Marinade - The Base Layer of Solana DeFi
Gm degens, today's topic of discussion is Marinade, which at its core, operates as a staking protocol on the Solana blockchain. This article will discuss Marinade's unique value propositions, competitive advantages and some risks
Let’s get started…
Coming up Next:
• The Marinade Chronicles
• What is Liquid Staking Anyways?
• The Tech
• Risks
• Final Thoughts
The Marinade Chronicles
In the spring of 2021, during the Solana x Serum Hackathon, two ambitious teams from diverse backgrounds converged. Their mission? To pioneer the first liquid staking protocol on Solana.
This wasn't your typical Silicon Valley story. By August, without a dollar from venture capitalists, Marinade was operational. No seed rounds, no private sales, and certainly no boardroom meetings with VCs. Their sole focus was on innovating the first-of-its-kind liquid staking solution for Solana.
From its inception, Marinade set out with a noble vision: to offer open-source tools for the community's benefit. Early in their journey, they championed a SOL delegation strategy, supporting over 400 validators. This strategic move not only bolstered these validators but also played a pivotal role in decentralizing the Solana network further.
Marinade highlighted how their initial SOL delegation, during Solana's nascent stages, was instrumental in fortifying the network's decentralization.
Fast forward, and Marinade's achievements are evident. The Nakamoto Coefficient, Solana's decentralization metric, impressively jumped from 16 to 33. Marinade then refined their delegation strategy, introduced Marinade Native for streamlined native staking, and continued their commitment to algorithmic and permissionless delegation. What's more, 40% of this is steered by the MNDE/mSOL community, supporting validators globally.
By November 2021, the MNDE token was launched, and Marinade evolved into an on-chain DAO by April 2022. Their latest stride? Transitioning governance to Realms, fostering a tighter bond between the Marinade protocol and MNDE holders.
Diving into Marinade: Marinade stands as a beacon in Solana's staking landscape. Stake your SOL tokens and entrust them to Marinade's automated strategy, shaped by MNDE and mSOL holders. Whether you prefer native staking or liquid staking (yielding "marinated SOL" tokens or mSOL), Marinade caters to both. Since July 2023, Marinade native offers an enhanced staking experience without the smart contract fuss.
Opting for liquid staking SOL for mSOL? Witness the mSOL value grow in tandem with Solana's inflation rewards. And if you ever wish to withdraw, you can either wait a short while (1-2 epochs) or, for those seeking immediacy, retrieve it instantly for a minimal fee. Marinade's dApp ensures a smooth transition of your SOL stakes to their validator pool. Plus, trading enthusiasts can seamlessly exchange between mSOL and SOL on secondary markets.
Before diving further into the protocol, we first need a baseline understanding of liquid staking.
What is Liquid Staking Anyways?
Staking: The Modern-Day Revolution
In a nutshell, staking is the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange. Stakers also help establish which blocks are valid. Let’s dive into how staking works for Ethereum to get a better understanding:
Ethereum Staking: Your Options Unveiled
Self Staking: Think of this as being the captain of your ship in the vast Ethereum PoS ocean. You take the helm, verifying transactions and steering the course. The catch? You need a hefty 32 ETH to start. It's a bit of a high-roller game, but the seas are rewarding for those who navigate them well.
Exchange Staking: Imagine a communal pot where everyone throws in their assets. Crypto exchanges manage this pot, making it easier for you to jump in or out anytime. No 32 ETH barrier here! But remember, every pot has its lid; there's a bit of mystery on how exchanges use these assets. And, sometimes, there might be a tiny fee to lift that lid and take your assets out.
Locked Staking: It's like putting your assets in a time capsule. You set the timer, and when it rings, voilà, you can access them again. Perfect for those who love a bit of suspense and are in no rush.
Liquid Staking: The Future is Fluid! Liquid staking is the new kid on the block, and it's making waves! Currently, individual staking on Ethereum demands a minimum of 32 ETH and the technical know-how to operate and uphold a node. Liquid Staking simplifies this process, allowing investors to stake any amount of ETH without being tech-savvy.
When participating in Liquid Staking, users receive tokens (LSTs) that represent their staked assets on the network. Unlike conventional staked assets, LSTs are naturally fluid, giving users the flexibility to trade, use as collateral, and invest these tokens in different DeFi platforms.
After the successful implementation of the Shappela upgrade on the Ethereum network in April 2023, trust in ETH staking has continually soared. Shappela provided investors with the liberty to stake and withdraw their ETH whenever they wish. Since its launch, the weekly net addition of staked Ethereum has consistently exceeded $700 million.
Part of this rise in staked ETH can be attributed to the LST market, which has witnessed remarkable expansion in 2023. This year alone, the total value locked (TVL) of all Liquid Staking Tokens on Ethereum has soared to a market capitalization of over $18 billion. This places LSTs at the pinnacle of DeFi sectors, even outpacing the combined TVL of Decentralized Exchanges.
Benefits of Liquid Staking Staking has revolutionized how token holders utilize their assets, enabling them to earn potentially higher returns. Liquid staking, however, has enhanced this concept even more. One notable advantage is the flexibility it offers.
