Since our last report on Marinade more than half a year ago, the protocol has seen an increased amount of usage and has had the opportunity to test out various incentive campaigns, which it is further refining. In addition, the protocol has successfully released new products which have seen impressive adoption.

Marinade Earn

One year ago, Marinade introduced the Open Doors Program, a 160M MNDE incentive program to grow the protocol. The program allowed for the distribution of up to 160M MNDE (16% of total supply) for stakers who are contributing 40M net new SOL staked into Marinade. For every 1 SOL held over the full duration of one year in either mSOL, Marinade Native, or directed stake, a user/protocol/validator would receive 4 MNDE. At the conclusion of the program, only ~3M MNDE was distributed, with the bulk of MNDE being distributed to protocols such as Solend and select validators who were able to increase their directed stake. However, overall, the program proved cumbersome to implement due to tracking different staked SOL deltas between all the participating parties. In addition, protocols/validators who received MNDE didn’t further distribute rewards to users as one would have hoped.

As a result of the implementation complexity of the Open Doors Program and excess approved spending left, Marinade launched an alternative incentive campaign. This 3-month MNDE incentive campaign, named Marinade Earn Season 1, was passed by the DAO in September 2023. This incentive campaign distributed up to 40M MNDE in incentives. As part of the campaign, each staker received 1 MNDE per 1 SOL staked over the 3 months of October - December 2023. At the end of the campaign, December 31, 2023, MNDE became claimable as locked MNDE with a 30-day unlocking period. Marinade also introduced a referral program, which allowed referrers to earn 1 MNDE per 1 SOL staked by referees over the 3 months. As a result of the program, roughly 10M MNDE was distributed, and SOL staked with Marinade increased by over 2 million. It is important to note that it is unlikely for all eligible participants to claim their rewards.

As a result of the success, a new incentive campaign, Marinade Earn Season 2, was recently launched on January 1. 25M MNDE is earmarked for this incentive program, and mSOL and native stakers will receive 1 MNDE per 2 SOL staked for the full duration of the campaign from January 1 - March 31. However, native referrals are suspended for Season 2 given that only 300K MNDE was earned via referrals in Season 1. In addition, Season 2 will feature a governor bonus, where MNDE holders will be able to use their locked MNDE to direct stake to the Marinade algorithm, thus earning them additional incentives.

Such incentive programs will likely become increasingly important as the Solana LST landscape becomes more competitive, and with a slowly flourishing DeFi ecosystem, where staking protocols will have to compete on yield generated, but also the utility of their LSTs namely in the form of innovative products and integrations.

Marinade Native

Over the years, Marinade has optimized its delegation strategy with the goal of maximal decentralization and staker rewards. With that, Marinade decided to make its delegation strategy available to everyone through Marinade Native. Marinate Native staking allows anyone to access an automated validator designation strategy, which allows holders of SOL/locked SOL to optimize their staking yield, instead of simply staking with one single validator, which reduces network decentralization.

This has additional benefits, as staking with one validator introduces staking risks such as commission rugging, offline time, server suspensions, forked validators, and more. For example, in epoch 473, Marinade identified 20% of validators (~1% of all nodes) rugged commissions by changing the commission to 100% just before the end of the epoch. Between November 2022 and July 2023, Marinade identified 165 validators who were commission rugging, roughly representing 8% of all validators at that time.

Marinade Native has no smart contract or DeFi interactions, minimizing the risk for stakers who want to diversify their stake. Marinade Native also enables more stake to be controlled by MNDE and mSOL via Directed Stake (40% of Marinade’s delegation strategy).

Thus far, over 1,000 wallets have created Native stake accounts. With the low fees on Solana, Marinade is able to create a stake bot that can cheaply and quickly generate 100+ stake accounts on behalf of the user just from being delegated the stake authority from the staker. It is important to note that Marinade Native charges a 0% performance fee, providing a much needed public good to the Solana ecosystem in decentralizing the stake. In addition, Marinade Native has a 0% deposit fee, and fees to rebalance between validators are covered by Marinade.

As shown below, Marinade Native has shown strong growth in comparison to Marinade liquid staking over the past half a year. Evidently, stakers view Marinade’s delegation strategy quite favorably, given its time in the market and the extensive data set that Marinade has collected, which does allow it to operate a much more sophisticated and data-driven approach to delegation. However, the growth of Marinade Native isn’t particularly beneficial to the protocol given that it does not generate fees for the protocol. But, Marinade Native could potentially act as a free customer acquisition tool, and eventually, these customers would be a lot more comfortable with Marinade’s delegation strategy and potentially choose Marinade’s LST over others when they opt to liquid stake.

