Liquid Staking with Solana — Lido & Orca
Two weeks ago I made a post about Celsius and the relatively risk-free 8.5% interest rate you can earn on USDC in these crypto banking protocols.
This week, I want to take this idea a step further to look at some of the more complicated yield farming opportunities available.
Staking with Solana
As a quick introduction, Solana is a Layer 1 Ethereum competitor which features much faster transaction throughput, but trades this off with greater centralisation and high expenses to run a network validator node.
Solana runs a proof of stake consensus mechanism known as ‘proof of history’, which creates a cryptographic proof of history to show that an event occurred at a specific point in time.
Most other proof of stake systems require the validator nodes to communicate to reach consensus on the time that each transaction occurs, but proof of history eliminates the need for this communication because each node maintains its own clock by encoding the passage of time in something called a verifiable delay function.
This allows you to sequentially map out the order of transactions based on their unique time hash and count; a cryptographic timestamp. The trade-off with this approach is that validator nodes are relatively expensive to operate, and require advanced CPUs and disk speed. Costs add up to around 1 SOL per day (~$100 USD at current prices), which adds up over time.
Those who are unable to run their own validator can stake SOL using Solana’s delegation functionality, whereby you delegate some or all of your SOL to an existing validator.
This is a voting system whereby individuals vote (by delegating their SOL) on the validator they trust to process transactions. The more SOL delegated to the validator, the more ‘weight’ it receives on the network, and the greater the rewards. This is a simple overview of the delegation process, but it’s not the main focus of this post.
For most people, the process of staking SOL tokens through delegation is sufficient. SOL can currently be staked on a range of platforms for around 5.5% — 6% p.a., which is a nice yield for those who believe in the long-term value of the Solana protocol.
Let’s take it a step further by doing a deep dive into liquid staking with SOL on the Lido and Orca protocols.
Staking on platforms which pay a liquidity token which can then be used as collateral on other DeFi applications.
Lido is a fantastic platform to unlock the potential of liquid staking.
First, connect your Solana wallet to the platform and stake your Solana at a 5.9% APY. In return, you will receive stSOL, a liquidity token which represents your share of the total SOL pool deposited in Lido. This is the ‘liquid’ component of ‘liquid staking’. You have access to a liquid, tradeable asset while your Solana is staked in Lido.
Over time, as your SOL accrues rewards at the 5.9% rate, the value of your stSOL appreciates. In comparison to other platforms which provide staking rewards as capital inflows into your staking account / wallet, stSOL is a synthetic asset whose price appreciates over time to reflect the SOL rewards earned by validators selected by Lido.
I’m sure this has interesting tax implications that I don’t fully understand. Your SOL is substituted for stSOL at an exchange rate of 1 stSOL = 1.0279 SOL (as at 5 March 2022), and the value of stSOL should (in theory) appreciate at 5.9% per annum.
Now the fun starts. A liquid asset like stSOL is fantastic because it can be utilised on other DeFi platforms to generate additional yield. This is the appeal of liquid staking over traditional staking, which requires you to lock up your tokens to receive staking rewards.
A common DeFi application is something called a liquidity pool. Liquidity providers add two cryptocurrencies in equal parts to a pool, which is used by the protocol to support automated market making when users swap the two currencies.
Orca is a DEX on the Solana blockchain which facilitates liquidity pools for the stSOL token. On a basic level, the lowest risk liquidity pairing is stSOL and a stablecoin like USDC, which currently pays an APY of 12.7% in the form of ORCA tokens and a share of trading fees (see image on the left above).
The final step is Orca’s ‘Double Dip’ functionality. When you provide liquidity to Orca’s ‘Aquafarm’ liquidity pools, you receive ‘Liquidity Provider tokens’ from the Orca platform which can be ‘double dipped’ to receive rewards of 22.4% in the form of wLDO (wrapped Lido DAO tokens).
Both Aquafarm and Double Dip rewards accumulate on the platform in real time and can be ‘harvested’ at any time. Once you have the ORCA and wLDO tokens in your Solana wallet, you can then exchange them on the ORCA platform back into your cryptocurrency of choice.
The key risk in yield farming in liquidity pools like Orca’s Aquafarms is something called impermanent loss, which occurs when the price of one of the assets within a liquidity pool pairing diverges substantially from the other asset. If, for example, Solana (and therefore stSOL) appreciates in value substantially, the rewards earned from the liquidity pool may be less than the appreciation in SOL.
This article was a quick walkthrough of some slightly more advanced and involved yield farming options available on the Solana blockchain.
In my brief experience, the Orca platform is a fantastic, user-friendly, platform to maximise yield on cryptocurrencies, especially in the current bear market.
Let me know if you have any questions or would appreciate any additional information!
Originally published at https://www.xanderhoskinson.me on March 8, 2022.