Traditional staking can sometimes be financially unsound due to the unpredictable nature of cryptocurrencies. When assets are staked, their value fluctuates based on the performance of the underlying asset. During bearish trends, conventional staking could lead to financial losses for the holder. In contrast, liquid staking allows users to quickly redeem a tokenized version and reinvest in other lucrative ventures to offset such losses.
Moreover, liquid staking provides diverse earning avenues. Users can lock their assets on one platform and then use the tokenized form as collateral to obtain crypto-backed loans. These borrowed amounts can be invested in higher-yielding accounts, offering increased profits. This versatility has made liquid staking immensely popular among DeFi enthusiasts.
Drawbacks of Liquid Staking As with any financial system, liquid staking comes with its set of challenges and risks.
A potential risk is the possible discrepancy between the value of the tokenized asset and the original staked token. For instance, on the Ethereum network, stETH's value dropped below that of ETH due to its extensive circulation and a flexible supply.
Another pitfall is that should a user lose their tokenized asset in a transaction, they simultaneously lose their staked amount. To recover the initial deposit, an equivalent new deposit must be made.
Although liquid staking relies on efficient smart contracts, these contracts can sometimes contain vulnerabilities, making them susceptible to hacking or smart contract risks. In such scenarios, users might face the grim possibility of losing their entire investment without any means of recovery.
With this in mind, let’s get back to Marinade!
The Tech
Marinade Native
Marinade Native is a service that enables automated management and optimization of your staked SOL through Marinade's delegation approach. Marinade Native presents an alternative to liquid staking, allowing users to benefit from a hands-free delegation strategy without the involvement of smart contracts. Here are the key differences:
Unlike liquid staking that uses smart contracts, Marinade Native utilizes built-in Solana functionalities.
With Marinade Native, users maintain full control and ownership of their SOL, ensuring they are the sole entity capable of making withdrawals.
Users aren't burdened with fees in Marinade Native. This means no deposit charges, no recurring management fees, and an exit option free of charges after a cooldown period. However, Marinade provides an option to exit your staking position (either partially or entirely) immediately for a nominal fee, contingent on the available liquidity.
Engaging with Marinade Native doesn't yield mSOL. Instead, users set up Solana stake accounts directly in their personal wallets and delegate the management responsibilities to Marinade.
Rewards for users of Marinade Native, since it's based on native staking, are directly dispatched to individual stake accounts after each epoch, which occurs every 2-3 days.
Why Use Marinade Native?
Marinade Native offers an advanced delegation strategy, targeting the highest-performing validators. It autonomously oversees and adjusts your staking position, ensuring it's assigned to the premier validators on the network, all without any fees or manual intervention on your part.
With Marinade Native, your staked assets are future-secured, always associated with a diverse set of top-tier validators. This adaptability ensures that even if the top-ranking validators evolve over time, your assets remain in a prime position. Moreover, any potential revenues from MEV or other sources are taken into account, as Marinade Native seeks out validators that maximize and fairly distribute value to their stakers.
Additionally, Marinade Native safeguards against risks like commission rugging (where validators alter their commission to unfairly seize rewards from delegators), selected validator downtime, or the use of outdated client software.
As slashing is anticipated to be introduced to Solana, having Marinade Native diligently monitor and recalibrate your staked SOL to steer clear of underperforming or malicious validators becomes a paramount strategy in minimizing slashing-related risks. In order to use Marinade Native, click on "Stake" for your SOL and select the "Automated" and "Native" options, then confirm the transaction.
Remember one of the risks for liquid staking was smart contract risk? By avoiding the involvement of smart contracts and ensuring you maintain complete control over your staked SOL, Marinade Native mitigates several potential risks.
Given that Marinade Native doesn't possess the authority to access your SOL, its sole capability is to reassign your stake among different validators within the network.
Marinade Native leverages Marinade's specialized delegation strategy, which is designed to distribute your stake across leading validators while also considering network decentralization. Additionally, there are technical safeguards (refer to Marinade Native details) established to guarantee that Marinade Native consistently acts in the best interest of your staking position.
Marindade Directed Stake
Since its introduction in July 2023, the MNDE Directed Stake has allowed those with locked MNDE in their wallets to also influence where their stake is directed, using the mSOL. For any single wallet, the chosen direction can be towards only one validator. Both the locked MNDE and mSOL from that wallet then channel their stake towards the chosen validator. If a change of validator or a halt in stake direction is desired, it requires conducting a SOL to mSOL transaction, and the new choice can be either a different validator or an automated delegation strategy.
