#42 — Marinade In One Essay

Ahmed
11 min readAug 22, 2023

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Photo by Austin Ban on Unsplash

“The Dutch, the Argentine, the Singaporean, the Slovak, the Czech, the Russian, the Belge, the American, and the Israeli all met each other on Discord” may sound eerily similar to the start of a dirty joke but that is the true origin story of Marinade DAO (hereinafter referred to as “Marinade”).

Far from dirty, it is possibly the greatest public goods success story on Solana and maybe all of Web3. If decentralization ever needed a poster moment, this would be in the Top 3.

Funded with $80,000 in grants (zero capital raise), Marinade today is the largest DeFi platform on Solana in terms of Total Value Locked (“TVL”) or in the parlance of Traditional Finance (“TradFi”) normies, deposits.

This deep dive into Marinade will address everything — the mission, the journey, the product suite, governance structures & much more. Buckle Up!

Part 1 — Native Staking, Liquid Staking, Marinade & OPOS

Photo by Ian Schneider on Unsplash

1.1. Problem Statement — Native Staking

Native staking as a product involves delegating your tokens to a validator in return for a yield. The validator, essentially, uses your stake to earn rewards for validating transactions on the blockchain & keeps a spread while passing on the bulk of the yield to you.

The problem statement here is that those delegating their tokens lose liquidity & this, in itself, is a major disincentive to staking. The end result is that either:

  • The staking yield has to go up to justify the loss of liquidity with the knock-on effect being higher inflation & a lack of token circulation to build the dApp ecosystem on the chain or;
  • Validators, representing a small minority of the circulation, continue to validate transactions potentially putting the security of the blockchain itself at risk.

1.2. Liquid Staking — A New Paradigm

Unlike native staking, those delegating their tokens under a liquid staking mechanism retain liquidity of their stake by receipt of a derivative token that represents it. If mass adoption & acceptability is available, such a derivative would work exactly like the locked token & allow for:

  • Lower inflation of the base coin by virtue of modest staking yields being offered;
  • Higher block security as validators with the highest proof of stake validate transactions;
  • The ability for the derivative token to continue to foster ecosystem growth with dApps and utilities.

1.3. Liquid Staking With Marinade

Marinade solves these issues with its own liquid staking solution whereby:

  • Those willing to delegate their $SOL can do so in return for $mSOL. This is not a one-for-one swap & the discount applied to $mSOL is representative of the staking yield that may accrue. So, for example, a 100 $SOL stake would yield ~ 93 $mSOL representing a 7% forward yield.
  • The $mSOL obtained is in essence proof of custody of your delegated $SOL and is widely acceptable across the Solana ecosystem — specifically DeFi where it can be used to generate additional yield as collateral for borrowing or for providing liquidity.
  • All this while you retain complete liquidity as you can, at any time, swap $mSOL into $SOL or other SPL tokens for which a liquidity pool is available or un-stake immediately on the Marinade protocol on a sliding fee scale.
  • Your $SOL holdings, in the meantime, our delegated onwards, by Marinade to validators through an automated delegation strategy that looks for diversification, appraises past performance & optimizes yield.

1.4. Marinade Native Staking — A Truly OPOS Thing

The second product under the Marinade armor is their version of Native Staking. However, before we address that, it is important to determine why anyone would prefer native staking over its liquid staking alternative given the benefits of the latter:

  • It so happens that despite its many advantages, liquid staking is exposed to smart contract risk, that is, when you lock your base token under liquid staking, you are essentially locking them with a program that may be susceptible to the risk of human intervention &/or malicious attacks.
  • The counter-argument is that native staking exposes delegators to the bad actions of validators where they may be penalized for bad behavior or coming short on their KPIs. Hence, the risk is the same here.

This is where Marinade shines with its automated delegation strategy. With a bird’s eye view of the validator space an individual wallet would not have to their advantage, they choose the best validators (over 100 at a time) to stake with and manage the portfolio for optimization.

However, this is not all. The real Only Possible On Solana (OPOS) fact, is the way native staking with Marinade is not possible anywhere else so far on Solana or the wider Web3 ecosystem:

  • As it stands, under the native staking product, Marinade only acquires the stake authority of the delegation & not the withdraw authority. This is consistent with the stake account structure of the Solana Program Library.
  • The implication is that you, as the delegator to Marinade, are not dependent on them un-staking their positions and returning your $SOL to you. In fact, you can use most wallets to revoke the stake authority granted to Marinade / their chosen validators when you staked natively & reassign the stake to other validators / get your $SOL back once the epoch ends.
  • So while it may seem that you are delegating your $SOL to Marinade & they are choosing the validators on your behalf, you retain custody by not delegating the authority to withdraw. That firmly stays with you.

