Hello readers,
Welcome back for another edition of The DeFi Report.
We believe liquid staking has staying power and is set up to be one of the strongest business models within DeFi. With the Shapella upgrade (staking withdrawals) now executed, we think the stake rate on Ethereum has the potential to double over the next year or so.
The market has caught onto this — evidenced by some serious capital flowing into liquid staking solutions over the last year. Having bottomed at $.49 last June, Lido now trades at $1.90 with a $1.67 billion market cap. RocketPool is up 494% over the same period.
Meanwhile, every major exchange is now offering staking services for its customers. Coinbase expects staking to be a major revenue driver in the years to come, helping to smooth out revenues during bear markets per forward guidance to Wall Street. In fact, at the current ETH price and with 2.3 million ETH staked on the platform, Coinbase is on pace to earn $54 million in annualized revenue from its staking services for ETH alone.
We covered Lido in January, but have been unable to build conviction since the team will be hard-pressed to grow market share on Ethereum due to centralization concerns ( 31.8% of total ETH staked is on Lido today). Rocketpool has just 8% of Lido’s stake rate (and 2.97% of all staked ETH) — but currently trades at 56% of Lido’s market cap — a valuation we have trouble reconciling.
Most of the chatter and capital within liquid staking is on Ethereum today.
Which leads us to Solana.
We’ve invested significant time studying the alternative L1s over the last year. The output of our research has been a growing conviction in Solana. We wrote about the network earlier this year and initiated a position during the market dislocation toward the end of last year. There’s a lot to like about Solana, but the main factors for us are strong leadership, a battle-tested developer network with a chip on its shoulder, and a truly differentiated architecture from Ethereum. Solana’s community has many parallels to Ethereum in the 2018/2019 period and we think it could potentially follow a similar growth pattern.
In this report, we’re breaking down the liquid staking opportunity set up on Solana, with an overview of Marinade Finance.
Disclaimer: Views expressed are the author's personal views and should not be taken as investment or legal advice.
Let’s go.
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Solana launched as a proof-of-stake blockchain in March of 2020. The network has a current stake rate of 72.3%. Almost all of this is locked in private validators, with a whopping 99.4% delegating their stake — meaning, they aren’t running their own validators.
That said, only 2.25% of all SOL is locked within liquid staking solutions today.
We think this number is *way* too low.
For reference, the % of staked ETH on Ethereum within liquid staking solutions is 36% today, and we expect this figure to rise along with the stake rate over the next year or so.
Marinade Finance currently controls 54.6% of the liquid staking market on Solana, or 1.23% of all staked SOL. But unlike Lido, Marinade’s market share is not a centralization concern because Marinade validators are not whitelisted by the platform (as they are on Lido). Any validator on the Solana network can opt into Marinade, and take a small fee of the delegated stake for doing so.
In terms of the tech stack, Marinade sits on top of its distributed set of validators. Users enter Marinade’s slick front end, and Marinade’s proprietary algorithm sends their SOL to the highest-performing validators on the network. More on the technical aspects here if you’re interested.
So Marinade could grow really big, without becoming a centralization concern for the network because Marinade does not control the validators. In fact, Marinade is actually a driving force for the decentralization of the validator network because it incentivizes more validators, who can earn additional fees from delegated stakers by opting into Marinade’s permissionless validator program.
In summary, Marinade is a tech solution that essentially pulls together a two-sided market of independent validators seeking delegated stakers (extra revenue) and SOL holders who want to earn some yield and stay liquid. Their value add comes from a slick interface and seamless user experience while offering yield and utility (DeFi integrations) — with the added benefit of further decentralizing Solana’s validator network in the process.
Marinade was launched October 7, 2021. The protocol takes 6% of the rewards paid to its users for providing the interface and seamless access to yield. This is the lowest take rate we have seen for a liquid staking protocol (Lido’s has the lowest take rate on Ethereum at 10%). Anyone running a validator can opt into Marinade’s network, and earn additional fees from Marinades delegators. There are currently around 450 validators on Marinade. Each validator receives a score from Marinade based on its uptime, take rate, etc. The top 100 validators are selected at any point in time, with the protocol delegating user deposits via an algorithm. Marinade publishes transparent validator reports for its users. Here is a quick snapshot of Marinade’s financials.
