Background (LSTs on SOL vs. ETH)

LSTs on Solana historically haven’t been as successful as on Ethereum. For example, Lido attempted to scale on Solana but withdrew in October 2023 due to low traction.

Ethereum LSTs have high market share at 32% of all ETH staked. With Ethereum staking ratio at c.28%, LSTs represent just under 10% of ETH’s total market cap.

Meanwhile, Solana has a higher staking ratio at 67%, but LSTs hold only c.6% market share, representing just over 4% of SOL’s total market cap.

Source: Dune Analytics ([@hildobby_],[ @andrewhong5297],[ @21shares])

The low market share of LSTs on Solana may be down to factors such as:

1. Native staking on Solana is lower friction: Ethereum’s native staking/withdrawal queue make liquidity and LSTs highly valuable because the time to stake/unstake is non-deterministic. In contrast, native staking on Solana has an activation/deactivation period of an epoch (~2.5 days), suggesting the relative advantage of LSTs over regular staking may be smaller due to lower friction.
2. Solana’s lending market is less developed: Ethereum market cap is 3.8x that of Solana, but the largest borrow/lend protocol on Ethereum (Aave) has 8.5x the TVL of that on Solana (Kamino). The relative immaturity of borrow/lend protocols on Solana means leveraged staking via LSTs has not taken off to the same extent on Solana as it has on Ethereum.

LSTs on Solana

• Though under-developed relative to on Ethereum, LSTs on Solana have been growing from a low base
• Since Q1 2023, LST market share has more than tripled from <2% of total stake >6.5% today
• Most of this growth has been driven by Jito, which has seen tremendous market share growth from nil 2 years ago to today’s nearly 50%. mSOL (Marinade) the former leader in contrast has lost market share

Source: Dune Analytics ([@21shares])

Source: Dune Analytics ([@21shares])

• What is not immediately apparent from the above chart is that Sanctum LSTs have grown from 0 to >16% share of the Solana LST market since the protocol launched in Q1 2024. Sanctum is a liquid staking protocol that enables the creation, trading and management of LSTs.
• So far, around 20 LSTs have launched through Sanctum, including those affiliated with major Solana projects like Jupiter (jupSOL), Helius (hSOL), Bonk (bonkSOL) and dogwif (wifSOL). This week, Binance (BNSOL), Bybit (BBSOL) and Bitget (BGSOL) each announced their plans to launch their own SOL LSTs through Sanctum.
• With >$700m TVL, Sanctum has risen to the top 6 protocol by TVL on Solana according to DefiLlama. With the top CEX’s Sanctum LSTs on the horizon, I anticipate continued TVL growth. For what it’s worth, Binance is the 4th largest staking provider on Ethereum (after Lido, Coinbase and EtherFi), with c.4% market share.

Source: Dune Analytics ([@21shares])

What is Sanctum?

Sanctum is an LST protocol that simplifies launching LSTs on Solana. It envisions an ‘infinite LST future” with thousands of LSTs.

Through 3 different products, Sanctum solves the liquidity challenges for LSTs, such that any LST (however small) could be swapped for another LST or SOL with minimal friction.

• The Reserve: An idle pool of ~400,000 SOL that allows instant LST-to-SOL swap for a small fee to bypass the one-epoch waiting period. This enables DeFi protocols to integrate any LST (regardless of size) as collateral by providing a safety net for instant unstaking. Pool utilization has been low so far, with cumulative 2.5m SOL unstaked through the Reserve since July 2022 (i.e. average daily utilization of <1%).

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

• The Router: A tool for zero-slippage LST-to-LST “swaps”, utilizing Solana’s Stake Account design. When a user stakes, a Stake Account is created and delegated to a validator for staking rewards. Solana LSTs essentially serve as an SPL token wrapper around this stake account. Under the hood, when a user swaps from one LST to another, Sanctum Router automatically undelegates an active stake account from a validator and unwraps it, then rewraps the account and redelegates it to a new validator. This mechanism allows for an LST-to-LST swap without the need for a liquidity pool. The Sanctum Router is integrated into Jupiter.