The difference, though, is that while the staking yield is higher for native staking as compared to liquid staking, native stakers receive no $mSOL tokens and hence are relatively illiquid. They may redeem their delegated position at the beginning of the next epoch.

Part 2 — Governance Structure, Transparency & Path To Decentralization

Photo by Benjamin Child on Unsplash

2.1. The Multi Sigs & The Marinade Board

Photo by Money Knack, www.moneyknack.com on Unsplash

The original band of 9 from 9 different parts of the world would change by the time the protocol went on main-net in October 2021 and comprised of 7 core contributors. This was the genesis of the decentralized governance structure of the protocol with the establishment of a multi-sig wallet (“joint account” for you TradFi normies) with a majority quorum of 4 out of 7 required to execute transactions.

Over the next few months, the core team would grow to 21 main contributors necessitating the establishment of a council elected through quadratic voting as to which 7 of the 21 would serve a term as signers. This group of 7 is effectively referred to as the Marinade Board and to this day operates the multi-sig — also called the Treasury multisig.

Apart from the treasury multisig, the Marinade Board also controls the operational multi-sig with a quorum of 4 out of 7. The authority of this multi-sig is limited to making certain operational program modifications to the $mSOL — $SOL liquidity pool.

2.2. Transparency — The Smart Contract Multisig

Photo by Hansjörg Keller on Unsplash

Major contract modifications, on the other hand, are the prerogative of the Main Multi-sig comprising 13 signers of which only 3 are from the Marinade Board. The remaining 10 are high-reputation representatives from the ecosystem that directly benefit from the continued security & transparency of the smart contract. These include:

  • Jupiter
  • Raydium
  • Phantom
  • Orca
  • Miton C
  • Mango
  • Solend
  • Solflare
  • Staking Facilities
  • Triton.One

A quorum of 6 out of 13 is required for major contract modifications to be executed.

2.3. Path to Decentralization — The $MNDE Token

Photo by ZSun Fu on Unsplash

While the prevalent form of governance structure as can be seen above is multi-sig / council-driven, Marinade was never going to become a public good unless the masses were given a voice of their own. The true path to decentralization for Marinade, hence, had already begun with the $MNDE token. Here is the journey:

  • Launched in November 2021 with a fair launch (no Initial Coin Offering) & negligible circulating supply;
  • The total Supply is 1,000mn with the mint authority burned & no final date of the full distribution. Instead, the same is determined by DAO votes (more on that later).
  • Initial allocations between reserves, ecosystem incentives & the founding team were 35%, 30%, and 30%.
  • The team allocation was initially on 2-year linear vesting which was further extended by 2 years. However, the inspiration for decentralizing control was overriding & the team voluntarily capped their allocation to 7.5% of the total supply with vesting milestones tagged to TVL growth. The excess 22.5% allocation then resides with the reserve fund.
  • The allocation of 30% for the ecosystem incentives was rolled out through a liquidity mining program whereby anyone adding liquidity to $mSOL as a pair with $SOL or $USDC was rewarded with $MNDE tokens. This was essential to incentivize the staking as no one would want to hold an illiquid derivative of $SOL.
  • Later on, in tandem with the decision to link team incentives with TVL growth, the liquidity mining program was discontinued and replaced with the Open Doors Program whereby DeFi primitives contributing to the growth of Marinade’s TVL were incentivized through $MNDE emissions.
  • The token has one core utility, that is, it is a governance token for the Marinade DAO and drives decision-making for the protocol and treasury as well as part of the validator pool.

2.4. Path to Decentralization — Marinade DAO on Realms

Photo by Shane Rounce on Unsplash

The SPL governance program (or “Realms”) is a Solana Foundation-funded public utility for the provision of tools and primitives that aid in the governance of decentralized communities on Solana. The program comes with certain native features & has been rapidly expanding on these primitives — most recently with the addition of multiple-choice voting.

At the same time, as an open protocol, there are multiple integrations available with other primitives in the ecosystem that allow, for now mainly, treasury management. Marinade, itself, provides certain integrations whereas other notable mentions are Dual Finance & Mean Finance.

The $MNDE token, as stated earlier, serves as the polling currency that drives governance on the Marinade Realm or DAO (Decentralized Autonomous Organization) via smart contracts on-chain. The process is simple:

  • You connect your wallet containing your $MNDE tokens on the Marinade Realm & lock them;
  • By locking your tokens you receive veMNDE tokens (a derivative of $MNDE) that can be used to vote on any live proposals.
  • You can also use your veMNDE tokens to direct 20% of the TVL to certain validators on Marinade’s app (more on that later).
  • Any time you want to withdraw your $MNDE tokens, you would be required to deposit your veMNDE tokens thus triggering a 30-day unlock period before you can access your $MNDE again.

