Original Article Title: Exploring Sanctum: Dragonfly-Backed Solana Liquidity Staking Aggregator Unlocks SOL’s Fragmented Liquidity

Solana has increasingly become known as a “Meme Playground.”

The platform is flooded daily with thousands of meme coin projects, drawing significant attention from the market. However, the concept of liquidity staking, which previously flourished in the Ethereum ecosystem, has yet to gain traction in Solana.

While the excitement of investing in meme coins is undeniable, there remains a segment of investors looking for more stable and consistent returns. Liquidity staking plays a critical role in providing such returns, but Solana has somewhat lagged in this area.

As a result, new projects targeting the liquidity staking needs within the Solana ecosystem have started to surface, potentially positioning themselves as new leaders in the space.

Sanctum is one such initiative, currently rolling out liquidity staking aggregation services on Solana. It allows users who either stake native SOL or utilize liquidity staking tokens (LST) to benefit from a robust, unified liquidity layer.

If you’re wondering why there’s a need for such projects, the explanation is straightforward:

While SOL can indeed be utilized to chase trends in meme coins, users also aspire to employ their SOL in a range of economic activities, including DeFi, NFTs, payments, and more. Holding LST tokens enables them to engage in more intricate investment strategies, exploring further avenues for returns.

However, deploying LST for such sophisticated strategies proves challenging within the current Solana ecosystem.

Fragmented Liquidity Staking Pools and PVP

How does liquidity staking fare in Solana today?

Despite its numerous benefits, after nearly three years of Solana’s operation, only a mere fraction—less than 5%—of staked SOL is involved in liquid staking.

If everyone thinks liquidity staking is good, why hasn’t it taken off on Solana?

Success is also fluid, failure is also fluid.

Liquidity staking on Ethereum is actually a super PvP thinking model: Lido and other giants are dominated by a few, each liquidity staking pool is completely independent, and each pool needs to compete for liquidity and attention. They all want to use liquidity as a moat to eliminate competition.

Due to Ethereum’s early start, large number of users and high acceptance, there is actually no problem with this winner-take-all environment; users can choose leading service providers such as Lido, and the remaining small service providers will compete with each other. Natural selection.

But for a rising star in the new public chain like Solana, if the service providers who follow Ethereum’s liquidity staking business are also PVPs, they will fight independently and not form a joint force, which will only cause the limited liquidity and become more Dispersion and fragmentation.

For example, there is a stSOL-SOL pool on Saber, an mSOL-SOL pool on Raydium, and an scnSOL-SOL pool on Orca, and these pools are completely independent.

In this case, it becomes difficult for small projects to survive, and it is impossible to have smaller LSTs.

Because to build their own stake pool, operators need to come up with millions of dollars of liquidity to start playing, otherwise their LST can easily become decoupled due to lack of liquidity.

Therefore, on Solana, the liquidity staking pool is fragmented and attention is drawn; the consequences faced by users are that the small LST pool has insufficient liquidity and the slippage is very high when exchanging assets, which makes it easy for assets to be lost and also restricts assets. flow and execution of transactions.

The figure below shows the embarrassing dilemma of LST tokens on Jupiter when exchanging SOL. Due to insufficient liquidity, exchanging a larger amount of SOL will have a very high price impact. Of course, users simply choose not to exchange; if they do not exchange, they will lose money. Further restricting the flow of assets…

Over time, users will naturally feel insecure about LST on Solana, because you don’t know whether you will lose money when you exchange LST for SOL, let alone all kinds of matryoshka dolls based on LST. Business is over.

Therefore,The core idea of ​​Sanctum is to convert PVP and PVE. It is not to let a certain liquidity staking project win, but to help the liquidity staking services of the entire Solana ecosystem form a joint force to revitalize the fragmented liquidity in SOL staking and let everyone LST can all have value.

Understand how Sanctum works

So what exactly does Santum do?

In the general direction, we are working with Jupiter to bring aggregation to the field of liquidity staking; specifically, Santum’s products can be divided into the following parts.

1. Infinity: Multi-LST liquidity pool, aggregating fragmented liquidity

Generally speaking, the LP pool only has two assets (such as USDC-SOL). Some LPs, such as the Curve stable swap pool, support three or four assets (e.g. USDC-USDT-DAI).

Sanctum has created a multi-LST liquidity pool called Infinity to aggregate the liquidity of different trading pair pools.

Currently, Infinity supports all whitelisted LSTs (e.g. SOL-bSOL-bonkSOL-cgntSOL-compassSOL-driftSOL-…).

Therefore, Infinity is also Solana’s only liquidity pool that can natively support millions of different LSTs. Since all LST can be converted into staking accounts, the fair price for each LST can be calculated by looking at the SOL contained in the staking account. This makes InfinitySupports swapping between any two LSTs of any size without relying on any constant product.

That said, there is no limit to the number of LSTs Infinity can support - hence its name.

• Validator LST: Improving the native SOL staking experience

Solana has such a large number of staking accounts that the network is temporarily paused at the beginning of each epoch to calculate the staking rewards for each staking account.

(Note: An epoch is a fixed time period in the Solana blockchain, used to reselect validators (nodes), update network status, and distribute rewards. It is the basic time unit of its consensus mechanism and network maintenance)

The existence of LST can greatly reduce the number of pledge accounts, which will also make Solana faster.

With LST, projects can run multiple validators (such as Bonk1 and Bonk2 validators) under one LST, increasing security and decentralization without fragmenting or confusing their stakeholders.

Validators can run incentive or loyalty programs. For example, validator Laine airdrops block rewards and priority fees to laineSOL holders, which results in annual returns of >100% for laineSOL holders. With LST, validators can easily airdrop tokens or NFTs to those who hold enough LST.

