MT Capital Insights How can Jito reshape the staking market landscape of Solana?

Revolutionizing Solana's Staking Market Insights from MT Capital on Jito's Impact

Author: Severin & Ian, MT Capital

“Jito has performed exceptionally well in the recent Solana recovery wave, as the first LSD protocol on Solana that combines both MEV earnings and staking rewards. It is expected to reshape the LSD market competition on Solana.”

TL;DR

• Jito is the first liquidity staking protocol on Solana that combines both MEV earnings and staking rewards. Its TVL has increased by nearly 70% in the past 30 days, and it has the potential to reshape the staking market on Solana.

• Jito is about to launch its governance token, JTO. Currently, there is limited circulation of JTO in the early market, and the main selling pressure comes from airdrop recipients. The utility of JTO is relatively limited, and its value capture ability is weak. Jito needs new incentives and ecosystem expansion to stimulate the continuous growth of Jito’s TVL, thereby alleviating the selling pressure from airdrop recipients and maintaining the stability of JTO’s value.

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• With the influx of new assets and users on Solana, as well as the increasing trading volume and the extremely low liquidity staking ratio on Solana, LSD protocols represented by Jito are expected to capture a higher staking TVL. The potential huge value of MEV on Solana gives Jito greater room for imagination.

• Compared to Marinade, the gap between Jito and Marinade in terms of ecosystem composition, decentralization, and the single staking model will continue to narrow as Jito develops. Meanwhile, Jito’s core competitive advantage in capturing and distributing MEV value will continue to expand with the prosperity of the Solana network. Therefore, we have a very optimistic future expectation for Jito, which has the potential to replace Maridane as the largest LSD protocol in the Solana ecosystem.

• The stable fundamentals of Jito will also drive the rise in the secondary token price of JTO. Referring to the price trend of LSD protocol tokens in the past month, we believe that JTO will also have a stronger performance in the secondary market.

Jito: The first liquidity staking protocol on Solana with MEV earnings

Jito Labs: Deeply involved in Solana’s MEV field

Jito Network is launched by the Jito Labs team. The Jito Labs team has been early pioneers in the infrastructure field of Solana’s MEV. In July 2022, Jito Labs launched the Solana MEV Dashboard, which classified and analyzed over 36 billion transactions on Solana since January 2022. Subsequently, in August 2022, Jito Labs announced the completion of a $10 million Series A funding led by Multicoin Capital and Framework Ventures, which will be used to continue building and optimizing the MEV infrastructure.

Following that, Jito Labs has successively launched products and services such as the Jito-Solana validator client and Jito Block Engine, which optimize MEV extraction and distribution. It has become another important infrastructure service provider in the Solana MEV field. Jito Block Engine solves the MEV problem by linking relayers, searchers, and validators in the network through off-chain auctions.

• First, the Jito Block Engine receives transaction orders from the relay and forwards them to the searchers.

• Next, the searchers submit transaction bundles containing bids.

• Finally, the Jito Block Engine simulates each transaction combination and finds the best transaction bundle combination to forward to the validators for processing.

According to the Solana Foundation’s Validator Health Report: October 2023, approximately 31.45% of Solana validator nodes currently choose to use Jito Labs’ Jito-Solana validator client, which indirectly demonstrates Jito Labs’ technical expertise in the MEV field.

With the continuous adoption of the Jito-Solana validator client, the MEV rewards captured by Jito-Solana are also increasing, laying a solid foundation for Jito to introduce the LSD module with MEV rewards.

The first Solana LSD with MEV revenue

Timing is everything, and JitoSOL has had a hard time gaining momentum: In November 2022, on the eve of FTX’s collapse, while observing the development of the popular LSD protocol, Jito Labs officially announced the launch of Jito staking services. Similar to other LSD protocols’ liquidity staking logic, users delegate SOL to validator nodes and receive JitoSOL as liquidity certificates. The price of JitoSOL continues to rise to reflect the acquired node validation rewards. Thanks to Jito Labs’ early layout in the Solana MEV field, Jito can also distribute MEV revenue to stakers, further enhancing their staking returns. Unfortunately, just after Jito announced the launch of the staking module, FTX collapsed due to misappropriation of customer funds. Solana, closely associated with FTX, was also not spared and experienced a massive loss of liquidity. Therefore, after the launch of the staking module, Jito’s TVL has remained lukewarm due to a lack of market confidence and liquidity demand.

