Note: This article is not financial advice. Hubble Protocol does not endorse any tokens or platforms mentioned in this article.
- Staking tokens helps secure blockchains in an eco-friendly way.
- Lido provides derivative tokens for users to participate in DeFi while staking.
- Hubble Protocol will onboard Lido's stSOL as collateral.
Hubble Protocol has proudly partnered with Lido Finance as both projects strive to offer liquidity solutions for the Solana DeFi ecosystem. This article explains the significance of Lido’s work in DeFi for increasing liquidity and validating network transactions.
Lido Finance provides liquid staking services across several networks. The majority of Lido’s total value locked (TVL) exists on Ethereum, with close to $8 billion of ETH deposited for stETH, Lido’s liquid staking token.
Since entering the Solana ecosystem, Lido has staked over $100 million in SOL for stSOL at its current market value. This means that millions of SOL tokens have been made available for participation in DeFi while still helping to secure the network through staking.
Background: Replacing Proof of Work Consensus
Proof of Work (PoW) blockchains, like Bitcoin and Ethereum, have consensus mechanisms that secure the chain through energy-intensive mining practices. Miners who participate in PoW consensus receive valuable tokens for honestly validating new blocks of transactions and helping maintain the blockchain.
This creates an economic incentive to act honestly. Miners need to spend a significant amount of money on electricity, and if they don’t receive mining rewards, then they are operating in the red. If miners honestly validate transactions, then the rewards can more than pay an electric bill and are quite lucrative in the end.
While PoW has been proven to work well, it poses some major problems for blockchain use cases and the planet. PoW can be slow, miners can abuse their position users by front-running transactions in a practice known as miner extractable value (MEV), and the energy-intensive practice raises questions about contributing to global warming.
The Liquidity Conundrum in Securing Proof of Stake Networks
An alternative to PoW is Proof of Stake (PoS), which requires validators to “put their money where their mouth is” and stake tokens in order to receive the rights to validate transactions and create new blocks. In this model, a validator that acts dishonestly not only doesn’t get their token rewards–they also have their stake slashed.
Securing a PoS network means millions of tokens must be staked for the system to work efficiently. For example, if a validator has staked $10 million SOL, then they can only validate $10 million in transactions at a time, so the more tokens a validator holds, the more throughput the network can process transactions during that validator's turn.
This means one drawback to staking for PoS consensus mechanisms is that it takes a massive amount of a blockchain’s tokens out of circulation. If SOL is being used for staking the network, then it can’t be put to use in DeFi at the same.
While PoS can work much more efficiently than PoW, it traps a great deal of a network’s native tokens in the process. This is where Lido provides such an effective utility.
How Lido’s stSOL Increases the Capital-Efficiency of Staking on Solana
Staking network tokens to secure PoS consensus is one of the lowest-risk yield opportunities in DeFi. As mentioned earlier, pursuing this yield also removes tokens from the greater DeFi ecosystem, where composability allows for multiple ways a token can be put to work.
Lido Finance solves this problem with stTokens. These are derivative tokens that users receive for staking their SOL with Lido, and they can be used in the same way as SOL for nearly everything in DeFi.
When a user stakes their SOL on Lido, they receive stSOL in return. Each stSOL accrues the rewards from PoS staking yield and therefore trades at a higher value than SOL. Then, stSOL can be deposited as liquidity for automated market makers (AMMs) or deposited in lending protocols to earn additional yield.
Behind the scenes, Lido ensures that the SOL staked with their protocol is delegated to trustworthy validators. Lido currently works with over a dozen Solana validators, and they are increasing the number of validators the project delegates to in order to help further decentralize Solana.
Additionally, users can unstake their SOL through Lido at any time. It can take up to two days to unstake tokens from a network validator on Solana, and in DeFi anything can happen in two days. So, the ability to unstake stSOL for SOL instantly solves a pain point in DeFi.
Since users can stake their tokens and still maintain the liquidity of their positions on those tokens, this process is called “liquid staking.” In the field of liquid staking, Lido is the number one liquid staking protocol by TVL, and it’s also one of the top protocols overall as measured by TVL across all of DeFi.
Participate in DeFi and Solana Network Security with Lido
One of the simplest ways for users to boost their DeFi participation is to stake through Lido. When users stake their SOL for stSOL, they begin earning yield before deploying their assets into yield strategies for SOL.
At the same time users are doubling up their yields, they’re helping Solana run more safely and efficiently with Lido’s help. It’s a win-win situation for users and the network, and Lido is a key player in making it possible.
The Hubble Protocol community is excited to onboard stSOL as collateral. Now, users can participate in securing the network, earn yield, and leverage their position with USDH all at the same time, and that’s the power of DeFi composability on Solana.
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