Delegation Strategy Updates

Marinade’s delegation strategy is one of the most battle-tested on Solana in terms of active time in deployment, and often has the highest amount of rewards. Despite the lead, Marinade continues to make improvements to its delegation strategy, of which there will be a major improvement implemented in February. For example, the eligibility criteria for stake is now much stricter, and criteria for algorithmic stake and directed stake have been unified. In addition, the concentration score helps to ensure a distributed validator set has been updated, and now consists of Country, City, and ASO. With the new update, the more stake a node has, the less it will receive, as previously, a node’s stake had no effect on stake received from Marinade. There are other updates such as increasing the number of validators that the strategy delegates to, allowing MNDE/mSOL holders to vote for algorithmic stake, and factoring MEV commission as a new parameter.

The last point is an important one, as there are certain Solana validators which have high MEV commissions, for example, BlockSmith and Shinobi Systems which have 90% and 100% MEV commissions. As such, tracking both validator commission and MEV commission is a vital component of a delegation strategy. However, it is important to note that some validators charge a higher MEV commission to provide a lower validator commission for stakers.

Protected Staking Rewards

In December 2023, Marinade introduced Protected Staking Rewards. Since the launch of Marinade Finance, the protocol has managed to support a large number of independent validators, by delegating SOL user deposits while allowing these validators to take a fee from validator rewards generated. However, like many other staking protocols that delegate user deposits to validators, there is always a principal-agent problem. For Marinade to expand its validator set, much like how Lido wants to expand its validator set, the protocol must have some form of an “insurance” system to align economic incentives between validators, the protocol, and depositors. This will ultimately allow the protocol to expand beyond the current set of 100 validators.

Such insurance comes in the form of Protected Staking Rewards. Under this mechanism, each validator must first set up a protection bond to be eligible to receive Marinade stake. Following that, if the validator has poor performance as measured by rewards for a validator being inferior to 95% of the average, the bond deposit will be used to compensate for staking rewards losses incurred by the pool.  

Protected staking rewards will be coming to Marinade in Q1, 2024. In mid-February, initiating a bond will become a validator requirement to receive Marinade stake, but the bond will not need to be funded yet. Some validators have already created their bond account. Come Q2, Protected Staking Rewards will be fully activated, opening up a validator to “slashing” for their bond when required. With the current design, a 50 SOL bond would be required to receive up to 50,000 SOL, only representing 0.1% of the delegated amount. This is in stark contrast to Ethereum, where the most capital-efficient protocol, Stader, still requires a 4 ETH bond for a total validator stake of 32 ETH, representing a bond amount of 12.5%. It is important to note that Marinade stake will still be distributed according to the delegation strategy, however, validators will have to put up a bond in order to be included within the delegation strategy.

Integrations

DeFi integrations for mSOL exploded in the past year as Solana DeFi experienced a revival. With over 45 integrations, users can now swap, lend/borrow, LP, and more with mSOL. One of the notable integrations was Super Stake SOL, a leveraged staking vault that performs recursing borrow/lending of mSOL and SOL via Drift. This is similar to the leveraged looped LST trade on Ethereum for a higher stETH yield. This boosts a depositor’s APY over 2.5x, depending on the lending/borrowing dynamics on Drift. However, there is still liquidation risk from a depeg, as seen from the mSOL depeg that occurred in December 2023 as a result of a large user exiting his mSOL position. 

Marinade Boosted Rewards Market

As a reminder, 20% of Marinade’s TVL is controlled by MNDE voting. Validators can receive votes from MNDE holders, and 20% of Marinade TVL is distributed to eligible validators based on the votes. A further 20% of Marinade TVL is controlled by Directed Stake. As a result of this segment of the delegation strategy, validators are starting to offer boosted rewards markets to attract more votes. For example, Solana Hub built a loyalty league for mSOL (Directed Stake) and MNDE holders, rewarding them with points that translate to additional SOL rewards.

Another example of this is Solana Compass’ Turbo Stake and Lucky Stake. They split their 4% validator commission each epoch with one lucky staker. Or for example, Cogent Crypto, which uses a snapshot tool to provide airdrops or NFT raffles to users who stake directly to them. This gamifies the staking experience, allows validators to build out their own staker communities, and has the potential to attract further depositors to Marinade.