MNDE holders now command 20% of Marinade's delegation strategy, a significant influence considering that before this feature, Marinade's stake distribution was purely based on a system that favored validators who not only decentralized the network but also showed superior performance. This was gauged by a score primarily calculated using on-chain metrics. With the MNDE Directed Stake, however, the system has become more nuanced. MNDE holders can now prioritize validators for reasons other than just their score. These reasons could range from personal alignment with community contributions, valuable Web3 tool creations, individualized assistance in DeFi or crypto-related queries, affiliations to certain DAOs, performance-based models, or even advocacy efforts for Solana on different platforms
There are guidelines and restrictions to this new feature. Delegating to validators who have a track record of last-minute commission changes, charging commissions above 10%, or any other unsavory actions is not allowed. Additionally, there's a cap on how much stake a particular validator can receive from MNDE directed stake, set at 10% (which is effectively 2% of the total stake pool). While immediate results might not always be visible due to the epoch-based operation, the introduction of this feature ultimately bolsters the value and utility of the MNDE token. It aids validators by providing them with a more consistent stake inflow, facilitating better growth planning, and it could prompt some validators to reconsider their commission structures, potentially leading to better returns for all users.
DAO Governance on Realms
Marinade's MNDE token grants its holders the authority to shape the protocol's governance, including managing the DAO's treasury, fees, and deciding upon validators for the pool's SOL stake. Revenue for the protocol arises from management fees in the liquid staking pool, instant unstaking fees from its SOL pool, gains from its Solana DeFi involvements, and a budding MEV bandwidth marketplace named mTransaction, open for validators' participation.
DAO Foundation Principles Ownership of Marinade resides with MNDE holders who secure their tokens to get veMNDE. veMNDE is the representation of your governance power in Marinade DAO. Locking MNDE in Realms results in your wallet having veMNDE power. In an earlier decision, MNDE participants endorsed a framework emphasizing Marinade's DAO objectives:
Strengthening Solana's Resilience: Marinade DAO aspires to fortify Solana's resistance against interference. It seeks to bolster risk-management processes, ensuring augmented security and effective use of capital for Solana and its users via SOL liquid staking. While Marinade's governance will advocate for projects emphasizing resilience and continuity, it won't delve into creating second-tier DeFi constructs like lending mechanisms, stablecoins, or DEX options.
Transparent Delegation Framework: Recognizing the intricacies and obligations of stake governance, the DAO commits to delegating stakes to consistently well-performing, diverse validators. Marinade encourages endeavors to make this delegation approach transparent and standardized, urging the community to agree upon responsible SOL staking delegation.
Power Delineation: To ensure adaptability, vital system segments fall under Marinade governance. However, the Marinade core team is given operational and financial control. The Marinade governance focuses on primary program enhancements and MNDE treasury, while the core team manages main program parameters and fee structures.
Allocation of Fees: Fees predominantly finance team operations and protocol enhancement. Surplus fee management lies with the DAO.
MNDE Disbursement Aims: Incentive structures should mirror the DAO's goals. Initiating with a fair launch, the governance envisages the DAO's control being widespread in the ecosystem, advantaging all entities powered by a fortified Solana.
Constitutional Changes: Alterations to this constitution require a two-thirds majority, with a minimum of 1% of all tokens participating.
DAO Framework In line with the foundational principles, Marinade has distributed its duties as follows:
MNDE Participants:
Those who've secured their MNDE for governance rights.
They own Marinade's treasury and program (currently under ecosystem multisig).
Marinade Council:
Comprises 7 internally chosen members responsible for operational direction and holds a 4/7 multisig authority on Realms.
Empowered to modify contract specifics and utilize protocol fees for operational purposes.
Has access to Marinade's operational budget wallet, which is determined through DAO voting.
Risks
From what I have read about Marinade’s architecture, the risks are rather minimal. However, that’s not to say there are no risks. I remember back in November 2022, Solend’s whale crisis rattled depositors and threatened to crash Solana DeFi.
When SOL's high utilization rates were coupled with its plummeting prices, it triggered users who were involved in the recursive leveraged staking method (where they deposit SOL, pull out USD, purchase mSOL, deposit again, and so on) to close their positions. This sequence of events resulted in a depeg, seeing mSOL values plummet to as low as 0.88 mSOL for every SOL. Since then, mSOL prices have stabilized but these volatility events are truly a test of mSOL's stability and resilience, challenging the perceived benefits of the token against the inherent risks of not holding native Solana directly.
Final Thoughts
Staking has recently garnered renewed interest with liquid staking protocols now dominating in terms of TVL, and platforms are rapidly innovating with staked assets. Marinade currently has a TVL of $143 million, accounting for slightly less than half of Solana's TVL.
My thoughts are that Marinade is trying to solve one of the core criticisms of Solana’s ecosystem - centralization. Marinade’s mechanism creates more decentralization within staking on Solana, which in turn enhances the ecosystem's resilience against censorship and promotes broader network security.
Originally, investors staked SOL directly with validators to leverage the rewards from Solana's proof-of-stake blockchain, which compensates those backing the network's validators. However, Marinade’s approach distributes the staked SOL amongst a selection of top-performing validators, not just one. This method, termed "automated staking," is a core feature of the Marinade’s staking mechanism, together with mSOL issuance.
Even with its notable presence, Solana's adoption of liquid staking doesn't match Ethereum's level, a clear leader in the DeFi and staking domain. This difference may stem from technological variations between the two blockchains and how they manage unlock processes, though this gap, in my opinion, is expected to narrow as time progresses.