The Rise of Liquid-Staked Tokens (LSTs): How JitoSOL is Contributing to Solana's Decentralization
Introduction
Since the FTX exchange collapse, liquid-staked tokens, or LSTs, have experienced a resurgence on Solana. While the total LST supply currently stands around 11 million out of nearly 400 million SOL staked, this represents less than 3% of the active stake. With significant growth potential, the expansion of LSTs can pave the way for increased total value locked (TVL) on Solana, especially in the domain of decentralized finance (DeFi) protocols. In this article, we explore the significance of LSTs and their ability to promote the decentralization of the Solana network.
Why Users Should Care About LSTs
LSTs offer several advantages that make them appealing to users. First, non-rebasing LSTs, such as those on Solana, may allow users to capture rewards without incurring taxable events, since the quantity of LST tokens in the wallet does not change (please consult a financial professional for advice specific to your situation). Additionally, LSTs can be readily sold during periods of high volatility, eliminating the need to wait for the typical 2-3 day unstaking period. Certain tokens such as JitoSOL also allow equitable distribution of maximal extractable value (MEV) to token holders. Finally, the "liquid" nature of LSTs allows them to be moved into DeFi protocols to be used as collateral, provide liquidity (LP), or even leveraged staking (again, not financial advice--but possible). Using an LST in DeFi comes with risks, but may allow the user to earn rewards in excess of normal staking. Examples are vaults or mixed SOL/xSOL LP pairs that receive LP rewards in addition to staking rewards. While the use case for LSTs is compelling from a user standpoint, LSTs also have tremendous potential to promote network decentralization.
The JitoSOL Liquid Stake Token: Encouraging Network Decentralization
To promote Solana’s decentralization, the JitoSOL liquid stake pool was developed. This pool distributes stake across more than one validator (not possible with solo-staking), and currently boasting approximately 2.4 million SOL in active stake. The stake is nearly evenly divided among 65 validators (as of Epoch 512), and distributed across data centers and ASNs to maximize censorship resistance and uptime of the network. The JitoSOL token has experienced notable growth in value committed to the protocol since October 2022, resulting in improved stake distribution and overall network health. As the TVL continues to increase, the Solana network is expected to become more decentralized. As shown below, the stake is nearly evenly distributed amongst its validator set.
Image 1. JitoSOL Stake Pool Distribution by Validator
One notable characteristic of the JitoSOL pool is that it engages validators beyond the largest ones. By distributing marginal stake to validators below the top one-third of the total stake (we’ll call it the Nakamoto Threshold), the pool plays a crucial role in promoting the network's Nakamoto Coefficient, which aims to counteract vote concentration and enhance consensus decentralization. Consequently, the stake is well-distributed across autonomous system networks (ASNs) and various data center locations worldwide to maximize censorship resistance and uptime of the network.
Image 2. Jito Stake Pool delegation to validators below the Nakamoto Threshold
The Importance of Geography and Client Software Diversity
Geographical distribution is a key aspect of decentralization. The scatter chart of stake size versus latitude and longitude reveals how the JitoSOL stake is spread across multiple continents and countries, although focusing primarily in the Northern Hemisphere. Future improvements could involve expanding nodes to South America, Africa, and Australia.
Image 3. Jito Pool Stake Distribution by Latitude and Longitude. Bubble size is stake (SOL), bubble color is software version.
Below, we see the pool’s stake distribution by ASN. Notably, there’s not a pronounced reliance on Amazon Web Services (AWS), with less than 150k of the 2.4M staked SOL at AWS Ashburn.
Image 4. Jito Pool Stake Distribution by ASN
Validator client software diversity also contributes to network resilience and hardening. Although choices are currently limited, the JitoSOL pool predominantly utilizes the Jito-Solana fork of the Solana Labs client, primarily versions 1.14.xx and 1.16.xx. Wider adoption of the 1.16.xx client offers extended feature support while promoting an even more robust network.
Image 5. Jito Pool Stake Distribution by Software Client. JitoSOL validators all run the Jito-Solana fork to enable MEV rewards.
Expanding Decentralization with Different LST Options
The Solana network currently features four major LSTs: mSOL, stSOL, jitoSOL, and bSOL. While the total supply remains relatively low, the growth of each LST flavor, with its own unique stake delegation algorithms, contributes to network decentralization. While mSOL's TVL is approximately double that of stSOL or JitoSOL, the competitive landscape on Solana provides a more equitable environment compared to other networks like Ethereum, ensuring that no single pool dominates network consensus. Preventing a liquid staking monoculture is essential to the health of the network. Here, competition is a very good thing!
Conclusion
Liquid-staked tokens (LSTs) serve as vital drivers for the decentralization of the Solana network. Encouraging wider participation, stake distribution across multiple validators, and fostering diverse geographical and client software representation ultimately strengthens the resilience, security, and long-term success of the Solana blockchain ecosystem. The JitoSOL stake pool provides an option for stakers who care deeply about decentralization, and the convenience of a liquid token that can be used in a variety of ways.
Data source: https://flipsidecrypto.xyz/ashpeezey/jito-stake-pool-facts-ZCGRea (by @solanobahn)
Disclaimer: The content of this blog post is for informational purposes only and does not constitute financial advice. You must conduct your own research.