Growth

Over the majority 2023, Marinade has seen its weekly depositors and withdrawers remain fairly stagnant, which is in line with the stagnant growth in stake for mSOL. However, following the massive airdrop from Jito on December 07, 2023, Marinade saw a large increase in depositors and withdrawers, likely as a result of multiple Twitter posts pointing people to Marinade as a potential airdrop protocol. Despite the increase in activity, the total stake in the protocol has remained steady, as those who are liquid staking should be relatively sticky compared to other DeFi sectors. Once you have chosen a liquid staking protocol, you’ll likely be using that specific LST around the DeFi ecosystem even with low switching costs. 

As the graph below shows, Marinade has slowly been losing SOL LST market share over time, most notably to bSOL, BlazeStake’s LST product, and JitoSOL, which is an MEV-optimized SOL LST, with JitoSOL validators running the Jito client. Now being the second largest SOL LST, the growth of JitoSOL was more so a “growing the pie” moment, where the total % of SOL that was liquid staked increased, rather than directly siphoning away stake from mSOL.

However, despite the decrease in market share in SOL LSTs, Marinade has compensated for this through strong growth in its Marinade Native Stake. As shown by the graph below, which shows SOL stake market share, excluding Native Staked, which is SOL delegated through native delegation as part of the core Solana protocol, Marinade Native has gained an impressive amount of market share in a short amount of time.

Risks

There are a few risks to Marinade. The first is the growth of alternative liquid staking protocols. For example, Jito has rapidly captured ~40% of the LST market from <10% a year ago. Further growth in JitoSOL, or other alternative LSTs could pose a growth threat to Marinade, especially since Marinade has an existing token, whereas other protocols without a token may be able to continue to use mechanisms such as points programs to grow market share. However, once JitoSOL airdropped its token, one can observe that its market share has since stagnated, and it is likely that other protocols attempting to replicate Jito’s strategy will not see nearly the same amount of success, due to Jito’s unique positioning with its MEV optimized client. On the other hand, Jito now has a DAO treasury of $440M, which is significantly larger than MNDE’s treasury of $167M, and Jito just closed applications for delegates, who will likely develop incentive programs that leverage the war chest.

Another risk to Marinade is Marinade Native. Marinade primarily generates revenue from its 6% commission on rewards, and further revenue from its instant unstake function, which charges 0.1%-9%. In comparison, Marinade Native has no deposit fee, management fee, or exit fee (however there is an instant unstake fee similar to mSOL). Given Marinade Native’s strong growth, there is a small possibility that Marinade Native cannibalizes mSOL liquid staking, as Solana still has not seen an elevated amount of integrations and demand for LSTs, in comparison to an ecosystem such as Ethereum with ETH LSTs.

Marinade has active plans in place to monetize Marinade Native, which should provide a strong boost to protocol revenue. However, Marinade Native and its delegation strategy have new competition from Jito’s StakeNet, which is a self-sustaining, transparent, and decentralized protocol for operating intelligent stake pools. The program stores three years of history for every validator on the network including vote credits, MEV commission, validator version, etc. Then leveraging that onchain validator history, a steward program computes scores and stake delegation amounts for each validator. Given Jito’s quickly rising LST and client market share, this could potentially be a threat to Marinade, although StakeNet is very much in the early stages of development and is primarily focused on LST delegation whereas Marinade Native is focused on native delegation. Furthermore, stakers might want to use a system such as Marinade Native, which has controllable parameters, and that has also been live for much longer.

Final Thoughts

Marinade has lost market share in the LST sector, as other notable competitors have gained ground. However, Marinade has an impressive and soon-to-be further improved delegation strategy, the growth of a new product in Marinade Native, and nearly $167M in MNDE in the treasury as token incentives for further growth.

Today, only ~5.5% of SOL is liquid staked, and that number has risen quickly from 2% half a year ago. Compared to ETH which has a significantly larger % liquid staked (albeit with differing staking dynamics, e.g. longer withdrawal queues), there is still significant room for SOL LSTs to grow as users seek capital-efficient and yield-bearing solutions. Given Marinade’s current duopoly with Jito in terms of the LST market, we expect sizeable competition on that front and for growth in market share terms to remain limited, but with possible growth in terms of overall SOL liquid staked. However, Marinade’s dark horse could be Marinade Native, which given the superior delegation strategy and impressive returns, could eventually become a revenue generating product. Paired with a much healthier amount of onchain liquidity, with the top pool increasing from $200K to >$2M in liquidity in half a year, MNDE could represent an interesting opportunity, especially in the face of potential future monetization of new products.

This research report has been funded by Sous Vide Ltd.. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency.  Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Sous Vide Ltd.. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures on a monthly basis that are reviewed by appropriate internal parties.

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