Everything is liquid: SOL Strategies’ new liquid staking solution – STKESOL

SOL Strategies is excited to announce the launch of STKESOL, a new algorithmic liquid staking token (LST), supporting the Solana network and dozens of smaller validators while offering stakers liquidity and decentralized finance use cases.

As experts in core network infrastructure and staking on the Solana network, we continuously evaluate our role and relevance in the network we call home. While we continue to operate our enterprise-grade, SOC2 Type II compliant, fleet of validators, we are expanding our staking offering into the liquid staking realm. 

With Solana’s composability and uniform token architecture, liquid staking tokens have become more and more popular. Today over 16% of all staked SOL on the Solana network is staked through LSTs. Generally, there are two flavours of LST: broad delegation and single or narrow delegation. With STKESOL we are launching a broadly delegated LST with a comprehensive network health focused scoring methodology.

Why liquid staking?

With bonding and unbonding periods of up to 48 hours, Solana’s native staking is relatively competitive compared to other blockchains where you may have to wait weeks for staked tokens to unbond and become available again. Despite this we have seen an uptick in LST adoption over the past few years.

While the avoidance of bonding and unbonding periods is a headline use case, tax efficiency, the ability to use LSTs as collateral for borrowing, provide liquidity, to amplify yields with leverage and diversify validator counterparty risk are additional benefits that many stakers seek out. Let’s dive into these:

Bonding & Unbonding: When you stake tokens on major layer 1 blockchain networks, there is a waiting period for your tokens to become part of the active set of staked tokens, as well as a waiting period if you want to retrieve those tokens back to your wallet. On Solana this waiting period is generally until the end of the current epoch, i.e. up to two days. With liquid staking tokens you immediately receive a fungible token in your wallet which you can sell, collateralize, hang on to, send to your friends, etc.

Tax Efficiency: This is not tax advice, every jurisdiction may differ, however it is generally thought and accepted that staking rewards earned in a stake pool, being capitalized into the value of the LST, are not taxable on receipt, while staking rewards received for native staking are. Further research and work done by the Jito Foundation indicates swapping in and out of LSTs may even not be taxable in some jurisdictions.

DeFi Yields: There are generally three major use cases for LSTs in DeFi that are accessible to most users of the blockchain. One can use an LST as collateral, borrowing stablecoins or SOL against them. This means a user can retain exposure to SOL price action, retain ongoing compounding staking rewards, as well as access liquidity in the near term against those funds.

Additionally one can participate in a liquidity pool and provide liquidity for users who wish to swap between an LST and a quote token, such as SOL. In this case one earns transaction fees from swap volume.

Lastly several prominent DeFi platforms offer LST Multiply products, where one can loop or leverage an LST combined with SOL borrowing to amplify the yield. This works because the LST price is pseudo-pegged to SOL (it only grows relative to SOL in value) and because the LST’s integrated staking yield exceeds the borrow cost of SOL. If a loop has a net yield of 2% (for instance a 6% staking yield and a 4% SOL borrow cost) and one loops five times you might have a resulting yield of 10%, while just holding the vanilla LST would yield the 6%. These numbers are examples and this explanation is simplified, please ensure you research and understand all products before depositing or participating.

Validator counterparty risk: While with both native and liquid staking your principal is always secure, and validators never have custody or access to your staked SOL, there is still risk associated with validator uptime, commission and performance. If a validator performs poorly, has bad uptime, poor monitoring, bad performance modifications, etc., your yield may be lower than it should be, or even zero. 

Additionally, a healthy distribution of stake and minimum number of validators is important for network health, while some validators act maliciously to the detriment of network users. Finding the right validators can be difficult and complicated. Broadly delegating LSTs can solve this. In our case we use a performance score that we first introduced in 2022, that takes over a dozen factors into account, is designed to improve network health and uses a 30-day lookback to smooth our temporary performance glitches.

LST Risks

When interacting with any blockchain protocol or product, swapping hard-earned SOL for another token, one should be conscious of and understand the risks.

Solana uses a unified token program approach, meaning tokens all utilize one of two central token programs, the same is true for stake pools, which are the programs underlying LSTs.