LST provides a better user experience than native staking accounts. Users can easily convert from any coin to SVT and vice versa (USDC ←→ xSOL) instantly using Sanctum or Jupiter.

The key is that you don’t have to deactivate your staking account, wait for an epoch, or mentally remember to claim it when you exchange it back and forth.

• Reserve: The “deposit reserve” account for when the pledge is released

Reserve, also known as the Sanctum Reserve Pool, you can think of it as an idle SOL pool that provides deep liquidity for all liquid staked tokens on Solana.

The pool accepts staked SOL and provides SOL from its pool in return. At current count, there are over 210,000 SOL in the pool.

The reserve pool is unlike any other LST-SOL liquidity pool. Every LST can tap into the reserves in this pool, whether it’s a large LST with large deposits like jitoSOL or bSOL, or a small upstart LST, The Reserve’s liquidity can serve them all.

In terms of business attributes, the reserve pool may be difficult for ordinary users to perceive, and it is not open to public deposits. It is more about providing services to project parties with liquidity pledges. This reserve is the basis for providing deep, immediate liquidity for staked SOL.

You can think of it approximately as the “deposit reserve system” in traditional finance.

When you want to “Unstake”, due to the existence of the reserve system, your unstaking operation will become smoother —- there is no need to wait or any other processes, the SOL in the reserve pool can satisfy you first No matter what the current liquidity of LST is, there are always reserves in the pool for you to withdraw.

• Router: any path for LST exchange

Router allows two LSTs that usually have no path to convert to and from each other. Unification of LST liquidity is achieved by allowing small LSTs to access the liquidity of larger LSTs.

Previously, the usage of each LST was limited to the amount they could raise in the Orca/Raydium Liquidity Pool (aka the xSOL/SOL Pool). If the pool is too shallow, their liquidity (that is, the ability of LST to immediately convert to SOL) will be too weak, which means that it is ineffective as LST, and other DeFi protocols will not integrate LST because of the underlying mechanism. Say, your LST cannot safely liquidate assets.

This is also the key to the inability to turn around the matryoshka business mentioned above - the repayment efficiency of your LST is in question, so how can you talk about starting a business based on LST?

but Through the routing mechanism, Sanctum can connect large and small LSTs and unlock a unified liquidity network.Like claws, Sanctum’s router can rip off and put on different liquidity wrappers (whether you call it aSOL or bSOL), depositing and withdrawing staking accounts into different LSTs.

For example:

• Users deposit SOL and receive 1 jitoSOL - this is actually a liquidity wrapper for the user’s own pledge account;
• When a user exchanges via the Sanctum Router, what happens on the backend is that the staking account is withdrawn from jitoSOL and deposited into the jSOL pool, providing him with JuicySOL.

This means that liquidity is no longer a real issue for the new LST. If you need to convert LST to SOL, Sanctum Router can quickly withdraw your staking account from LST and deposit it into any LST with a deep liquidity pool.

All LST liquidity is now unlocked and shared by everyone.

Judging from the data released by Sanctum, as of the end of March, the transaction volume brought by routing services has reached 500 million US dollars, which shows the demand for different LST replacements on Solana.

Overall, Sanctum is actually optimizing the fragmented liquidity staking status in the Solana ecosystem, connecting large and small liquidity staking pools, so that any LST in the ecosystem has deeper liquidity support, thereby providing support for different LSTs. More ways to play provide backup.

Insufficient liquidity is no longer a potential psychological anxiety that LST cannot cash out. LST’s more matryoshka doll methods can run more reassuringly.

From native staking to LST

In fact, Sanctum did not appear suddenly. Its predecessor can be traced back to Socean Finance, the native staking protocol on Solana.

Socean Finance is a decentralized algorithmic staking project that improves Solana’s network security and provides users with risk-free returns. The project was launched on the mainnet as early as September 2021, and in the same year it received 5.75M in seed round financing, led by Dragonfly, with participation from Redshirt and Jump.

But at that time, Solana was not as popular as it is today. The collapse of the FTX empire also caused Solana to experience a long period of neglect.

As the market recovers and Solana makes a comeback, the narrative changes and new gameplay frequently emerges.

Socean Finance naturally realizes that relying solely on the previous simple Solana pledge pool cannot well solve the current pain points of Solana ecological liquidity.

Therefore, in the past year and a half, Socean has been committed to the development of Sanctum, from native staking to liquid staking aggregation, using another way to realize the vision of making all SOL more liquid.

For some projects, switching to whichever track is hot is more like a realism of quick success;

This change of Sanctum is more like a business accumulation in the same line. Since we have already done the staking of native SOL, it is natural to do the aggregation of liquidity staking. We have both the ability and the demand.

Given that there is currently no similar project in the Solana ecosystem to aggregate the liquidity of LST, Sanctum is still a non-consensus project worthy of attention outside of AI, Depin and MEME hot spots.

But how far Sanctum can go depends on the overall market environment and risk changes.

In a bull market environment, liquidity aggregation is the lubricant for many businesses, and everyone wants better liquidity; in a bear market, liquidity dries up, and no matter how good liquidity aggregation is, it may become a decoration in name only.

It remains to be seen whether Sanctum can usher in a tailwind moment across the cycle.

Disclaimer:

1. This article is reprinted from [techflow], the original title is “Interpretation of Sanctum: Solana liquidity pledge aggregator led by Dragonfly, liberating SOL fragmented liquidity”, the copyright belongs to the original author [Deep Tide TechFlow], if you have any objection to the reprint, please contact Gate Learn Team, the team will handle it as soon as possible according to relevant procedures.

2. The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

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