Marinade Analysis — The Pioneer of Liquid Staking on Solana

Let’s say you have 20 SOL just sitting in your wallet and today you finally decide to do something with it to earn a little passive income.

What should you do? Stake it to earn rewards? Supply as collateral on Hubble, lend it on Solend, or maybe use it to provide liquidity on Orca?

Why not do it all!

Through Marinade Finance, you can stake your SOL without losing access to the liquidity of your tokens.

This week we‘re covering Marinade Finance, the first non-custodial liquid staking protocol built on Solana. As usual, this is not financial advice but only educational content. DYOR pls.

Table of contents

1. Summary
2. Recap on liquid staking
3. Marinade’s history
4. Core features
5. Tokenomics
6. Governance
7. Roadmap
8. Final thoughts & Open-ended talk with Marinade

Part 1. TL;DR

• Liquid staking allows users to stake assets and receive a collateralized token that can be used in a plethora of DeFi protocols.
• Marinade is Solana’s first liquid staking protocol. It has 7.4M SOL staked and 32 dApp integrations as of Sep 1st, 2022.
• Marinade hasn’t raised any money from investors and is self-funded with help from the ecosystem grants awarded by Solana and Serum.
• mSOL is the derivative token representing stake position in the Marinade stake pool. MNDE is the governance token.
• Marinade’s Unstake Pool generates swap fees to LPs and liquidity to users who choose to unstake immediately.
• MNDE token holders who lock at least 1,000 MNDE to mint a Marinade Chef NFT can take part in on-chain governance of the Marinade DAO.

Part 2. Recap on liquid staking

Solana is a PoS blockchain that uses a staking mechanism. Through staking, users can help secure the network while earning rewards. Here’s the problem: if your SOL is locked up with a validator, you can’t use it anywhere else within Solana’s ecosystem. In other words, your staked SOL is illiquid.

Liquid staking, allows you to use your SOL in DeFi protocols and also stake them at the same time. You receive a collateralized, liquid version of the staked SOL through protocols like Marinade, which can then be used in all your favourite DeFi protocols. Proving you truly can have your cake and eat it too!

Part 3. A lil bit on Marinade’s history

Back in April 2021, the team was awarded 3rd place in Solana x Serum DeFi hackathon with their liquid staking solution. After the hackathon, they decided to grow their team. We all know that finding qualified developers is already a hard enough task, but having to do it on a chain like Solana, that’s still in its infancy, makes it even harder.

Through Github, the team finally connected with a separate team who was also working on a liquid staking solution. Match made in heaven, Github really is the dating app for developers. Long story short, Marinade was born.

Marinade didn’t take the easy path, I’m sure you know the one. Raising money from VCs, hiring a marketing agency to hype up the project and selling a token through IDO at an insane valuation while having no real product to show yet. Instead, they went a different route. They haven’t raised any money from investors and are self-funded with help from the ecosystem grants awarded by Solana and Serum. That’s it. And it’s this that helped them stay laser focused on product development and to cultivate a community that truly cares about what Marinade is doing.

After choosing the hard way and some glass-chewing, Marinade was officially launched on Mainnet on August 2nd, 2021. To ease things in, they started with an initial cap of 10,000 SOL staked max. An hour after the launch announcement, they reached 50,000 SOL staked. In 2.5 days, the cap of 100,000 SOL was reached and no further stake orders were allowed.

Fast forward to a little over a year, today. Total TVL now sits at 7.4M SOL, a whopping 7,000% growth. With 32 dApp integrations, ranging from protocols building DEXs, derivatives trading, yield farming, wallets, and many more. The creation of Marinade DAO, a community that contributes to Marinade through its governance token and NFT. What a year!

In the words of our Solana Papa Anatoly — “Liquid staking solutions like Marinade help increase decentralization while creating new opportunities for users through staking derivatives.”

