Why LSTs are Better Than Regular Staking (on Solana)

by Obi3 (Twitter)

Before diving in, I recommend reading Sanctum’s LST Risk Guide for the Paranoid where I cover the risk behind Solana LSTs and why they are safer and fundamentally different from those on Ethereum.

TLDR;

LSTs give you several advantages over regular staking, such as:

• Liquidity & Re-balancing Portfolio: You can instantly convert your LST to SOL or USDC at any time and re-balance or access your portfolio without waiting for the end of the epoch.
• Diversified Validators: It is much easier to diversify your validators with LSTs either by Stake Pools or multiple tokens of Single Validator LSTs and minimize validator performance risk.
• Better Hard Wallet Security: You can stake on a hard / cold wallet without ever having to approve / sign a smart contract, making the funds unbreachable.
• Improved Solana Blockchain Performance: Regular stake accounts are messy and add significant computational burden to the network. LSTs consolidate the number of stake accounts to speed up the Solana network.
• Tax Efficiency: Convert your return from the form of dividends to increasing asset value. No country taxes unrealized gains, giving you more control over tax liability.
• Higher Yields: Many LSTs offer additional boosts to the yield such as lower commission, sharing priority fees, airdropping tokens, and more.

Optional Benefits:

DeFi Farming: You can earn additional yield on your LST through liquidity pools and lending. This can give you an even higher yield to your stake (however that starts to expose you to Smart Contract Risk depending on your practices).

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LSTs, despite having only 5.44% market share of the broader stake market, have a number of benefits that can make it superior to normal staking from both a return and a safety standpoint. This post dives into why you can gain more from switching from traditional stake to LSTs. You only need 0.1 SOL reserved for transaction fees, and you can hold your remaining SOL in LST tokens to passively earn yield.

Liquidity & Re-Balancing Portfolio

With crypto’s volatile market it’s a powerful competitive advantage to be able to re-balance your portfolio in unexpected events or based on price action.

In cases of a black swan event you would have the ability to immediately liquidate all or some of your funds to hedge against the risk. You would also be able to immediately realize gains from a market rally without having to wait ~2 days, risking a market pullback.

Diversified Validators

The benefit of diversifying validators is both increasing the security of the Solana network and minimizing risk of yield underperforming as a result of an underperforming validator. It is much more difficult to diversify validators using traditional staking given the barriers to delegation and withdrawal.

There are 2 ways LSTs let you diversify validators more easily than traditional staking:

1. Using Stake Pool Program: LSTs such as jitoSOL and mSOL aggregate dozens and hundreds of different validators. They also manage the stake allocation to avoid delinquent validators or validators that manipulate commission percentages.
2. Swap for Your Favorite LSTs: It’s easier to hold and manage 10 different LST tokens than to have a stake with 10 different validators.

Improved Solana Blockchain Performance

Solana has so many stake accounts that the network comes to a halt temporarily at the start of every epoch to calculate staking rewards for each stake account. Validator LSTs greatly decrease the number of stake accounts and make Solana faster.
- [Source]

Often times each wallet will have multiple stake accounts for a single validator (due to funds delegated/staked at different times). The network has to calculate the returns for each stake account, in turn making 3x-4x the number of calculations it needs to do.

LSTs consolidate all the stake accounts into a single one, and can increase the speed of the network.

Better Hard Wallet Security

Note: If you’d like to stake funds using the traditional method it is much safer to do it directly from your wallet as opposed to using the sites. That feature is supported by SolFlare, Backpack, and Phantom.

In order to stake many users would have to approve a transaction on a webpage to delegate their SOL to the validator. That opens up two vulnerabilities where a Hard Wallet can’t protect you

1. Phishing: The most common scamming methodology, in most cases users who are drained were not subject to a complex hack, but instead were fooled by a site that poses as a genuine service and upon signing a transaction will fully and trick users into signing a transaction.
2. Unsecure / Vulnerable Smart Contract Signing: Although highly unlikely, it is possible to sign a transaction with a vulnerability that could expose your wallet to some risk.

The most bullet proof method to protect your hard wallet is to never approve a smart contract.

The hard/cold wallet should only send tokens to the hot wallet, with the hot wallet acting as a middle layer to interact with the DeFi ecosystem and sending the tokens back. If you follow this rule of thumb your hard wallet funds will be untouchable.

