SANCTUM RESEARCH - PART 1

Greythorn Asset Management
10 min readMay 27, 2024

MARKET OPPORTUNITY

Liquid staking revolutionises the way assets are managed in PoS networks by transforming traditionally illiquid staked assets into liquid ones. Staking typically involves locking up crypto holdings to support the blockchain’s security and operations, which renders these assets inaccessible for the duration of the staking period. Liquid staking, however, issues Liquid Staking Tokens (LSTs) in exchange for the staked assets. These LSTs represent both the staked amount and the accrued rewards, allowing users to trade, utilise them in DeFi applications, or leverage them as collateral without having to wait for the staking period to end.

EigenLayer, a decentralised restaking protocol on the Ethereum network, takes this concept further. It enables users to restake their LSTs by depositing them into EigenLayer’s smart contracts, in return for Liquid Restaking Tokens (LRTs). These LRTs encapsulate the value of the staked tokens, staking rewards, and additional rewards from EigenLayer’s operations, providing users with greater flexibility and potential for increased profits.

The total value locked in liquid staking has seen explosive growth, soaring from $30 million to over $57 billion in under four years. Lido, a major player in the liquid staking space, alone accounts for approximately $35 billion in staked assets.

Source: DeFiLlama

Despite this growth, there’s a disparity in staking ratios across different networks. For instance, Solana boasts a staking ratio of over 70%, significantly higher than Ethereum’s 27%. However, LSTs constitute only 6% of Solana’s staked supply, compared to over 40% on Ethereum, according to Dune Analytics.

Source: Dune Analytics

This presents a substantial market opportunity for Sanctum in the Solana ecosystem. By introducing innovative restaking options and promoting a competitive environment, Sanctum can offer Solana stakers more flexibility, increased liquidity, and additional profit opportunities. This not only aligns with the growing DeFi movement but also caters to the demand for more efficient and diverse staking solutions, ensuring Solana does not follow Ethereum’s path of a dominant staking protocol like Lido.

THE PROTOCOL

Sanctum Infinite Pool

Sanctum Infinity is an innovative liquidity pool designed to make trading and staking Liquid Staking Tokens on Solana easier and more efficient. Think of it as a big, flexible pool where you can swap various LSTs seamlessly.

Here’s the cool part: when you buy an LST with SOL, you might notice you get a bit less than one LST. This is because LSTs earn staking rewards over time, which makes them more valuable. For example, JitoSOL has a higher price than SOL because it has been collecting rewards since its launch, showing about an 11% return.

Sanctum Infinity uses Solana’s stake pool data to price LSTs accurately. Traditional AMMs can be inefficient, especially when there’s low liquidity or a big trade happens. But Infinity’s method ensures precise pricing no matter the liquidity, thanks to its use of reliable on-chain data.

When you put your LSTs into the Infinity pool, you get INF tokens in return. These tokens are special because they earn staking rewards from all the LSTs in the pool and collect trading fees from swaps, giving you an extra source of income.

Infinity also keeps things balanced by adjusting swap fees dynamically. This means it encourages trades that help maintain a good mix of different LSTs in the pool, ensuring both new and established tokens can grow and provide good returns.

The Infinity pool allocation strategy encourages the creation of new LSTs by setting aside 20% of the pool for new, approved LSTs. Each new LST needs at least 1,000 SOL, adjusted based on how much value it holds and its recent yield. The remaining 80% of the pool is dedicated to a mix of existing LSTs and trading returns. This part aims to achieve diverse yields and high trading volume, with allocations based on the value each LST holds, and future adjustments will consider yields and support for smaller LSTs.

Source: Greythorn Internal

With this approach, Sanctum Infinity is a cutting-edge solution for trading and staking a wide variety of LSTs, designed to support an endless number of tokens efficiently.

Validator LST

A Validator LST is a token that represents your stake with a specific validator. These tokens grow in value as they accrue staking rewards, offering a flexible and efficient way to participate in staking.

When you traditionally stake SOL, a stake account is created and delegated to a validator. To unstake, you need to deactivate this account, which takes some time. In the liquid version, when you deposit SOL into the Validator LST pool, a stake account is created and delegated for you. In return, you receive a Validator LST that represents your stake.