Incentive program boosts Jito’s recovery: With the recovery of the Solana ecosystem in the second half of this year, Jito’s TVL has gradually increased. Meanwhile, in August of this year, Jito also launched its own incentive program to promote the widespread adoption of JitoSOL. Users can earn points by participating in Jito staking, holding JitoSOL, engaging in DeFi activities with JitoSOL, and inviting friends. Points represent users’ contributions to the Jito community and are also viewed as important criteria for future airdrops. The introduction of the incentive program has significantly steepened the growth curve of Jito’s TVL.

Lido’s exit, Jito’s opportunity to take over the Lido Solana market share: In October this year, after a community vote, Lido DAO decided to stop supporting new SOL staking, and node operators would gradually withdraw from the SOL staking market starting from November. Lido’s exit means that the nearly 6 million worth of stSOL needs to find a new staking location. Meanwhile, Jito, which combines staking with MEV rewards and provides incentive points, has successfully taken on a large amount of stSOL, causing Jito’s TVL to skyrocket and become one of the top LSD protocols on Solana.

A more decentralized Jito – StarkNet

To make the underlying validator pool and the management process of staking pool fund changes more decentralized, Jito has proposed the future development plan of Jito StarkNet. Jito StarkNet is a self-sustaining, transparent, and decentralized smart management protocol for the validator pool. Jito StarkNet primarily consists of three modules: Keepers, Validator History Program, and Steward Program.

• The Validator History Program stores the historical data of each validator node for nearly three years, including the node’s participation and correctness data in the consensus process, commission rates, MEV extraction value, total staked value, and staking rankings.

• The Steward program calculates the score and appropriate delegated staking amount for each validator node based on the on-chain historical data of each validator node.

• The Keepers Network then allocates the delegated staking amounts based on the calculations from the Steward program.

In the Jito StarkNet network, the historical behavior of validator nodes will serve as the only reference standard for allocating delegated staking amounts, thereby encouraging healthy competition among underlying validator nodes to provide users with a better staking experience. At the same time, the management of delegated staking funds no longer relies on the centralized management of the protocol but is automatically executed by the Steward program and Keepers Network, making the operation process more decentralized.

Token Economy

On November 28th, the Jito Foundation announced the launch of the governance token JTO. The introduction of JTO is an important step in Jito’s development, as it will be used to reward early contributors through airdrops and empower users with governance capabilities over the protocol.

Token Allocation: The total supply of JTO is 1 billion tokens, including:

• 10% for airdropping to early users;

• 24.3% controlled by DAO governance for community growth;

• 24.5% and 16.2% of tokens respectively belong to the Jito team and early investors. These tokens will be subject to a one-year lock-up period and a three-year unlocking period;

• 25% of tokens will be used for ecosystem development;

Token Utility: JTO holders can make decisions on important protocol parameters and governance measures, including but not limited to:

• Setting the fee for the JitoSOL staking pool;

• Adjusting key parameters of Jito StarkNet to allocate staking funds delegation strategy;

• Managing the JTO tokens held by the DAO and the fees captured by JitoSOL;

Token Airdrop Incentives: Early adopters of Jito will have the opportunity to receive JTO token airdrops. Among them,

• 80% of the tokens will be airdropped to JitoSOL holders and users;

• 15% of the tokens will be airdropped to validators running Jito-Solana clients;

• 5% of the tokens will be airdropped to Jito MEV searchers;

From the token allocation of JTO, there is relatively less circulating JTO in the early market, and the main selling pressure comes from airdrop users. In terms of token empowerment, JTO has limited use cases and poor value capturing ability. Jito needs new incentive measures and ecological expansion to stimulate the continuous growth of Jito TVL, thereby alleviating the selling pressure from airdrop users and maintaining the stability of JTO value.

Jito’s Future Expectations

Explosive growth of Solana

After experiencing the bankruptcy of FTX, the long-awaited Solana has finally seen a recovery. Since September, TVL on Solana has started to grow significantly, reaching nearly 700M. In this upward cycle, the monthly growth rate of TVL for the top ten blockchains is only 14.8%, while Solana’s TVL has surged by 85%, far exceeding other blockchains. From the asset side, the influx of assets is expected to drive the increase in SOL staking demand.

