Crypto traders who are open to taking risks on the Solana blockchain are borrowing from Ethereum’s “Liquid staking token” (LST) frenzy, using their SOL token derivatives in ways that could yield high returns. This somewhat complex process involves staking SOL tokens, obtaining a proxy receipt token called mSOL, and then leveraging those mSOL as collateral to borrow SOL. This method of leveraging SOL for mSOL, similar to leverage tactics seen in other digital-asset markets.
Drift Protocol, a project for on-chain crypto trading on Solana, recently launched a service called “Super staking” that simplifies this leveraging cycle into a single process in response to its growing popularity. The team at Drift noted immediate interest following the service’s launch, exemplifying the market’s eagerness for potential annualized returns of up to 10% – an offering that was so widely sought after that Drift nearly ran out of SOL tokens to lend out. Concurrently, SOL’s token price surged in crypto markets, echoing the excitement around Super Staking.
The yields generated by Drift’s Super Stake originate from mSOL, an LST provided to SOL stakers using Marinade Finance. mSOL tokens appreciate over time as the SOL tokens that underpin them gain interest from Solana’s proof-of-stake processes. Holders of mSOL can anticipate an increase in returns the longer they keep their mSOL. Super Stake amplifies this by allowing holders to borrow new SOL against their mSOL and then stake that SOL for additional mSOL. This set-up brings higher yield-bearing opportunities, but with it, the possibility of rapid losses and potential liquidation.
This intricate process is indicative of the LST economies appearing on various proof-of-stake blockchains. Ethereum leads this landscape with Lido’s staked ETH tokens that have secured $14 billion in ETH value, according to DeFiLlama. Marinade’s mSOL, comparatively smaller with $114 million worth of SOL, is nonetheless the biggest LST on Solana.
The risks attached to this process came into sharp focus during FTX’s collapse in November when Solana’s top on-chain lending platform Solend, the most popular venue for borrowing against mSOL, was on the brink of failure due to an mSOL depegging.
With leveraged yield loops, practitioners risk underestimating the likelihood of large losses for minimal to no gains, as exemplified by Drift’s Super Stake, which uses 10% of borrow fees to fill an “insurance fund” as a safety measure. However, Drift maintains Super Stake as a highly-requested public good and argues its preparedness in the face of market volatility is superior to Solend’s during FTX’s collapse, claiming the protocol automatically handles shortfalls without external intervention.
Source: Coindesk