Benefits of Validator LSTs

  • Native staking APYs are similar across validators, making it hard for them to stand out. Validator LSTs, help validators differentiate themselves by issuing their own tokens and offering unique rewards.
  • LSTs allow stakers to engage in the broader DeFi landscape, providing more opportunities for rewards.
  • LSTs reduce the need for creating liquidity pools, allowing new and smaller validators to compete with larger ones, making the validator set more decentralised and competitive.
  • LSTs simplify the staking process, offering instant swaps and avoiding the lengthy unstaking periods associated with traditional methods.

The Reserve

The Sanctum Reserve Pool offers deep liquidity for all LSTs on Solana, providing unique benefits and addressing key challenges in the staking ecosystem.

Users typically have two options to redeem LSTs:

  1. Deactivate and Wait: Deactivate the stake account and wait 2–4 days for SOL.
  2. Instant Trade: Trade the LST for SOL on a DEX for immediate liquidity.

The Sanctum Reserve Pool simplifies the process of redeeming LST by allowing users to exchange LSTs for instant SOL. The Reserve then deactivates the stake account and retrieves the SOL after the cooldown period. It works by accepting staked SOL and giving SOL in return, then unstaking the staked SOL at the end of each epoch to refill its reserves.

The Reserve also supports a wide range of DeFi protocols, allowing them to accept any LST as collateral. This broad compatibility boosts the utility and adoption of LSTs.

Importantly, the Reserve Pool helps smaller validators by providing a shared source of liquidity, making it easier for them to compete with larger validators and promoting a more decentralised network. This democratises staking, offering users more choices and higher returns.

Source: Desentralised.co

The Router

Sanctum’s Router is a tool that makes it easy to swap between different LSTs on the Solana blockchain. Here’s a simplified explanation:

A stake account is a locked account of SOL that you delegate to a validator. When you stake SOL or deposit it into an LST, a stake account is created and managed by the pool.

Previously, the liquidity of an LST was limited by its specific pool. Shallow pools made it hard to convert LST to SOL quickly, reducing their effectiveness and attractiveness for DeFi.

Sanctum’s Router solution allows seamless swapping between any LSTs by moving stake accounts between pools. This process unifies liquidity across all LSTs.

Sanctum charges a flat 0.01% fee on every LST to SOL swap through the Router.

In essence, Sanctum’s Router unlocks the full potential of liquid staking on Solana by enabling easy and efficient swaps between LSTs, thus enhancing liquidity and usability in the DeFi ecosystem. Lido has become a dominant force in the Ethereum staking ecosystem. As of now, 27% of all ETH is staked, with close to 30% of that deposited in Lido. This translates to a TVL of around $35.5 billion, surpassing the second-largest staking protocol, RocketPool, which holds $4.6 billion. Lido’s TVL represents more than half of Ethereum’s total staked value and nearly one-third of the total DeFi TVL across all chains.

Sanctum vs Lido

Lido’s liquid staking token, stETH, has become a key element in the Ethereum ecosystem. Its liquidity and widespread acceptance make it the “USD of staked assets.” The high liquidity of stETH attracts many users, enhancing its dominance. However, this concentration of power also raises concerns. With the Lido DAO controlling approximately 30% of staked Ethereum, it potentially wields significant influence over the network, which could impact its decentralisation.

Sanctum, on the other hand, is taking a different approach on Solana. Their journey led to a crucial realisation: LSTs are fundamentally fungible, merely wrappers over the same stake accounts. This insight shifted their strategy towards fostering a multi-LST environment rather than competing directly against other staking pools.

Sanctum’s philosophy is about cooperation rather than competition. They aim to create a supportive infrastructure that allows various LSTs to thrive. By focusing on growing the overall staking pie rather than dominating it, Sanctum hopes to achieve greater success.

Lido’s success on Ethereum is built on its dominance and the widespread adoption of its stETH token. This model has proven highly effective but comes with risks related to centralization. Sanctum, in contrast, aims to build a more decentralised and cooperative ecosystem on Solana. By supporting multiple LSTs and fostering collaboration, Sanctum aspires to create a healthier and more inclusive staking environment positioning itself to potentially surpass Ethereum’s staking landscape in terms of innovation and participation.

Sanctum vs Jito

Jito is a Solana-native protocol that gained significant attention with its airdrop in 2023. It has since grown to dominate the LSTs market on Solana, leveraging its governance token, JTO, to incentivize liquidity and integration with other major Solana protocols.