2.5. Path to Decentralization — The Aspiration

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Full decentralization would entail that all multi-sigs are disbanded & all decisions are taken by the DAO only through Realms. However, there are two problems with this approach:

  • At the moment, the tooling on Realms is yet to advance past a certain point where it can directly call upon contract code modifications;
  • There are operational needs that cannot be fully met without a certain operating structure.

It is for these reasons that the aspiration for Marinade is to achieve a separation of powers such that:

  • The treasury multi-sig, funded by approved budgets & any protocol fees, & the operational multi-sig remain in the control of the Marinade Board;
  • The $MNDE holders govern the treasury & the contract modifications parameters.

3. Marinade — The Protocol

Photo by Max Komthongvijit on Unsplash

3.1. Marinade — Revenue Parameters

The Marinade Protocol makes revenue in the following ways:

  • Management fees from the $mSOL liquid staking pool;
  • Fees generated from instant un-staking fees
  • Own treasury management that generates yield from DeFi operations

3.2. Marinade — Delegation Strategy

The delegation strategy is to split the total TVL into three parts:

  • 60% of TVL is allocated amongst validators based on their performance score against robustly defined metrics;
  • 20% of TVL is directed based on $MNDE votes
  • 20% of TVL is directed based on $mSOL votes

Together the bottom two equate to 40% which is the directed stake. Essentially, this is the community voting to direct the stake to certain validators for reasons that could be personal to the each$MNDE / $mSOL holder. For example, the validator may be a member of a community I am part of or has built great open-source tools for the Solana ecosystem. Apart from these personal attributes, the voice of the community adds a democratic flavor to the whole operation.

That said, there are certain criteria that need to be met by validators to be able to be considered for a directed stake.

3.3. Marinade in Numbers

Since the launch on Main-net in late 2021, the project has gone from strength to strength and maintained a leadership position in the Solana DeFi space despite the disastrous impact of major Web3 protocols/companies, especially FTX / Alameda, going bust. Denominated in $USDC, the fall in the price of $SOL has had a major impact on $ denominated TVL but as the graph above on the left shows, the protocol has continued to maintain the amount of $SOL staked by and large. Furthermore, as per the graph below by Defilama, Marinade continues to be the top protocol by TVL on Solana representing almost 43% of all TVL on Solana DeFi.

This is representative of the strength of their liquid staking product by virtue of the wide prevalence and acceptability of $mSOL within the Solana ecosystem as a medium of exchange plus their automated delegation strategy that constantly rebalances and optimizes for yield and performance.

Part 4 — Conclusion — Built on Solana For All Of Web3

In conclusion, Marinade is a robust, decentralized & extremely cost-effective staking protocol that enables the growth of the Solana ecosystem, DeFi, and beyond, while also ensuring network security. The fact that fees on Solana are so low makes it an ideal destination for Web3 capital to take advantage of dynamic portfolio yield optimization strategies which would be too costly to implement on other chains. In this respect, Marinade is the most well-positioned protocol to be the number one choice for Web3 DeFi yield seekers.

Disclaimer: The intent of this post is educational in nature. The views presented herein, if any, are the personal opinion of the author & do not represent that of his employer nor are financial advice. Please do your own research before investing in or using any product mentioned in the post. The author may or may not be invested in any particular product.

References:

  1. Marinade Website — https://marinade.finance/
  2. Marinade Documentation — https://docs.marinade.finance/
  3. Marinade Documentation — https://marinade.finance/blog/
  4. Marinade App — https://marinade.finance/app/validators
  5. Marinade Stats — https://stats.marinade.finance/d/sqUQd1Onk/marinade-kpi-dashboard?orgId=1&refresh=1m
  6. Marinade Dashboard — https://flipsidecrypto.xyz/discover?d_search=marinade
  7. Marinade on Realms — https://app.realms.today/dao/MNDE
  8. Marinade on Medium — https://medium.com/marinade-finance/mnde-tokenomics-update-revisiting-incentives-at-marinade-3fc2d087d764
  9. Marinade on Youtube — https://youtube.com/@marinadefinance
  10. Solana DeFi by TVL — https://defillama.com/chain/Solana
  11. Jack the Pine — Twitter — https://twitter.com/jackthepine/status/1693686915894055264?s=20
  12. Image Credits — “Built for Whats Possible” — https://solana.com/tr/possiblehttps://solana.com/tr/possible

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