Friday, March 1, 2024



Risk-tolerant crypto traders on the Solana blockchain are taking a page from Ethereum’s “Liquid staking token” (LST) craze by leveraging their SOL token derivatives in pursuit of lofty yields.

Their rather obtuse process involves staking SOL tokens for a proxy receipt token called mSOL and then using those mSOL as collateral to borrow SOL – and then swapping that SOL for mSOL again – is reminiscent of the sort of leverage-on-steroids approach long witnessed in other corners of the digital-asset markets.

Drift Protocol, an on-chain crypto trading project for Solana, released a new service Tuesday known as “Super staking,” which packages this entire re-leveraging cycle into a one-click service – in the hopes of catering to a broader appeal.

Digital asset traders have quickly taken up the new offering, according to the team. Drift said its daily active user base hit all-time highs immediately after the launch, highlighting the market’s hunger for annualized yields that can climb as high as 10%.

The trade became so crowded that Drift nearly ran out of SOL tokens to lend out, co-founder Cindy Leow told CoinDesk.

“Definitely a huge success overnight,” Leow said in a Telegram message. “It shows that people are extremely keen on passive/leveraged yields.”

Separately, SOL’s token price jumped in crypto markets over the past 24 hours, up 8.8%, making it one of the day’s top performers among digital assets tracked by Messari with a market cap of at least $500 million.

LSTs and mSol: How it works

The yields generated by Drift’s Super Stake come from mSOL, a LST issued to SOL stakers that use Marinade Finance. mSOL tokens appreciate over time as their underlying SOL tokens accrue interest from Solana’s proof-of-stake processes. The longer a depositor holds mSOL, the more SOL they can expect to get when they redeem their mSOL.

Super Stake levers up this market math by letting holders borrow new SOL against their mSOL – and then staking that SOL for more mSOL. More mSOL means more yield-bearing upside. There’s more risk too: A rapid price move could lead to fast losses and possibly liquidation.

Drift’s Super Stake packages up a yield loop that savvy mSOL holders previously did manually: borrowing SOL against their mSOL collateral and swapping that borrowed SOL for more mSOL – on repeat. Each levered loop-de-loop increases depositors’ exposure to the yield accrued by their mSOL tokens; Super Stake maxes out at three times around.

This convoluted procedure is representative of the LST economies popping up on many proof-of-stake blockchains. Market-leader Ethereum has the most mature landscape with Lido’s staked ETH tokens locking up $14 billion in ETH value, per DeFiLlama. Marinade’s mSOL is comparatively tiny at $114 million worth of SOL, but it’s still the biggest LST on Solana.

“People have been doing this manually ever since mSOL came out,” said Marinade’s Head of Communications, Brandon Tucker. “Drift just finally built a nice UI for it.”

Risks of DeFi looping

If mSOL loses value relative to the price of SOL, those SOL borrowers who post mSOL as collateral could get liquidated. Each turn around Super Stake’s loop-de-loop lowers the threshold at which this might happen – increasing risk for the user and the protocol too.

Those risks were on full display during FTX’s collapse last November when Solana’s top on-chain lending venue Solend – the most popular venue for borrowing against mSOL – nearly imploded from an mSOL depegging.

The pseudonymous Soju, who formerly worked at Solend, had to coordinate between lenders and market makers to defend the peg and save the protocol, Discord records show.

“We came very very close to dying that day,” Soju said of Solend this week. The protocol had fatefully planned to launch its own yield loop feature the same time that FTX collapsed. Solend “killed the project” instead.

He said he emerged with a distaste and distrust of leveraged yield loops.

“They underestimate the risk and they’re doing it for little to no gain,” he said of Drift, which isn’t taking a profit from Super Stake – but directs 10% of borrow fees into an “insurance fund” that would backstop the protocol if things go south.

Loew, who calls the addition “a highly requested public good,” said Drift is better-suited to handle market madness than Solend was during FTX’s collapse. A depeg in mSOL would have to be more severe – and also sustained – to shake the protocol or its users.

“If shortfalls do happen, the protocol automatically handles shortfalls with either insurance or social loss without external intervention, in a way Solend’s didn’t,” she said.

Edited by Bradley Keoun.



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