Key Features

  • JitoSOL is the leading LST on Solana, boasting the highest APY, TVL, and volume on Kamino liquidity vaults.
  • Collaborations with top protocols like Solend, Drift, Jupiter, and marginfi enhance its ecosystem presence.
  • Through Wormhole, Jito is expanding its reach to Arbitrum, increasing JitoSOL’s utility.

Jito excels in maximising Extractable Value through its innovative Solana client and blockchain engine. This technological prowess allows it to offer higher staking rewards and optimise transaction sequencing.

While Jito’s growth mirrors Lido’s on Ethereum, the same concerns arise about whether similar dominance might pose risks to Solana’s ecosystem health.

Sanctum focuses on offering robust infrastructure support, ensuring stability and security within the Solana ecosystem. Key Features

  • Infinity Multi-LST Liquidity Pool aggregates liquidity from various trading pairs, enhancing liquidity and reducing slippage risks.
  • Reserve Pools and Routers facilitate instant unstaking services and efficient LST token exchanges, supporting liquidity and stability.
Source: Greythorn Internal

Bullish Fundamental Factors for Sanctum

  1. Sanctum’s unique approach with the Sanctum Reserve and Router provides capital-efficient ways for users to redeem LSTs and swap between them, enhancing liquidity and user appeal.
  2. With a reserve pool of over 200,000 SOL (~$30 million), Sanctum offers robust liquidity, ensuring instant redemption for LST holders and reducing slippage, making it an attractive option for users.
  3. By lowering barriers to creating LSTs, Sanctum enables smaller validators to issue their own tokens, promoting decentralisation and increasing validator competition within the Solana network.
  4. Sanctum’s TVL has grown to over $700 million, positioning it as the 4th largest protocol on Solana, indicating strong market acceptance and trust.

Bearish Fundamental Factors for Sanctum

  1. Despite its innovations, Sanctum faces significant competition from established players like Jito, which is already dominating the LST market on Solana.
  2. Sanctum’s success is heavily tied to the growth and stability of the Solana ecosystem, which has experienced volatility and infrastructure challenges in the past.
  3. While Solana does not currently implement slashing, any future introduction could pose risks to validators and stakers, impacting the attractiveness of staking and LSTs.
  4. The unique mechanisms of the Sanctum Reserve and Router, while innovative, may face challenges in user understanding and adoption compared to simpler staking solutions.

As with all crypto protocols, Sanctum is subject to regulatory scrutiny and potential changes in legislation that could impact its operations and the broader liquid staking landscape.

Breaking into the Sanctum: Part 2

In the upcoming second part of our Sanctum research, we will delve deeply into all the liquid staking tokens within the Sanctum ecosystem. Our goal is to provide a concise comparison, analysing both the risks and potential staking advantages of each LST. Additionally, we will share our insights and opinions on the future of this innovative project.

We recommend staying tuned by connecting with and following us on our socials for the latest updates and insights. Your engagement will ensure you don’t miss any key developments, including our deep dives into how innovative features like the Sanctum Router function within the broader blockchain landscape.

Disclaimer

This presentation has been prepared by Greythorn Asset Management Pty Ltd (ABN 96 621 995 659) (Greythorn). The information in this presentation should be regarded as general information only rather than investment advice and financial advice. It is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. In preparing this document Greythorn did not take into account the investment objectives, financial circumstance or particular needs of any recipient who receives or reads it. Before making any investment decisions, recipients of this presentation should consider their own personal circumstances and seek professional advice from their accountant, lawyer or other professional adviser. This presentation contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Greythorn is not obliged to update the information. Those assumptions may or may not prove to be correct. None of Greythorn, its officers, employees, agents, advisers or any other person named in this presentation makes any representation as to the accuracy or likelihood of fulfilment of any forward looking statements or any of the assumptions upon which they are based. Greythorn and its officers, employees, agents and advisers give no warranty, representation or guarantee as to the accuracy, completeness or reliability of the information contained in this presentation. None of Greythorn and its officers, employees, agents and advisers accept, to the extent permitted by law, responsibility for any loss, claim, damages, costs or expenses arising out of, or in connection with, the information contained in this presentation. This presentation is the property of Greythorn. By receiving this presentation, the recipient agrees to keep its content confidential and agrees not to copy, supply, disseminate or disclose any information in relation to its content without written consent.

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Greythorn Asset Management

Melbourne-based asset management firm specialising in Technology, Web3, Cryptocurrency, and Blockchain. Subscribe for our latest industry insights.