Data: Solscan, Coingecko, Marinade.Finance, Staking Rewards. As of 5.5.23.
Marinade’s profitability is dependent on two primary factors:
The price of SOL
The amount of SOL staked within Marinade
Both of these figures are very low today. The price of SOL is currently 91.6% off its all-time high. Furthermore, the stake rate in liquid staking derivatives is extremely low on Solana right now at 2.25% (Marinade has a total of 1.23% or 54.6% of the market). This number could easily jump to 10%. And if Marinade maintained its market share and the price of SOL made it back to all-time highs (certainly no guarantee here), the DAO would be making $22m annualized with its 6% take rate.
For reference, Lido is doing about $25m annualized revenue today and has a market cap of $1.65b (230x Marinade’s market cap today).
Marinade currently has the highest TVL within Solana DeFi ($106m). We should note that about 28% of the value staked was removed on April 28th. We asked about this in Marinade’s Discord and received a response with the wallet address in question, but the team does not have an explanation as to why the stake was removed.
Marinade is very much a community-oriented project within Solana. The team has close ties to the Solana Foundation and was spun out of one of Solana’s many hacker house programs. They bootstrapped with zero investors. The founding story is similar to ENS on Ethereum due to its close ties with the Solana Foundation. Lucio Tato is the main engineer/architect and serves as the CTO. The project has many contributors from all over the Solana DeFi ecosystem. For example, any changes to the code of the protocol must be run through Marinades multi-sig, which has 13 wallet keys. Members from Solana DeFi projects such as Raydium, Jupiter, Orca, Solend, Solflare, etc all own a key on the multi-sig.
The core team appears focused, oriented to long-term goals, and mission-driven. More on the team here.
Marinade has fantastic branding and an active Twitter account with 31.3k followers today. One potential downside is that there is no active “leader” within the community with a large Twitter following that we are aware of. This is not a requirement but is generally something we like to see. Because Marinade is closely aligned with the Solana Foundation, we can accept the lack of a public-facing leader.
None. The project was bootstrapped out of a Solana hacker house with help from the Solana Foundation.
Lido, which controls 87% of liquid staking market on Ethereum, and 31% of the overall staked assets on the network, is the #1 competitor to capture the market on Solana at the moment. Lido currently has a 30% market share amongst liquid staking protocols on Solana (Marinade has 54.6%), and has integrated stSOL with most of the high-profile DeFi projects.
The primary difference between the two is as follows:
Lido takes 10%. Marinade takes 6%.
The current yield on Lido = 5.3%. The current yield on Marinade = 6.5%.
Lido permissions validators into the protocol. Marinade does not. This means Lido is a centralization concern (also the case on Ethereum today) and has a cap on growth. Marinade does not.
Marinade has close ties with the Solana Foundation and is a “Solana project.” Lido is an “Ethereum project” seeking to expand its business on Solana.
The governance docs are well-written, transparent, and easy to follow. The project has had 36 proposals come to a vote. A run-through of the proposals and the public discourse forum reveals a mature community making strategic long-term decisions. We are a member of the Discord and have asked questions that typically get answered in a matter of minutes.
We are users of the protocol and find it to be one of the best user experiences we’ve had in crypto. Close ties with the Solana Foundation, integrations with popular wallets, and many of the important DeFi projects on Solana give the project an early lead on its competition.
MNDE is the governance token of the Marinade DAO. There are a total of 1,000,000 tokens, with 19% circulating today. The allocation is as follows:
35% - DAO Distribution. Used as the DAO sees fit. Initially used for liquidity mining programs and retroactive rewards for early users.
35% - DAO Treasury. Used for operations, grant programs, and strategic partnerships. The treasury is governed by the multi-sig and MDNE holders.
30% - Team. Subject to 2-year vesting and started in April of ‘22.
Liquid staking is a hot topic within the Ethereum ecosystem today, but we have not seen this spill into Solana just yet. We expect that to happen at some point and are looking to be positioned for when it does.
