Epsilon Research — Staking Derivatives on Solana
We are excited to begin the Epsilon Research series!
The Epsilon Research series is a collection of articles that will explore many topics within the Solana ecosystem and provide a concise yet comprehensive overview of Solana decentralized finance protocols and mechanisms.
This first piece of the Epsilon Research series will cover liquid staking and staking derivatives on Solana, and how Epsilon makes use of these derivatives in its treasury.
Staking vs. Liquid Staking
To dive into the liquid staking ecosystem within Solana, let’s first briefly discuss the mechanisms of traditional staking. Staking is the method by which participants of a cryptocurrency network lock up their tokens to help secure and propagate the network forward. Usually, users can stake their cryptocurrency for an allotted vesting period and generate yield on their locked tokens, which in turn helps secure the underlying Proof-of-Stake network.
The key incentive to staking for most users is earning a yield on staked tokens, and this usually amounts to annual yields between 5–8% on Solana (Nominal Staking APY currently at 6.59% between ~1400 validators). Users must select a validator and stake their tokens directly through them.
Liquid staking, on the other hand, is the act of delegating your SOL to a protocol, such as Marinade Finance, which uses automated staking strategies. In return, Marinade will provide derivative tokens (in this case “marinated SOL” tokens — mSOL), which represent your staked SOL tokens. Your staked SOL is automatically spread throughout a number of validators and works to further decentralize and democratize validator staking distributions. Liquid staking offers further advantages over traditional staking methodologies, which will be discussed.
Staking Derivatives on Solana: mSOL
When delegating your SOL to a protocol such as Marinade Finance, you are, in return, given their native derivative token known as mSOL. These tokens act as a receipt or IOU, allowing you to exchange them later on for your original staked SOL and accrued yield reward. This means that while staking your SOL, you can simultaneously use Marinade’s mSOL within the Solana DeFi ecosystem for lending, staking, and other services.
Using liquid staking and mSOL within the Solana DeFi ecosystem has a number of use cases, as well as benefits over traditional staking, including:
On-chain liquidity provision: Many liquidity pools use mSOL/XXX pairs, allowing you to provide liquidity and generate yield
Borrowing/lending: mSOL can be used as collateral or borrowed for further DeFi strategies and expanding yield aggregation
Circumventing staking lockups: When staking SOL through a validator, there is currently a lockup period where staked SOL is locked (until the end of the current epoch). Liquid staking through Marinade allows for users to unstake immediately and freely use mSOL within the DeFi ecosystem
Validator selection: Marinade uses automated staking strategies to allocate vested SOL. The protocol aims at furthering the decentralization of Solana validators and stakes users’ SOL in a variety of different validators outside the top 20 (which account for roughly 34% of all staked SOL in the network)
Epsilon and Staking Derivatives
Epsilon plans on holding mSOL in its treasury by offering mSOL bonds. These bonds will work to expand the treasury and will allow it to accrue yield from staking rewards automatically. Additional stable assets will then be used to back additional EP native tokens, ensuring that every EP in circulation is 100% backed by a pegged asset.
Using mSOL bonds will increase the exposure of the Epsilon treasury to the growth of the Solana network and will support Marinade’s vision of furthering the decentralization of Solana validators.
Epsilon will use staking derivatives and tap into the liquid staking ecosystem by making use of Marinade’s mSOL tokens. mSOL bonds will provide Epsilon DAO members with more exposure to the growth of Solana and work to promote decentralization both within the protocol and the network itself.