Solana LSTs are just liquid version of a user’s stake account. This means LSTs on Solana are semi-fungible

• Infinity is a liquidity pool comprising a basket of Sanctum-approved LSTs. It enables swaps between any of the included tokens. Liquidity providers can deposit LSTs into the pool, in exchange for the INF token which is 1) itself an LST (i.e. composable with DeFi) and 2) accrues both the staking rewards of the underlying LSTs and trading fees from the pool. INF APY is currently at 7.63%, marginally higher than JitoSOL (7.59%) and the estimated network-wide APY (7.34%).

Source: Sanctum

Why launch a Sanctum LST?

Through the Reserve, Router and Infinity, Sanctum has built a unified liquidity layer, lowering the liquidity barriers for a longer tail of LSTs. The question remains, why would someone launch a Sanctum LST?

Possible motivations include:

• Incremental revenues: LSTs can choose to charge a commission on stake TVL or staking rewards.
• Stake-weighted Quality of Service: SwQoS is an anti-sybil mechanism currently being discussed in the Solana ecosystem. It ties stake-weight to transaction quality of service. If implemented, a validator with 1% stake would have the right to transmit up to 1% of the packets to the leader, giving higher-stake validators a better chance of transaction inclusion. This model incentivises projects with high transaction volumes (e.g. Jupiter) to accrue more stake, potentially through an LST, to enhance their quality of service for their users.
• Identification of community/users/fans: Sanctum is developing a v2 called Sanctum Profiles, which aims to build a “composable social and loyalty layer” on Solana. The idea is to enable anyone, including individuals, projects and businesses, to launch personalized LSTs - which essentially act as NFTs (or social tokens) that provide access to token-gated features, rewards or subscriptions. The design space here feels truly massive. As explained by @JamesleyHanley in this post, staking rewards could go back to the LST issuer for delivering a specific service or product to their holders.

Source:[ @JamesleyHanley]

Sanctum ($CLOUD) Path to Value Accrual

• As the project is still in its early stages, the focus is on increasing the TVL of Sanctum LSTs. Recent Tier-1 CEX partnerships suggest promising product-market-fit with both DeFi and CeFi players.
• Intuitively, eventual value accrual strategies may include: 1) monetizing liquidity swap features (Reserve, Router & Infinity) via a fee switch, and/or 2) charging a small commission on the LSTs. The first is a function of LST swap volumes (i.e. unlimited upside), while the second is a function of total TVL of Sanctum LSTs (i.e. bounded by SOL market cap).
• TVL modelling: If LST market share on Solana reaches that on Ethereum, and Sanctum LSTs collectively reach Lido’s market share, Sanctum’s TVL could expand 6x from 1% of SOL supply currently to 6%. Upside could be multiples higher if V2’s individualized LSTs as the social/loyalty layer concept gains traction.

• Swap volume modelling: Swaps volumes specifically for LSTs are difficult to model, though we draw insights from Lido’s stETH. Annualized 90D on-chain volumes for stETH was $50.6bn, around 1.9x that of stETH’s current TVL. Applying this ratio as a rough estimate points at c.$9bn of annualized trading volumes for Sanctum’s base case TVL and c.$34bn for the bull case. One can then estimate potential swap fees accruing to the protocol assuming 1, 5 or 10 bps swap fees for a LST-to-SOL or LST-to-LST swaps on Sanctum’s products.

Source: Artemis.xyz, Dune Analytics (https://dune.com/lido/wsteth-liquidity)

• $CLOUD is currently trading at $0.265, equivalent to $48m MC or $265M FDV. With expected TVL growth from the recently announced Tier-1 CEX LSTs and proven monetization strategies of DEX’s, I see Sanctum as an appealing liquid investment play at its current valuation.

Conclusion

• Sanctum is driving LST adoption on Solana with a unique approach, distinct from Ethereum’s. Sanctum leverages Solana’s stake account architecture to unify liquidity across long-tail LSTs, contrasting with Ethereum LSTs’ winner-takes-most landscape built through the liquidity moats of leaders like Lido.
• Recent Tier-1 CEX partnerships suggest a significant TVL increase for Sanctum and the broader Solana LST market.
• Upcoming V2 Sanctum Profiles will further push what is possible with LSTs. The potential applications for personalized LSTs are vast, especially with customizable utility for staking rewards.

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