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
ㅤHolding bSOL
ㅤDepositing bSOL in Solend
ㅤLiquidity Pools: AMMs
ㅤSolend bSOL/SOL looping
ㅤConclusions
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 BlazeStake’s bSOL as they are a very popular stake pool with a ton of DeFi integrations.
Holding bSOL → 10.22% (3.46% from BLZE)*
The simplest way to make gains from bSOL is to just hold the tokens in your wallet and trade them back for SOL at a later date.
By holding bSOL, you are also rewarded with BLZE (BlazeStake’s Governance token), regular snapshots are taken to determine your participation in the SolBlaze ecosystem which are calculated based on your SolBlaze Score. BLZE is then periodically airdropped to your wallet. The more bSOL you hold, the more BLZE you will receive.
Your BlazeScore can be increased by staking SOL with BlazeStake and/or using bSOL in DeFi strategies which we discuss further below.
Holding bSOL = 1:1 BlazeScore (1x)
To learn more about BLZE and how it can be utilized, see here.
Risks: Protocol risk, although it is worth noting that BlazeStake actually uses the official open-source smart contract built by Solana Labs engineers (the same team that writes the code for Solana itself).
Mitigations: Blazestake is very cautious with any changes to their core protocols and have had several rigorous audits (read more here.)
Depositing bSOL in Solend → 7.79%*
Solend is a well established borrowing platform on Solana offering great lending APY’s, making it a popular choice for the community.
When you deposit bSOL in Solend, you receive interest from borrowers as well as liquidity partner rewards. In this case, when supplying bSOL, you receive rewards in BLZE. At the time of writing, the returns are around 7.75% BLZE rewards.
Lending bSOL also contributes to your BlazeScore at 1:1.5 ratio (1.5x).
Risks: Because you are now engaging in another set of protocols, you are exposed to the Solend protocol risks in conjunction with bSOL 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 → 7%–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.
Liquidity Pairs:
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 bSOL/SOL pair you would have to have an equivalent amount of SOL and bSOL. What this means for providing stake pool tokens to a liquidity pool is you are possibly missing out on half of the gains from bSOL due to the other side of the Pool not increasing in value.
You can see a list of available liquidity pools on BlazeStake
Impermanent Loss:
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.
Risks:
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 bSOL/SOL looping → 20–40%*
Note: we built a companion Solend APY calculator for this strategy
While you can make gains by just supplying bSOL, 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 60% 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.
bSOL/SOL loop
The bSOL/SOL loop is performed by supplying bSOL and using the bSOL collateral to borrow SOL up to 60% of the value of bSOL supplied. Once you’ve borrowed that SOL, the next step is to convert the SOL to bSOL. You can do this on either Jup.ag or directly on BlazeStake. We recommend that you check both and go with the one that provides more bSOL for a given amount of SOL. Once you have converted the SOL to bSOL you navigate back to your borrowing platform (Solend in this case) and supply more bSOL. Now that you have supplied additional bSOL 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 bSOL will approach 4x the value you started with and you are borrowing 3x the original value of bSOL but in SOL.
Rewards
This is where the power of bSOL comes in. Because bSOL is constantly increasing in value relative to SOL, you are exposed to the value increase in the total amount of bSOL supplied and the bSOL you supplied from the borrowed and exchanged SOL. Because of the leverage applied, your rewards from the gains of bSOL are now ~4x more than before.
Hypothetical Examples
As mentioned above, we built a Solend APY calculator with special logic to handle the intrinsic rewards from simply holding bSOL 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 bSOL 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 bSOL’s price relative to SOL is very stable. Additionally, the value of bSOL 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.
Conclusions
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, talk alpha, and more.
* All APY’s in this article are the current values at the time of publishing Dec 23. 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%
Please consider staking with us if you found this article helpful. Search “Cogent” in your wallet or stake directly on our website https://cogentcrypto.io/.
Why stake with us?: At Cogent Crypto we strive to be a helpful and contributing part of the Solana community, deliver maximum value to our stakers and provide the opportunity to bring others along the ride of our success. We are a JITO enabled validator who are proud to offer our stakers healthy and competitive APY returns, consistently being in the top of the APY return leaderboards. Besides offering top rewards, Cogent Crypto also offers a unique NFT collection known as the Cogent Cogs. You can learn more by joining our Discord or you can check out our website CogentCrypto.io for more information and additional instructions on how to stake.