Part 4. Exploring Marinade’s features

Marinade offers two options to start liquid staking:

1) Stake your SOL and delegate to a pool of validators chosen by Marinade’s delegation strategy, in return you receive mSOL.

2) Deposit your stake account if you’re already delegating your SOL to a validator, and receive mSOL.

mSOL, or “marinated” SOL, is the derivative token representing stake position in the Marinade stake pool. Marinade mints mSOL for users according to the mSOL/SOL ratio within that epoch.

Let’s say there’s currently a supply of 90 mSOL, and a total of 100 SOL staked on Marinade. I decide to stake my 20 SOL through Marinade at this given epoch. I would receive 18 mSOL in return.

To unstake, users can choose between Unstake Now or Delayed Unstake. Marinade performs a mSOL → SOL swap using the liquidity pool (more on this later) and calculates SOL according to the current mSOL price. After a swap fee deduction, you can receive your SOL right away. The swap fee ranges from 0.3% — 3% depending on the available liquidity in the Unstake pool. In the current situation, it’s usually never more than 0.3%.

Let’s say that it’s been 3 days, there’s now 160 SOL staked in Marinade (this increases because staked SOL earns yields) and 110 mSOL minted. This makes the current mSOL price 1.45, my 18 mSOL is now worth 26.1 SOL.

Since I chose Unstake Now, I would need to pay for a swap fee.

The current parameters of the Unstake pool are:

Max fee: 3%
Min fee: 0.3%
Liquidity target: 100 SOL

There’s currently 200 SOL in the unstake pool, and I want to unstake 26.1 SOL. This maintains the remaining SOL balance above the liquidity target of 100, so I would only be charged the minimum of 0.3% fees. 26.0217 is the final amount of SOL I would receive if I choose to unstake 18 mSOL now.

The ROI in this scenario is roughly a 30% yield in 3 days.

But what if the parameters of the Unstake pool are different?

Let’s assume there’s currently 120 SOL in the unstake pool, and I want to unstake 26.1 SOL.

This drops the remaining SOL balance below the liquidity target of 100. In this case, my swap fees would be calculated using the formula:
unstake_fee = max_fee — (max_fee — min_fee) *amount_after / target

I would receive 25.6353 SOL. The ROI in this scenario would be roughly 28% yield in 3 days.

If I don’t want to pay for the swap fee, I can opt for Delayed Unstake. When I choose this option, I will receive a claim ticket in the form of an NFT that indicates the amount and due time of my unstake. At due time, I will be able to claim my SOL and have the NFT claim ticket destroyed in exchange.

How to become a liquidity provider on Marinade?

Aside from staking, users can also provide liquidity to Marinade. Remember the Unstake liquidity pool we just talked about? Users deposit SOL to that pool and receive a LP token representing their share of the pool. They can then earn swap fees generated when other users opt for Unstake Now.

The Marinade mSOL/SOL Unstake pool is an internal pool that’s intentionally unbalanced and operating at its best if 100% of its liquidity is filled with SOL from liquidity providers.

Since the pool only accepts SOL deposits, the Unstake liquidity pool is free from impermanent loss (excluding transaction fees from Solana of course)

The pool is used to provide immediate liquidity for unstaking, match staking and unstaking orders, and to provide a fair-price source for mSOL liquidations. It has a linear swap fee decreasing until the target liquidity is reached to cover for operation costs and incentivize liquidity providers. 50% of the fees goes to liquidity providers and the remaining 50% back to the Marinade treasury.

What about unstaking SOL?

~97% of SOL remains staked the old-fashioned way: to one validator. A warm-up and cool-down period at the start and end of each epoch is required when staking or unstaking SOL.

Typically, one of the key tradeoffs when staking with a single validator is the stake’s illiquidity because you generally have to wait until the next epoch to get your SOL back once you initiate the unstake. The waiting period (48–72 hours) can mean that you could lose major trading opportunities.