In addition to a significant increase in TVL, the daily transaction volume on Solana has reached a peak of nearly 400M. The increasing number of transactions can drive the growth of Solana network fees and also promote the improvement of MEV fees, both of which will drive staking demand represented by Jito.

Furthermore, the number of new users and reactivated users on Solana is also steadily recovering, further expanding the audience for the LSD protocol represented by Jito.

Solana LSD still has huge development potential

Although the current staking rate of SOL has reached 70.07%, the proportion of liquid staking is only 3%-4%, indicating that liquid staking still has significant room for growth. Compared to other staking methods, liquid staking allows users to participate in other DeFi activities while enjoying staking rewards by providing them with liquidity tokens, resulting in higher capital efficiency. As shown in the following figure, with the gradual recovery of the Solana ecosystem, liquid staking has also experienced explosive growth. We expect that liquidity staking on Solana will replace larger-scale general staking markets due to its higher capital efficiency in DeFi activities.

Huge value space for Solana MEV

Since Jito distributes MEV rewards to JitoSOL holders, the higher the MEV value in Solana, the more staking rewards will be allocated to JitoSOL holders. The increase in APR will further enhance the attractiveness of JitoSOL to users. In the past year, Solana MEV profit has reached as high as 14M, indicating a huge potential for optimizing MEV value.

With the prosperity of the Solana network, the accumulated MEV value captured by Jito is continuously increasing. We expect this trend to continue, and Jito will accumulate more MEV value in the rapidly growing network activity on Solana and distribute it to JitoSOL holders.

Comparison with Marinade, Jito has unique competitive advantages

Marinade is the earliest LSD protocol in the Solana ecosystem, disrupting TVL that once reached 1.7B and is also one of Jito’s biggest competitors. The main competitive disadvantages of Jito compared to Marinade are as follows:

1. The ecological network of Marinade LST is richer than that of Jito LST.

2. Marinade has more validation nodes, making it more decentralized than Jito.

3. Marinade can provide other staking options in addition to LSD.

For competitive disadvantage 1, as shown in the following figure, JitoSOL is constantly expanding its ecosystem use cases and is currently integrated with 10+ mainstream DeFi protocols. Furthermore, Jito has the support of Multicoin, which is deeply rooted in the Solana ecosystem, making it easier to expand its ecosystem partnerships in the future.

For competitive disadvantage 2, Marinade currently has about twice the number of nodes compared to Jito, indicating a significantly higher level of decentralization than Jito. In the short term, Jito may find it difficult to surpass this aspect. However, Jito itself is also transitioning towards Jito-StarkNet, with the expectation of further increasing the protocol’s decentralization in the future.

In addition to competitive disadvantages, compared to Marinade, Jito also has the following competitive advantages:

1. JitoSOL is able to capture additional MEV rewards, with staking rewards slightly higher than Marinade;

2. Under the same incentive plan, Jito is able to capture more active users in this round of Solana’s recovery tide;

Jito’s ability to capture and distribute the value of MEV is its core competitive advantage in the long-term competition. The more active the Solana network, the greater the value of MEV, making Jito’s competitive advantage more apparent. The fact that Jito is able to capture more active users also indicates that Marinade has yet to form a monopoly in the LSD market, leaving room for the development of other LSD protocols, such as Jito.

In summary, compared to Marinade, the gap between Jito in terms of ecosystem composition and decentralization will continue to narrow as Jito develops. Meanwhile, Jito’s core competitive advantage in capturing and distributing the value of MEV will continue to expand with the prosperity of the Solana network. Therefore, we have a very optimistic outlook for Jito. It has the potential to replace Maridane as the largest LSD protocol in the Solana ecosystem.

Jito’s solid fundamentals will also drive the rise in the price of JTO secondary tokens. Referring to the trend of LSD protocol token prices in the past month, we believe that JTO will also have a stronger performance in the secondary market.

Reference

1. https://www.jito.network/docs/jitosol/overview/
2. https://www.jito.network/blog/
3. https://solana.com/news/validator-health-report-october-2023
4. https://foresightnews.pro/article/detail/48090
5. https://www.techflowpost.com/article/detail_14335.html

Translation:

Reference

1. https://www.jito.network/docs/jitosol/overview/
2. https://www.jito.network/blog/
3. https://solana.com/news/validator-health-report-october-2023
4. https://foresightnews.pro/article/detail/48090
5. https://www.techflowpost.com/article/detail_14335.html

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