Solana has a primary stake pool program, called the SPL Stake Pool Program, which has been on Solana Mainnet for over four years and has been extensively audited by third party auditors. Many prominent LSTs use this program, including jitoSOL. Some LSTs use modified versions of the SPL Stake Pool Program, adapted to support just a single validator in the pool, or adapted by LST managers like Sanctum. 

A stake pool is a software program on the Solana blockchain, and it allows users to deposit and withdraw SOL. It can then take the deposited SOL and stake it to validators. Critically when a user deposits SOL into the pool, they receive the LST (in our case STKESOL) in return. When a new stake pool is created usually 1 SOL deposited will give the user 1 LST in return. After a year, if the pool achieved a 6% staking yield, the pool will have 1.06 SOL and the user will still have 1 LST, therefore over time the exchange rate of LST to SOL increases by the staking rewards rate. The user can, after a year redeem their 1 LST for 1.06 SOL. This example uses a year for simplicity but in reality of course a user and deposit and redeem at any time, the total outstanding LST tokens relative to the total SOL in the stake pool program, including all accrued rewards, provide for the exchange rate at a given point in time.

Because you can only take SOL out of a stake pool by burning the LST belonging to that pool, it is generally considered very safe. Native staking on the Solana blockchain is considered the gold standard of safety, with LSTs being a close second. There has never been a documented successful exploit of a stake pool on Solana.

Algorithmic Delegation

STKESOL uses an algorithmic delegation strategy using the Wiz Score from stakewiz.com. What this means is that we do not select validators manually, validators do not need to apply, complete KYC, buy a token or product of our company or otherwise do something to be included in our stake pool.

With algorithmic delegation we attempt to remove bias from validator selection and offer validators a  clear and defined path to inclusion.

The Wiz Score on stakewiz.com was established about four years ago, in early 2022. It is currently in its 65th iteration and tracks and scores 15 different metrics, computing a percentage-style score with a theoretical maximum of 100%.

The score was designed to support network health and decentralization. To get an optimal score a validator shouldn’t be too large or too small, it shouldn’t be too new, and it should perform well, have published information, be up to date and in a low-concentration city and data centre. The score doesn’t focus solely on APY or commission but attempts to blend many factors together.

For four years we have computed a Wiz Score for every validator on Solana every five minutes. This has developed into a massive data resource to observe validator behaviours and changes over time.

To smooth out temporary troughs and peaks we utilize a 30-day mean of the Wiz Score, this means typically a validator’s score for purposes of STKESOL inclusion consists of a mean of 8,640 scores each measuring 15 metrics, thus combining a total of almost 130,000 data points per validator.

Over time and based on the composition of the validator set in the pool or changes in the network behaviour we will amend the Wiz Score methodology or weighting. The current weighting can be viewed on the FAQ page of stakewiz.com.

With this methodology we believe we can support a healthy distribution of stake on the network, supporting smaller but well-performing validators and offer stakers good staking yields with strong diversification.

Initially we aim to support in the range of 40-60 validators with all receiving equal delegation from the pool, over time this set may grow or we might change the amounts delegated to validators to align with their individual scores. This will be assess by our team from time to time.

Conclusion

This is a major milestone in the ongoing evolution of SOL Strategies as a major infrastructure provider to the Solana ecosystem. As we are continuing to see growth of the Solana Economy and continued adoption by Wall Street and institutions, we are proud to bring users a new option in staking that offers unique value and opens up additional doors to validators to receive stake while keeping the network healthy.

As the Solana Economy grows and activity on-chain skyrockets, we prepare to do our part in providing staking and validator infrastructure to support it.

Disclaimer

1. No Investment Advice or Offer: The information provided here is for general informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities, futures, options, or other financial instruments. This information is not investment, legal, or tax advice and should not be considered an individualized recommendation or personalized advice. Any decisions based on this information are your sole responsibility.
2. Opinions, Accuracy, and Liability: Views expressed are as of the date indicated, are subject to change without notice, and may not reflect the views of SOL Strategies. Certain statements may be based on SOL Strategies’ views, estimates, or opinions, which may not be accurate or ultimately realized. Information obtained from third-party sources has not been independently verified, and SOL Strategies does not assume responsibility for its accuracy. SOL Strategies nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees, or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of this information. SOL Strategies expressly disclaims any and all liability relating to or resulting from the use of this information.
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