Marinade’s instant liquid unstake feature available for mSOL is now also available for SOL! All you need is a stake account with more than 1 SOL at least 2 epochs old and you can utilize the Marinade dApp to instantly unstake it. The unstaking fee is the same 0.3% as mSOL.

Check out more mSOL strategies here.

Part 5. Tokenomics

You now know what mSOL is, how to get it, and what to do with it. But what is MNDE?

MNDE, or Marinade token, is the governance token of Marinade DAO. It was launched on October 7th 2021 and allows you to take part in the governance of the Marinade protocol and treasury. The token had a fair launch with no ICO or VC allocation.

Token holders who lock their MNDE to mint a Marinade Chef NFT (more on this later) are eligible to take part in on-chain governance of the Marinade DAO. This includes oversight of the treasury, the delegation of the stake pool and liquidity mining incentives from token emissions.

In June 2022, Marinade executed the Token Exchange Program to bring builders, validators, and other protocols into the Marinade DAO through asset swaps. Participants exchanged stablecoins, SOL, or their own governance tokens in exchange for MNDE.

MNDE can be traded on open markets, however holders cannot participate in governance until they lock a minimum of 1,000 MNDE to mint a Chef NFT. Once you acquire a Chef NFT, you can participate in proposal voting, as well as utilize MNDE in Validator Gauges and Liquidity Mining Gauges.

What are Validator Gauges?

Validator Gauges determine the allocation of 10% of the total SOL in the Marinade stake pool. Gauges feature weights that allow the Chef NFT holder to assign different amounts of MNDE to multiple validators.

Let’s say I have 2,000 MNDE and I assign a weight of 4 to Validator A, 3 to Validator B, 2 to Validator C, and 1 to Validator D.
Validator A gets 800 votes. B gets 600, C gets 400, and D gets 200.

Suppose that a total of 20,000 MNDE is used among all Chef NFT holders to vote, and the delegation amount is 200,000 SOL. Each validator’s total votes aggregated are as follows:
Validator A — 10,000 votes
Validator B — 4,000 votes
Validator C — 4,000 votes
Validator D — 2,000 votes

Each validator will receive their percentage of votes as SOL stake. Validator A receives 100,000 SOL. B and C receive 40,000 SOL, and D receives 20,000 SOL.

What are Liquidity Mining Gauges?

Marinade provides incentives to Solana DeFi protocols through MNDE token emissions. Chef NFT holders decide where to send 1M MNDE every week by using these gauges to vote for their favourite liquidity pools and protocols.

Part 6. Governance on Marinade DAO

If I wanted to participate in Marinade’s governance, I would need to hold and lock at least one Chef NFT. To get a Chef NFT, I can either buy it off a secondary NFT marketplace, or stake at least 1,000 MNDE. If I decide to stake more than 1,000 MNDE, my Marinade Chef will have a level that represents my locked MNDE.

Let’s say I have 5,000 MNDE and I decide to lock them all to get a level 2 Marinade Chef. While browsing through Magic Eden one day, I came across this beast of an NFT and decided that I absolutely need to have it. I ape in 150 SOL to make it mine. After looking at its metadata on Solscan, I realized that it has 25,000 MNDE locked in it, making it a level 3 Marinade Chef. Since I bought Chef #1768 from the owner, the sale also facilitates a transfer of the locked MNDE within the NFT. I can unlock it to receive the 25,000 MNDE for myself.

After unlocking the NFT and receiving the 25,000 MNDE. I decided to lock it into my existing level 2 Marinade Chef to increase its voting power in governance. When leveling up, the art of the NFT will also change. Voting power is equal to the number of locked MNDE in the NFT. In this case, someone with a level 1 Marinade Chef will have less voting power than me.

