a paradox: the smart contract layer may be secure, the computational results may be correct, but if the oracle provides incorrect data, the entire system still faces risks. From a security perspective, the security of the entire system ultimately depends on the weakest link.

Therefore, some key services in the Solana ecosystem can enhance their security by re-staking Solana. For example, @switchboardxyz, a permissionless oracle network on Solana, is collaborating with Jito (Re)staking to ensure the reliability of its data source. If this model is successfully implemented, it will simultaneously improve the security and stability of the Solana network.

Optimizing stake to enhance capital efficiency for DeFi users

Compared to regular staking on Solana, re-staking offers a higher annual yield. As one of the core objectives of DeFi users is to optimize capital efficiency, re-staking has become an attractive option. It allows DeFi users to unlock new earning opportunities on Solana without additional capital investment. For example, instead of purchasing liquidity staking tokens to earn SOL staking rewards and use them in the DeFi ecosystem, users can choose to purchase liquidity re-staking tokens, which not only provide higher APY but also allow for continued freedom to operate in the DeFi ecosystem.

From the rapid growth of DeFi in the Solana ecosystem, we can assume that a mechanism that can optimize capital efficiency will help attract a large amount of liquidity in the long term. In fact, DeFi activity on Solana is surging, with the total locked value of Solana DeFi increasing from $1 billion to $10 billion in the past year, and the growth momentum remains strong, further proving the market potential of Solana stake.

Summary

Staking on Solana is still in the early experimental stage, but it has shown enormous potential, and many interesting use cases are gradually emerging. Assuming that in the long run, Solana can capture a market share equivalent to that of Ethereum in the staking market, then its market opportunity will be considerable.

Currently, the Solana stake infrastructure is mainly dominated by two core protocols: Solayer and Jito (Re)staking. As a pioneer, Solayer has already built a complete stake stack and achieved a TVL of over 3.5 billion US dollars. However, in the long run, Jito is more likely to become the protagonist of this narrative. With a strong technical foundation, the highest TVL in the Solana ecosystem, and a clear vision, Jito has established its leadership position in the Solana ecosystem. In addition, Jito’s stake stack design is highly flexible, with liquidity stake token integration built in from the start, supporting multiple assets, further enhancing its future growth potential.

Anyway, I want to end with a quote from Freeman Dyson:

“Great innovations, almost always, appear in a messy, incomplete and confusing form. Even its discoverer can only understand half of it; for others, it is even more of a mystery. If an idea doesn’t seem crazy enough at the beginning, then it has no hope.”

This statement perfectly describes the current state of stake in Solana: early, full of potential, and incubating new DeFi opportunities.