Solana needs to grow its TVL. The only way this can happen is if more SOL (or mSOL) is making its way into DeFi. Ethereum had the same challenge early on. DeFi and TVL didn’t explode on Ethereum until there was utility for ETH. MakerDAO gained momentum in 2018 and the rest is history. We think Marinade Finance could be the catalyst for Solana because mSol allows stakers to earn yield + access DeFi applications.
mSOL is already integrated with all of the top DeFi projects in Solana. Therefore, anyone using Marinade has utility for mSOL — the derivative token received in return for staking SOL. We think this positions Marinade to take the lead when delegated stakers eventually seek liquidity for their SOL. As Solana’s co-founder Anatoly said, why would anyone stake SOL and not want to stay liquid? We have observed that utility and integrations with DeFi are what gave Lido an early lead on Ethereum. Lido was part of the “cool kid club” on Ethereum. Almost every DeFi founder was involved with the project. We see the same dynamics with Marinade today due to its close relationship with the Solana Foundation and Solana DeFi.
As users of the product, we have had a pleasant experience interacting with the protocol, the Discord group, and the governance docs.
The Solana Foundation has worked with Marinade on several audits of the protocol, smart contracts, and contract risks. Kudelski Security, Ackee Blockchain, and Neodyme did the 3rd party work. You can find documentation here if interested.
Marinade has extremely low liquidity, trading between $50k-100k on average in current market conditions. Anyone buying the token should view it as a private, illiquid investment at this moment. With that said, Marinade is listed on Coinbase. This is important because it provides an on/off ramp for liquidity when market flows shift. The MNDE token is also tradeable on Gate.io (tier 2 exchange) and on Raydium and Orca - DEXs in Solana DeFi.
Current Market Cap: $6,415,710
Fully Diluted Market Cap: $30,539,784
All-Time High: (15 months of trading): $.30
All-Time Low: $.028
Current Price/Token: $.032
The team operates quite lean, with just 8 full-time contributors today. This is important considering the current market conditions, with the protocol doing about $419k in annualized revenue — a number that fluctuates with the price of SOL. The team also has access to tokens within the Treasury, but selling to finance operations at the bottom of a bear market would be a very bad idea (& the DAO would have a say here). We think Marinade will make it, but there is certainly some runway risk with the project given its nascent stage and current market conditions. The project has close ties with Solana and the Solana Foundation, making it an important ecosystem project. Because Solana is well capitalized (raised over $340m), we think this could potentially serve as a favorable backstop if market conditions were to worsen.
Smart Contract Risk. A bug in the code would be catastrophic for the protocol.
Runway Risk: the team is bootstrapped, but well-connected within the Solana Foundation and an important ecosystem project for Solana. Current annualized revenues are only $419k.
Liquidity Risk: as mentioned, the token is a small cap and has very little liquidity. Anyone thinking of purchasing the token should view it as a private illiquid investment that will need to be held.
Solana risk. This project is very much tied to the health and overall success of the Solana ecosystem as a whole. If the price of SOL drops, this impacts Marinade’s revenues. If you don’t have a long-term conviction in Solana as a viable L1 (there are many uncertainties here), then you should probably stay away from Marinade.
Regulatory Risk: the team members are international as is the DAO, but needs to be considered regardless.
We’re still in the crypto winter, but we continue to see some growth in quality crypto assets, primarily the big dogs: BTC & ETH. This is largely where you want to be in the bear market. Looking at almost any chart of an altcoin against the behemoths reveals a slow bleed out for the alts. Furthermore, when flows return to the crypto markets, alts are more likely to run toward the end of the cycle.
Therefore, right now we are primarily focused on research, data, and building conviction as we prepare for the next cycle. If you’ve been following along, you know that we did a pretty good job of calling the cycle bottom last year. But there are still some dark clouds circling in macro land to pay attention to.
As such, identifying key growth areas *today* is critical to finding success in the coming years. Given the success of liquid staking protocols on Ethereum, it’s possible that a project like Marinade Finance could significantly outperform in the next cycle. We think it’s a project to put on the “watch list” at minimum. Of course, with the potential for big rewards comes higher risk. Marinade should be viewed as a risky project due to its nascent stage (launched August 2021), low liquidity, and its position on Solana — which is still an unproven network.
Stay safe out there and please do your own research.
Thanks for reading.
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Disclosure: we own a small position in Marinade, but have no formal ties with the project.
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.