Part 7. Roadmap

Marinade’s current roadmap highlights include:

• Revisit the delegation strategy, fee structure, and generated revenue strategy.
• Reduce the team allocation at the expense of the founding team and allocate tokens to the DAO treasury.
• Build vote delegation to allow representatives to vote on behalf of delegators.
• Create an ecosystem MNDE grant program to support builders and projects building on top of Marinade and mSOL.
• Transfer ownership of MNDE treasury from the team multisig to the MNDE token holders.
• Stress testing, governance contract audits, and exploring options to upgrade the existing Marinade DAO tooling.
• Transfer ownership of Marinade program parameters and the delegation strategy to the MNDE token holders.
• Market making for MNDE.

Two of the biggest objectives Marinade hopes to explore are to make Solana performant and decentralized, and spread control over Marinade to the Solana ecosystem.

Read here to understand more about Marinade’s roadmap.

Part 8. Final Thoughts

Marinade is one of the very few projects we’ve covered that genuinely surprised us with how steady, but quick, they’ve grown within this one year since they first launched. We actually joked about it internally while we were doing our research for these content pieces.

What stuck to me the most was how deep within the Solana ecosystem Marinade has managed to build. Even when I was writing my last research piece on Derivatives Protocols on Solana, I couldn’t help but notice that almost every single DeFi derivatives protocol had mSOL listed. With it being one of the most productive assets on the leading Solana DeFi protocol, Friktion.

For a protocol that’s just a year old, and operating with no VC funding, Marinade has achieved so much. From a fully working DeFi product, to integrations deep within the ecosystem, to a DAO with NFT and token governance that ties back into its DeFi protocol. I’m eager to engage in a more open-ended talk with Marinade on the state of the DeFi space, and hopefully tap into the minds of Marinade’s team to get a glimpse of their secret sauce for success.

An open-ended talk with Marinade

Sixohfour: I just read a blogpost about this protocol that decided to shut down after going through a series of crises. In it, the founder said their biggest mistake was that they didn’t raise enough money.

Their argument was that running a DeFi protocol is way more capital intensive than a usual startup. Including things like legal costs, rounds of security audits, and needing a substantial amount of liquidity for releasing a token. Coupled with the harsh conditions of the bear market, and needing to expand their internal team to increase the pace of development. They believed all this was impossible, or near impossible, to do without fundraising.

Given that Marinade is a protocol that was able to develop and scale up without raising any outside capital, what are your thoughts on this?

Marinade: Investment runway can postpone problems if there is no product-market fit. Marinade was fortunate to receive funding from the Solana Foundation and Serum at the beginning to launch liquid staking on Solana and immediately found a supportive user base. Web3 is all about community and being different, so Marinade went the difficult way, bootstrapping and building with an ethos that resonated well with our community who feel like real owners of the protocol and have helped share the message.

Sixohfour: Building on to the previous question. While I was researching, I couldn’t help but notice that all of your docs and blog posts have very extensive information and detail, from infographics, to NFT-themed gifs and banners. You’ve also built many products that extend from Marinade’s core liquid staking product.

I presume that Marinade has a robust and sizeable internal team with many inhouse (or even outsourced?) talents. I’m constantly seeing protocols struggle with needing to increase their pace of development to become profitable and hiring too quickly. How does Marinade approach the balance of this, and what was your process of building Marinade to where it is today?

Marinade: Thanks for noticing! Marinade has been very capital efficient and the team loves to ship! After the third month of being live on mainnet, Marinade made about $250k in profit and reinvested all of it into the team and growth of the project. Marinade is capital efficient and attracted dedicated talent who preferred to make things right over making quick money in crypto. Now that the market has slowed and money is harder to come by, the team has become more compact with an emphasis on fully committed people who are very knowledgeable about the project so they can really make meaningful contributions and know what needs to be done.

Sixohfour: It’s definitely been a tough year for the market, and consequently for DeFi. Having experienced the fastest yearly drawdown of liquidity in history. Everyone rushed for the exits and this wave of volatility created a deleverage event that caused a liquidation catastrophe that wiped out Luna, Voyager, Celsius, 3AC.

