Hello readers,

The Jito airdrop on December 7th lit the Solana DeFi ecosystem on fire. We were pleased to see it happen. Because it meant that our liquid staking thesis was playing out in a big way — albeit in a shorter timeline than we had anticipated.

In this week’s report, we are revisiting our Solana Liquid Staking thesis.

Disclaimer: Views expressed are the author's personal views and should not be taken as investment or legal advice.

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Marinade.Finance

Let’s go.

Revisiting the Thesis

On May 9th, we shared a report titled “The Liquid Staking Set-up on Solana.”

Our thesis was simple:

We had a strong conviction that Solana would re-emerge as the #1 competitor to Ethereum. We shared that with you on January 3rd and 4th.
As Solana re-emerged, we felt that DeFi would come alive again.
For that to happen, there needed to be a spark for increased liquidity.
We felt that Liquid Staking could play a role. Why? Users can stake SOL, and then take their deposit token (mSOL) into DeFi — to earn additional yield (and take on additional smart contract risk). *We previously observed Lido rise to prominence on Ethereum after integrating with Aave via stETH.
As we analyzed the setup, we realized that Solana had a high stake rate. But only 2.7% was locked in liquid staking solutions (Ethereum was 10x this figure at the time).

We felt that gap would close, and so we started exploring ways to express our thesis.

Enter Marinade Finance. Our diligence on the project included becoming early users (still are), some number crunching, business model analysis, reading through the governance docs, spending some time in the discord, and researching & talking to a few members of the team.

We were impressed. But we were in the bitter cold of the crypto winter at the time. It wasn’t clear if Marinade’s lean team would survive. The market valuation hovered around $6 - $10m — reflecting the fear in the market.

But there was also a lot to like about Marinade:

They were first to market with liquid staking on Solana.
The team spun out of a Solana hacker house and bootstrapped with zero VC investors.
Marinade has close ties to the Solana Foundation.
Marinade is integrated with every major Solana DeFi project (via mSOL).
The governance docs are well-organized and accessible.
The Discord channel is orderly and mature.
Marinade frequently communicates with its community.
Validator listings & take rates are transparent.
The core team has a desire to align incentives with the community (the team is incentivized by TVL milestones).
The MNDE token is listed on Coinbase (and now crypto.com and Kucoin)
Marinade had zero exposure to FTX (or any VCs for that matter).

Finally, we had a light-bulb moment when we used the product. It was the best user experience we had seen in crypto. By a lot. Shout out to Phantom Wallet as well.

As mentioned, the market cap was less than $10m at the time. The token price was around $.035. With seed-stage projects (pre-product) raising at similar valuations, it seemed there was a gap in the market.

Since that time, the market cap of Marinade went to $150m ($77m at the time of writing) and the token price touched .63 cents (18x). The only Solana project that has outperformed Marinade over the same period is Bonk — which is up an eye-watering 43x.

The catalyst for the big move?

Liquidity came back to the markets. SOL made a big move starting in mid-October. Then Solana DeFi came alive.

But the really big move came after the Jito (#2 liquid staking solution on Solana) airdrop last week at a fully diluted value north of $2b.

Here’s a recap of our original analysis from 5.9.23, updated with current numbers:

Data: Solana Compass, Marinade.Finance, Coingecko

At the time of writing, Marinade trades at $75b ($309m fully diluted). Jito trades at a $278m valuation ($2.4b fully diluted) — a 7.7x premium to Marinade (!).

This has us thinking. Is Marinade still underpriced?

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Marinade vs Jito

First of all, congrats to the Jito team and to those who were early users and received the airdrop. If you’re not aware, the team airdropped 10% of the token allocation to its early users.

Some estimates indicate that 10,000 + people made between $10-$200k from the Jito airdop. While some point to the frothy valuation, this is an incredible feat of wealth creation and something we don’t see talked about enough: crypto rewards its early users more than any industry in the history of the world. Full stop.

Not to mention, we are pleased to see a strong competitor enter the liquid staking arena on Solana. We believe the competition will be good for both teams. Competition is good for innovation. It’s also good for the health, security, and decentralization of the Solana Network.

Having said that, now it’s our job to figure out why the market is pricing Jito at a valuation nearly 7.7x that of Marinade.

A quick high-level view of some important numbers:

Data: Dune (@ilemi), Jito, Marinade.Finance, defillama

Hmm.

Again: Jito has nearly 7.7x the fully diluted market cap as Marinade.

The famous quote from legendary investor Benjamin Graham comes to mind:

“In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.”

Some context:

The voting machine = short-term narratives (long-term noise).

The weighing machine = fundamentals (long-term signal).

The narrative in the market is that Jito = Lido + Flashbots. That Jito has some “special sauce” because it’s returning some MEV to delegators to its stake pool. Which is true.

But Marinade has this feature as well. In fact, Marinade’s stake pool delegates a large portion of its stake to Jito validators — which return MEV to stakers using Marinade’s interface. To date, Marinade has returned 200 SOL in MEV vs 264 for Jito. (Marinade MEV dashboard coming soon per the team).

So where’s the actual “special sauce” when we compare Jito to Marinade?

We’re not seeing it.

As a matter of fact, we see more “spice” within Marinade than we do Jito.

Venture Capital

It’s worth repeating that Marinade Finance is a project that was bootstrapped with zero investors. When the token went public to early users via airdrop (as Jito’s did on 12/7), its initial valuation was set by the market with no input from Marinade.