Tax Efficiency

Many countries expect investors or users to pay taxes upon receiving dividends or proceeds from their portfolio. With regular staking most validators choose to distribute yield to holders. In these cases, you are taxed immediately upon receiving your yield.

Meanwhile there is no country that requires individuals to pay tax on unrealized gains. With LSTs (exception of juicySOL - where priority fee proceeds are airdropped to holders) the value of the token itself increases relative to SOL, giving you more control over your tax liability.

For example- you can swap SOL to clockSOL, over time the value of clockSOL will increase relative to SOL. However you can choose to convert clockSOL to SOL during a time of market pullback (where SOL has dipped below your purchase price), this exercise is often called Tax Loss Harvesting.

[Source - Warren Street Wealth Advisors]

Higher Yields

Given the lower barrier to entry & exit LST validators are competing to provide the greatest yield for users to win stake. It’s much easier to win stake from competing validators, but it is also easier to lose the stake. That is why we see more LSTs competing for attractive user yields, with some even going beyond that to provide more boosted yields.

That is also why we have seen some (albeit rare) cases of traditional validators practicing *commission cheating* - where they increase their commission from <5% to 100% right before the epoch ends, so users end up earning 0% yield. Marinade uncovered several here as part of an investigation.

Traditional Stake Yields:

Yield ranges from 5.5% - 8.3% (varies by epoch)

• Most validators don’t share MEV proceeds
• Some high profile validators caught practicing commission cheating or misleading the community
• Top high profile validators are big corporations such as Coinbase, Binance, Ledger, Figment, P2P.org that have higher commissions (reducing end user yield)
• Most of the top Validators aren’t the best performing ones, with some having a score between 15% - 25% according to Stakewiz

really don't like that the top 6 validators on Solana are giant corporations instead of Solana-native teams

need to change this

and they charge up to 8% commission🤯

i) stake with native teams
ii) you are paying too much in fees

try helius, laine, cogent, overclock etc pic.twitter.com/s8jjW4MQwD

— mert | helius | hSOL (@0xMert_) April 15, 2024

Average Score of Top 5 validators

https://x.com/7LayerMagik/status/1754902142249279871

LST Yields:

Yield ranges from 8.3% - 12% (varies by epoch)

• Most LSTs charging 0% MEV commission (giving you 100% of the yield)
• Validators have explored boosting yields even beyond MEV, such as:
• • juicySOL airdropping 50% of priority fees to holders (sometimes it’s more than the staking yield itself)
  • laineSOL returning 10% of the priority fees to the LST value
  • jupSOL adding 100K SOL of their own to share those returns with users
  • bonkSOL airdropping $BONK to holders
  • bSOL lets holders earn BLZE rewards

Some LSTs are even exploring providing additional non-monetary value to holders similar to NFTs such as hubSOL and pathSOL.

Optional Benefits

DeFi Farming

Stake Pool LSTs (jitoSOL, mSOL, bSOL)

You could easily gain extra yield from LSTs by depositing the LST (usually a validator pool such as jitoSOL, mSOL or bSOL) into [Kamino](https://app.kamino.finance/) or [Margin](https://app.marginfi.com/) to either lend, or add to a liquidity pool and gain incremental yield.

Single Validator LSTs (e.g. compassSOL, lanternSOL, picoSOL, + LSTs mentioned above)

You can use the Sanctum LST liquidity pool $INF, which has 10.5%-12+% yield and may grow higher as more individuals and validators use Sanctum’s liquidity protocol for LSTs.

Note - keep in mind that engaging in DeFi exposes you to smart contract risk and counter party risk. If you want to prioritize safety you can simply hold the LSTs in a hard / multisig wallet.

Benefits of Regular Stake

Sometimes A Delay Before Selling Is Good

Putting SOL in a regular staked fund can be a good line of defense to stop users from panic selling or making impulse buys (cough cough NFT’s).

However, if you would like to have that barrier to protect you from those mistakes consider using a hard wallet such as KeyStone, Ledger, or Trezor. You can also use a multi-sig wallet such as Fuse Wallet (by Squads Protocol).

Not only will that add an additional step before panic selling or impulse buying, it is also a much more secure method to managing your funds and better opsec.

Conclusion

If you would like to explore LSTs and learn more I recommend starting at Sanctum’s LST list (which includes their INF liquidity pool).

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