Solana Staking Guide Part 2: Advanced Staking Strategies
Leveraging Defi to Super Charge Your Gains
Disclaimer: We run a Solana validator. If you find this article helpful and would like to support us by staking our validator you can find the details at the bottom of this page.
Table of contents
In the Solana Staking Guide Part 1: we talked about staking directly with validators and introduced the concepts of liquid staking. This guide builds on liquid staking and proposes Defi strategies to take advantage of liquid staking tokens on the Solana network. To simplify this article, we will focus on Marinade’s mSOL as they are the biggest and most popular stake pool with the most Defi integrations.
Holding mSOL → 6.2%*
The simplest way to make gains from mSOL is to just hold the tokens in your wallet and trade them back for SOL at a later date.
Risks: The additional risk in this scenario is protocol risk. If there was a bug in the smart contracts built by Marinade then its possible that the value of mSOL could go down.
Mitigations: Marinade is very cautious with any changes to their core protocols and have had two rigorous audits and a professional third-party code review (read more here.)
Staking mSOL for MNDE → 7.9%*
Another way to boost your gains above and beyond simply holding mSOL is to stake it directly back with Marinade in their MNDE stake vault. At time of writing, the APY for staking mSOL is 1.7%*. Combined with the inherent gains of holding mSOL, you get a grand total of 7.9%* APY.
Risks: This option carries no major additional risk over simply holding mSOL. If you do not plan to take risks in other major protocols, this option is a really great one.
Depositing mSOL in Solend → 7.5%*
Solend is the primary borrowing platform on Solana. With a TVL higher than all other lending platforms combined, it is a clear community favorite.
When you deposit mSOL in Solend, you receive interest from borrowers as well as liquidity partner rewards. In this case, when supplying mSOL, you receive rewards in mSOL, SLND, and MNDE (Marinade Dao token). At time of writing, the returns are .51% MNDE rewards and .73% SLND rewards. Those returns combined with the inherent growth of mSOL, you get 7.48%* APY.
Risks: Because you are now engaging in another set of protocols, you are exposed to the Solend protocol risks in conjunction with mSOL protocol risks.
Mitigations: Solend has also taken the time to have a third party audit their smart contracts. You can read their audit here. Because you are not borrowing in this strategy you are not taking on liquidation risks.
Liquidity Pools: AMMs → 6%–20+%**
Most liquidity pools on Solana are evenly weighted pairs of tokens that follow Uniswap’s constant product AMM formula. Whenever you make a swap on Solana using a dApp like Jup.ag, what you are actually interacting with is a liquidity pool created by an AMM. Describing precisely how AMMs work and how liquidity pools function can be its own article. For this article, we will focus on using liquidity pools and how to reason about risks and rewards.
When providing liquidity to a pool, you must provide both tokens that the pool is creating liquidity for. For example, if you are considering providing liquidity in an mSOL/SOL pair you would have to have an equivalent amount of SOL and mSOL. What this means for providing stake pool tokens to a liquidity pool is you are possibly missing out on half of the gains from mSOL due to the other side of the Pool not increasing in value.
You can see a list of available liquidity pools on marinade.finance
Impermanent loss can be tricky to understand and reason about. We have created an Impermanent Loss Calculator to help understand hypothetical scenarios.
Impermanent loss occurs when one token changes price relative to another token within a liquidity pool. It doesn’t matter which direction either token makes any price change creates a loss for the pool. Thankfully the loss is relatively minor until you start seeing price changes greater than 50%.
Here’s a quick cheat sheet to get a feel for loss amounts relative to given price changes:
25% price change results in 0.6% loss relative to holding
50% price change results in 2.0% loss relative to holding
75% price change results in 3.8% loss relative to holding
200% price change results in 5.7% loss relative to holding
300% price change results in 13.4% loss relative to holding
400% price change results in 20.0% loss relative to holding
500% price change results in 25.5% loss relative to holding
Note: If the price ever reverts back to the same ratio then the loss is recovered. This is why its referred to as “impermanent” loss.
Fees and rewards:
To incentivize investors to take on impermanent loss risk, liquidity pools charge fees to make swaps and often have additional rewards outside of that fee structure. Rewards outside of the fee structure are referred to as “liquidity mining”. When token creators want to encourage and incentivize liquidity pool engagement, they provide the aforementioned “liquidity mining” opportunities.
When token creators allow liquidity mining, i.e. providing rewards for a liquidity pool, it is often a constant amount for the whole pool. When pools first open up you can see astronomically high APYs that will soon deflate into something a bit more sustainable. When you see the APY deflation, it means the incentive structure set up by the token creator was sufficient in incentivizing enough people to provide liquidity.
Aside from protocol risks of the liquidity pools, the obvious biggest risk is impermanent loss. You can mitigate the risk by picking pairs with stable prices but that typically equates to less rewards. Use your judgement and reason about the chances of the impermanent loss being higher than the APY over the course of a year.