Jito took a different approach to funding & token launch — with Multicoin, Framework, Solana Ventures, Delphi Ventures, Robot Ventures, Alameda (RIP), etc. on its cap table.

In our opinion, Jito’s initial listing price was likely influenced by the VCs backing the project. Of course, the market can always re-price the token — but the initial listing price plays a role in what we believe is an overvalued token at present.

Does the Market Sober Up?

Two potential outcomes:

The Jito airdrop has reset the valuation on liquid staking protocols in Solana. In this case, Marinade is still underpriced.
The Jito airdrop made the market drunk (or slightly more drunk). And the Jito price needs to come back to earth.

We think it’s more likely a combination of both.

For further stress testing, let’s take a look at a comp over in Ethereum via Lido:

Data: Etherscan, Lido.finance, Glassnode, Dune (@hildobby), Coingecko

Hmm.

Once again. The numbers are telling us that Marinade is underpriced. Case in point: Lido’s DAO Revenue Multiple is currently 1.2x higher than Marinade. Its Total Revenue Multiple is .8x higher.

Marinade 2.0 Update

The Marinade team spent the past few years obsessively thinking about staking, speaking to every single staker who would listen.

The endless iteration ultimately led to some important innovations since we first covered the project back in May.

Marinade Native Stake: Until now, those wishing to stake SOL natively with multiple network validators required 1) multiple transactions, 2) constant performance monitoring, and 3) exposure to smart contract risk.

This has made staking unattractive to many risk-averse institutional investors. Native stake solves that by eliminating smart contract risk with access to 150+ of the best-performing validators. Rolled out in July, Marinade now has over 3.8 million SOL “native staked.”

Key Takeaway: Approximately 96% of all staked SOL (370 million) is staked natively with individual validators. Therefore, by introducing this new product, Marinade is a first mover on a 27 billion-dollar opportunity. The incentive for native stakers to move over to Marinade is 1) the option to delegate to a vetted and monitored group of validators, 2) reduce concentration risk, 3) monitor performance across all validators.

*Note that Native Stake is currently not monetized, but we understand the team has plans to do so. The business model for native stake could materially impact our forward-looking revenue models.

MNDE Token Utility: 20% of the Marinade stake pool is now determined by MNDE token voting via “directed stake.”

Key Takeaway: MNDE holders can use their MNDE tokens to vote for validators, receiving boosted staking rewards for doing so. This not only incentivizes the right behavior from validators but also creates new utility for the MNDE token.

mSOL Locked in DeFi

Data: Dune (@ilemi)

Over 2 million mSOL (the “receipt token” for staking SOL) is currently locked in Solana DeFi — representing nearly 30% of the total circulating. We view this as a positive sign for the utility of mSOL — both for Marinade users and for Solana DeFi liquidity at large.

Looking Forward

The key questions we’re asking ourselves:

Will the Solana stake rate in liquid staking solutions continue to close in on the Ethereum number (currently 4.7% vs 24%)? We think the answer is yes.
Will the power laws we’ve seen across open-source networks and protocols apply to the Solana liquid staking space? We think the answer is yes.
Is it more likely that the market reprices Jito down or Marinade up? We think the latter.
Will Marinade outperform Jito moving forward? We think the answer is yes (with volatility).
Will Marinade outperform SOL moving forward? We think the answer is yes (with volatility).
What could derail our thesis?
1. Solana momentum dies off. Probabilistically, we think this is less likely given the VC activity we are starting to see.
2. Technical bug. This applies to every crypto protocol in the market but always needs to be considered.
3. A competitor enters the market and can pull users away from Marinade. Marinade TVL grew after Jito launched its token. As did Blaze — an up-and-coming solution we are keeping an eye on.
4. Execution/team risk. So far so good, but something we cannot ignore.
5. Macro risk. We think the set-up looks good, but expect volatility at some point.

It’s not often that we get a clean shot on net as we had with Marinade back in May. It’s even more rare to have the thesis play out as quickly as it did.

Yet here we are with another seemingly fat pitch to swing at.

As ever, please do your own research.

And don’t forget: Solana has an inflation rate of 5-6% today. If you are holding SOL and not staking, the protocol is diluting you. Learn more here: Marinade.Finance.

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Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment professional and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

Resources:

Marinade Dune Dashboard: https://dune.com/ilemi/marinade-finance/3e155e45-e682-4c17-8621-9a121c66bf5c

Jito Dune Dashboard: https://dune.com/ilemi/jitosol

Marinade Native Dashboard: https://stats.marinade.finance/d/sqUQd1Onk/marinade-kpi-dashboard?orgId=1&refresh=1m

Marinade Native Stake: https://marinade.finance/blog/case-for-solana-automated-staking-marinade/

Marinade Directed Stake: https://docs.marinade.finance/the-mnde-token/mnde-directed-stake

Brandon Tucker (Marinade Comms) Interview w/DeFi Dad:

MNDE Token: https://docs.marinade.finance/the-mnde-token

Discord: https://discord.com/invite/6EtUf4Euu6

Twitter: https://twitter.com/MarinadeFinance

Jito FAQ: https://www.jito.network/faq/

Jito Overview: https://www.jito.network/docs/jitosol/overview/

Marinade Validators: https://marinade.finance/app/validators/?sorting=score&direction=descending

Marinade Blog: https://marinade.finance/blog/

Solana Liquid Staking

Revisiting the thesis

Topics Covered