The overall fearful sentiment casted over the crypto market and everyone joked about seeing $3 SOL or 3 digit ETH. DeFi had to withstand an insane amount of volatility. How has all of this affected Marinade, what were the risks you had to withstand, and what were some of the actions you took?

Marinade: Marinade didn’t see much drop in SOL TVL, but considering the drop of SOL price, we felt the downturn considering the protocol charges its fees in mSOL. It resulted in a restructuring of the team and ensuring everything being worked on is contributing towards the main goals of decentralizing Solana and the Marinade DAO itself. A proposal was also passed that updated the fee structure of Marinade to make the protocol healthier long term. We are also taking this time to emphasize and explore partnerships with larger and institutional participants that could have a real meaningful impact on the ecosystem.

Sixohfour: Speaking of the wipeout of Luna/Voyager/Celsius/3AC. There’s been a paradigm shift in the evolution of DeFi. We’ve gone from farming during the DeFi summer of 2020, to OHM/Anchor forks in 2021, and now the “real-yield” narrative with protocols that offer sustainable yields especially during the bear market. What are your thoughts on this “real-yield” narrative, and how has Marinade contributed to this?

Marinade: As a bootstrapped project, sustainability is built in because Marinade needed to make revenue from the very beginning. There are about $16M yearly staking rewards flowing through Marinade, most of it distributed to mSOL holders and validators in the ecosystem. So there’s not only decentralization but also value to holders contributed by Marinade.

Sixohfour: I can boldly assume that Marinade is bullish on Solana, being the first liquid staking protocol that chose to build on Solana. A lot of projects we’ve talked to mentioned Solana’s ability to provide an environment to build a cheaper, faster, more low-latency protocol. As we all know, Solana is still in its early stages, and obviously there are drawbacks to this.

Notably frequent network outages, the wallet hack, and the most recent irreversible program closure that accidentally shut down a DEX. How has Marinade dealt with these Solana network security issues, and what is your outlook on the future of Solana?

Marinade: Marinade has always taken security and performance very seriously and is trying to be a leader in the ecosystem by example. Marinade might be the only protocol on Solana that requires ecosystem consensus to change the code and upgrade the contract, which has been the case for almost a year now.

Marinade remains 100% committed to Solana and this summer’s performance of the blockchain shows a lot of progress. The Nakamoto Coefficient has risen to 31, which is putting Solana among the leaders of decentralization for PoS L1’s, and there is still plenty of room to raise this metric.

Sixohfour: The Solana community is paying close attention to Aptos and Sui. There was a Trilemma event in SF where major Solana players like Anatoly and David Ticzon gathered with many Solana developers to discuss these three chains. With a number of Solana protocols even deciding to move or build onto these two chains.

There was already the concept of superfluid collateral in 2019 that manifested into staking derivatives that can flow between L1 chains. What are your thoughts on this, and what is Marinade’s approach to achieving composability?

Marinade: Going multi-chain is tempting and we can’t rule this option out (in fact, it’s been also discussed by the community on the Marinade Forum). But for now we’re much more interested in doubling down on Solana and making Marinade a core infrastructure part of its evolution. Despite being as high as the #1 TVL protocol on Solana, we’ve only attracted about 2% of all staked SOL, so there is still plenty of work to do before thinking about expansion.

Sixohfour: What can users look forward to? Any alphas to drop? Last remarks?

Marinade: Marinade launched on-chain governance in April and already has quite a few governance updates in store for later this year. The team has been contributing to Solana Labs’ governance module and also plans to empower the DAO with more capabilities, including treasury ownership. Governance updates also include the introduction of vote delegation and bribing mechanics.

That’s a wrap, boys and girls! Make sure to follow Marinade’s socials to stay up to date on all of their new features.

https://twitter.com/MarinadeFinance

Join the Marinade Discord Server!

-SixOhFour