GM, this is your Daily Bolt briefing
Amidst a brutal bear market, one of the ecosystems that some see potential in is Solana. With DeFi as well as NFT/ gaming applications, the EVM-alternative network boasts one of the highest developer counts in all of crypto.
Keep reading to learn more about Solana DeFi, specifically around how liquid staking of $SOL is playing out.
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1/ Bell Curve - State of Solana DeFi Ecosystem
Preview: Myles and Mike are joined by Lucas and Xavier to discuss the state of DeFi and LSD ecosystems on Solana, MEV, and the future. Click here to listen to the full episode (88 mins).
Read our Note (7 mins) and save 81 mins.
Background
Mike (Host) - Co-host at Bell Curve
Myles (Host) - Co-host at Bell Curve
Lucas (Guest) - Founder of Jito Sol
Xavier (Guest) - Chief Investment Officer at Chorus One
Jito Sol - Solana’s 1st MEV-powered liquid staking derivative
Chrous One - a staking solution platform on Solana
Liquid Staking and DeFi on Solana
Lucas talks about the potential of Solana's DeFi ecosystem, emphasizing that operating in a non-gas-constrained environment opens up new possibilities for DeFi applications.
Myles adds that a robust DeFi ecosystem on Solana would increase the opportunity cost of not participating in liquid staking, thereby making the ecosystem more capital-efficient.
Xavier discusses how liquid staking tokens (LSTs) are still in their infancy on Solana, partly because the native staking mechanisms are already efficient.
Lucas mentions that the ease of native delegation on Solana has led to a high staking ratio but low LST penetration. He suggests that this is because most people won't go out and buy hardware just to stake when easier options are available.
Myles points out that the more broken the native delegation system is, the more likely it is for liquid staking protocols to take off. He cites Lido's success on Ethereum as an example, attributing it to Ethereum's limitations in native staking.
Mike reiterates that a more robust DeFi ecosystem on Solana would naturally lead people to seek more capital-efficient methods like liquid staking.
Lucas adds that as DeFi grows on Solana, the demand for liquid staking solutions will likely increase to allow users to maximize their capital efficiency.
Lucas explains that Jito has a curated set of node operators.. He discusses the importance of voting performance in Solana and the automation involved in running a curated set.
Lucas shares that Jito Sol is building a system to fully automate any staking pool, which will live purely onchain
Mike comments on the Solana mindset of automating processes, mentioning that it's a unique approach compared to Ethereum and Cosmos.
Xavier lists four categories for evaluating validators: performance, participation, ecosystem contributions, and security. He discusses the application process and due diligence involved.
Lucas confirms that they look at many of these factors, emphasizing the importance of voting performance and commission rates in Solana.
Xavier discusses the different considerations for validators in Ethereum, Solana, and Cosmos, mentioning that MEV rewards are becoming more significant in Ethereum.
Validators and Decentralization
Lucas argues that hardware requirements are not static; they evolve over time due to technological advancements like Moore's Law. He suggests that this makes it easier for more people to participate in staking over time.
Myles adds that each blockchain ecosystem, like Ethereum, has its own nuances when it comes to decentralization and that it's not just about hardware requirements.
Mike highlights that most of the validation in blockchain networks is done by professional entities like Chorus One, Figment, and Blockdaemon, rather than individual node operators.
Xavier points out that this is not necessarily a bad thing as long as these professional entities have strong internal controls and ensure that the stake is geographically distributed.
Lucas discusses how Cosmos and Solana started with the expectation that validators would mostly be professionals, which is reflected in their design choices. For example, Cosmos has a 150-validator active set that demands a lot from its validators.
Myles notes that Ethereum is trying to make validators as simple as possible to increase accessibility, contrasting this with Solana's focus on performance and professional validators.
Mike suggests that the future of decentralization might be more nuanced than the current binary debates suggest, such as the debate between modular and monolithic systems.
Lucas agrees and adds that as technology evolves, the barriers to entry for individual validators may decrease, leading to a more decentralized ecosystem.
Design Choices and Miner Extractable Value (MEV)
Lucas explains that Ethereum aims to keep validators as simple as possible to make the system more accessible, contrasting this with Solana's focus on performance.
Myles adds that these design choices can have downstream implications, affecting everything from apps built on the platform to staking yields and user experience.
Mike says that MEV is handled differently in Ethereum and other ecosystems. In Ethereum, the focus is on how to redistribute MEV.
Xavier points out that other ecosystems like Solana aim to minimize MEV through low-latency events and other techniques like threshold encryption.
Lucas adds that Ethereum's acceptance of MEV and its redistribution mechanisms are part of its platform tax, which can affect user experience.
Myles discusses how professional validators like Chorus One are building specialized nodes and hardware to maximize MEV capture. This is their way of competing against liquid staking pools while also being part of them.
Lucas mentions that this could be a competitive differentiator in the future, especially as the market turns bullish and people start caring more about yield relative to trust and brand safety.
Mike suggests that the future will likely be more nuanced than the current debates suggest, especially regarding how MEV is handled.
Xavier adds that as technology evolves, new methods for handling or minimizing MEV may emerge, potentially leading to a more user-friendly experience.
Incentives and Platform Tax
Lucas says that Ethereum's design choices prioritize ETH's "money-ness" and features like censorship resistance, but these choices may lead to an unhealthy set of incentives.
Myles adds that Ethereum's platform tax essentially comes from these design choices, which prioritize certain aspects like ETH's value and decentralization.
Mike points out that linking the burning of ETH to user experience could lead to a not-so-great user experience but may increase the value of ETH, creating a potentially unhealthy incentive structure.
Xavier notes that this could be problematic in the long term, as it might not align with the best interests of the users.
Lucas discusses how the focus on burning ETH and other design choices could lead to a trade-off between user experience and the value of ETH.
Myles states that while safety and security are probably the number one factors for users, the yield will not be inconsequential, especially as the market turns bullish.
Mike suggests that the future of how platform tax and incentives are structured will likely be more nuanced than what current debates suggest.
Lucas adds that as the technology and ecosystem evolve, there may be shifts in how platform tax and incentives are viewed, potentially leading to a more balanced and user-friendly system.
Future of Blockchain Ecosystems
Mike says that aside from Ethereum, Bitcoin, and Solana, most blockchain projects don't have real product-market fit yet, at least by Web 2.0 Silicon Valley standards.
Lucas adds that the true test will be user preferences, which will ultimately decide the success of various blockchain ecosystems.
Myles notes that while some platforms like Uniswap might not have millions of users, they could still have product-market fit in a B2B context.
Mike highlights that many assumptions held dear by the blockchain community could change as the technology and user base evolve.
Xavier adds that the future is likely to be more nuanced than the current binary debates, such as those between modular and monolithic systems, suggest.
Lucas discusses how the next phase of blockchain development will likely be driven by user preferences and market trends, rather than just technological capabilities.
Myles mentions that as the market turns bullish, factors like yield and user experience will become increasingly important.
Great breakdown, thank you
appreciat 💪