Solana Liquid Staking Tokens vs. Classic Staking

Solana liquid staking tokens from protocols like Marinade Finance and Lido Finance allow users to yield on their yield in an ingenious method for staking SOL.

Decentralized finance (DeFi) is constantly finding new ways to maximize capital efficiency. One recent and extremely capital-efficient development in DeFi has been liquid staking tokens, and there are now several projects working on offering liquid-staked assets.

In Hubble's last article on Crypto Basics, we discussed staking tokens and how to stake tokens on Solana. If you're unfamiliar with how staking works, read about the basics first, so this article on liquid staking tokens will make more sense.

What are Liquid Staking Tokens?

When you stake your tokens on a PoS blockchain, you lose the ability to use those tokens until you unstake them. For example, when you stake SOL with a Solana validator, the validator will use your tokens to help secure the network and finalize transactions. While your tokens are being used for this purpose, they cannot do other things, like participate in DeFi.

liquid staking, solana liquid staking, msol, ststol, lido finance, marinade finance
You can stake SOL with over 2,000 different validators.

On the other hand, liquid staking tokens let you have your cake and eat it too. When you deposit SOL with a liquid staking protocol, they will give you back a yield-bearing token like Marinade SOL (mSOL) from Marinade Finance, or Lido-staked SOL (stSOL), from Lido Finance, and you can use this token for DeFi.

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Stake your SOL with marinade.

To get back your SOL, you can trade mSOL and stSOL for vanilla SOL through a decentralized exchange (DEX), or you can burn your liquid staking tokens to withdraw SOL from the liquid staking pool. For example, if the rate for staking SOL is 6% APY, you should be able to exchange or burn your liquid staking token for around 0.06 more SOL after a year.

Let's review what this means:

  • Your SOL tokens are staked and help secure the network.
  • You are earning Solana staking rewards.
  • You have a token, like Marinade SOL, that grows more valuable over time.
  • You can use your mSOL as collateral for a DeFi loan.
  • You can get back your initial SOL with interest earned from staking.

Through the magic of DeFi composability, so much is possible. Liquid staking tokens are perhaps one of the most magical developments yet!

How Does Liquid Staking Work?

When you stake tokens with a validator, you should do your due diligence to determine which ones are reliable, have the best rates, and help improve the overall decentralization of the network you're supporting. Unfortunately, this research can take a lot of work, and you may be left with doubts about whether or not you chose the best validator for you and the network.

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Stake your SOL with Lido Finance.

When you participate in liquid staking on Solana, Marinade or Lido Solana will do all the calculations for you to choose the best validators. These liquid staking pools take into account reliability, rates, and how well adding to a validator's stake contributes to the decentralization of Solana.  

Marinade and Lido pool users' resources to ensure enough tokens are available for withdrawal while the majority are being staked with validators. It's highly improbable that every user taking part in Lido staking on Solana will simultaneously burn their stSOL for SOL, allowing Lido to delegate the majority of pooled SOL towards validators.

How Can You Obtain Liquid Staking Tokens?

You can trade for liquid staking tokens on a DEX, but what's arguably the best way to get mSOL or stSOL is to deposit SOL directly with Marinade or Lido. By depositing additional SOL into the liquid staking pool, more tokens can be spread to different validators that will help increase Solana's Nakamoto Co-efficient.

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Get mSOL from Marinade Finance and help decentralize Solana!

The process for staking with Marinade and Lido is very similar:

  • Navigate to the Marinade Finance or Lido Finance staking page.
  • Connect your wallet.
  • Enter how much SOL you want to stake.
  • Click "Stake" and approve the transaction.
  • You're finished! You will find mSOL or stSOL in your wallet.

Once you get your liquid staking tokens, you can begin participating in DeFi with them. You can earn additional rewards for using these tokens on different platforms, so be on the lookout for incentive programs from your favorite DeFi protocols.

How are Liquid Staking Tokens Used in DeFi?

The price of mSOL and stSOL will necessarily be higher than that of SOL, since it constantly reflects the rewards earned from Solana staking. For instance, at the time of writing, mSOL is valued at $33.51, stSOL is valued at $33.35, and SOL is valued at $31.48.

It's possible to hold mSOL in your wallet and watch it grow, but that wouldn't be much different from staking SOL directly with a validator. Liquid staking tokens can be put to good use! They can be used as collateral for borrowing, and since mSOL and stSOL are earning APY while being used as collateral, they can sometimes negate the costs of borrowing.

You can also provide liquidity on a DEX for liquid-staked SOL and vanilla SOL to earn fees from traders. This is a fantastic way to maintain exposure to SOL, earn rewards from staking, and earn fees from providing liquidity. In addition, since mSOL and stSOL are pegged to SOL, there is very little risk of impermanent loss (IL).

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Earn fees from traders when supplying liquidity for stSOL.

On many Solana DeFi protocols, mSOL and stSOL can be used the same way as SOL. Using liquid staking tokens is a much more capital-efficient way to participate in DeFi while also helping the network hosting your DeFi services operate more effectively and securely.

What Else Should Users Know about Liquid Staking?

There are a few additional risks associated with liquid staking tokens. First, liquid staking is an amazing innovation in DeFi, and this innovation is powered by smart contracts, which means another layer of smart contract vulnerability is added to your position when using tokens like mSOL or stSOL for DeFi.

In addition to smart contract risk, liquid staking tokens introduce the risk of de-pegging. Like all pegged assets on an open market, their price can be affected by market forces pushing the asset off its peg for several reasons.

Fortunately, if a liquid staking token drifts from its peg, it can still be redeemed for the correct amount of its underlying asset. That's one of the magical things about liquid staking tokens—just one token can represent more than one token!

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