Solend mSOL/SOL looping → 30–35%*
Note: we built a companion Solend APY calculator for this strategy
While you can make gains by just supplying mSOL, much greater returns (and risk) can be had when you take advantage of borrowing. Borrowing on lending platforms such as Solend are asset-backed borrows (i.e. it’s not possible for you to borrow more than you supply). In fact, the maximum you can borrow is 75% of your supplied capital.
All borrows and collateral supply values below are computed in dollar values supplied by multiple on-chain “oracles” such as Pyth and Switchboard. Smart contracts use these on-chain price values to determine borrow amounts and liquidation thresholds.
What is looping?
Looping on a lending platform refers to the process of maximizing your total utilization by building up a larger and larger collateral supply and borrowing balance. For the example below, we use 75% Loan to Value and a starting supply amount of $10,000.
- Supply Asset A: $10,000 Supply Collateral Total
- Borrow Asset B up to max utilization: $7,500
- Convert Asset B to Asset A: $7,500
- Supply Converted Asset A: $17,500 Supply Collateral Total
- Borrow Asset B up to max utilization: $5,625
- Convert Asset B to Asset A: $5,625
- Supply Converted Asset A: $23,125 Supply Collateral Total
- … etc.
The mSOL/SOL loop is performed by supplying mSOL and using the mSOL collateral to borrow SOL up to 75% of the value of mSOL supplied. Once you’ve borrowed that SOL, the next step is to convert the SOL to mSOL. You can do this on either Jup.ag or directly on marinade.finance. We recommend that you check both and go with the one that provides more mSOL for a given amount of SOL. Once you have converted the SOL to mSOL you navigate back to your borrowing platform (Solend in this case) and supply more mSOL. Now that you have supplied additional mSOL you can once again borrow more SOL. But this time it’s 75% less than the previous time. If you do this many times, your total supplied mSOL will approach 4x the value you started with and you are borrowing 3x the original value of mSOL but in SOL.
This is where the power of mSOL comes in. Because mSOL is constantly increasing in value relative to SOL, you are exposed to the value increase in the total amount of mSOL supplied and the mSOL you supplied from the borrowed and exchanged SOL. Because of the leverage applied, your rewards from the gains of mSOL are now ~4x more than before. Not only are you getting rewards from the mSOL supplied, you are also earning rewards from borrowing SOL due to the negative interest rate of borrowing SOL. At the time of writing, the borrow interest rate for SOL on Solend is -1.94%*. When the borrow APY is negative, you receive rewards instead of paying interest.
As mentioned above, we built a Solend APY calculator with special logic to handle the intrinsic rewards from simply holding mSOL and other liquid staking options. You can use this tool to go through a few different scenarios and estimate what your APY returns will be.
Protocol Risks: Because you are now engaging in another set of protocols, you are exposed to the Solend protocol risks in conjunction with mSOL protocol risks.
Liquidation Risks: Lending platforms such as Solend keep their protocol secure by allowing others to liquidate positions when the borrow utilization increases beyond the maximum allowed. For a Solend liquidation, 20% of the borrower’s loan is paid off by the liquidator and the equivalent amount plus 5% is taken from the borrower’s collateral as an incentive to liquidate the position.
For example: Bob supplied $10,000 USDC and borrowed $7,500 BTC. If BTC then goes up by 6.69%, the BTC value increases to ~$8,001 and Bob’s account is now eligible for liquidation. The liquidator then repays 20% of the BTC loan ($1600), collects $1,600 from the collateral USDC supply to cover the BTC, and collects an additional 5% of the loan repayment amount in USDC ($80 in USDC) for a grand total of $1,680. Now Bob has $10,000 - $1,680 = $8320 in USDC, $8,000-$1,600 = $6400 in BTC. At the same time, the liquidator paid $1,600 in BTC and received $1,680 in USDC for a net positive of $80.
Mitigations: The largest risk mitigation component of this strategy is the fact that mSOL’s price relative to SOL is very stable. Additionally, the value of mSOL continues to increase relative to SOL, providing a growing liquidation buffer over time.
The remaining liquidation risk closely tied to protocol risk. When extreme volatility happens and price oracle delays can cause a momentary spread in price. This happened once in Solend’s history and a few accounts got liquidated due to price oracle inaccuracies. To mitigate that scenario, the Solend team paid back the liquidation losses for all those affected by protocol issues.
This guide touches on a few specific strategies with varying degrees of risk. There are other defi options out there and many more are being built. When engaging in defi it is important you understand the underlying protocols and how they work. While we’ve outlined some of the key risks to consider there is always outside risks like price fluctuations, rug pulls, scams, etc. Always DYOR and stake responsibly.
If you’d like to continue the discussion and learn more, join the Cogent Crypto discord. We discuss Defi, answer questions, and talk alpha, and more.
* All APY’s in this article are the current values at the time of publishing Feb 22. APY can and does change all the time.
**Liquidity Pool APY’s can occasionally shoot up to 100+% but quickly come down. Most stable, well supplied pools will be sub 20%
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