MT Capital Insights: How is Jito reshaping the Solana staking landscape?

Authors: Severin & Ian, MT Capital

“Jito has performed exceptionally strongly in this wave of Solana’s recovery, and as the first LSD protocol on Solana that combines MEV yield and staking yield, Jito is poised to reshape Solana’s LSD competitive landscape.”

TL; DR

• Jito is the first liquid staking protocol on Solana that combines MEV yield and staking yield, and TVL has risen by nearly 70% in the past 30 days, which is poised to reshape the Solana staking market landscape.
• Jito is about to launch JTO, a governance token, and there are fewer JTO circulating in the market in the early stage, and the main selling pressure comes from airdrop users. The use cases of JTO are relatively limited, and the ability to capture value is poor. Jito needs new incentives and ecosystem expansion to stimulate the continuous growth of Jito TVL, so as to alleviate the selling pressure of airdrop users to a certain extent and maintain the stability of JTO’s value.
• Backed by Solana’s new assets, the influx of new users, and the increase in trading volume, as well as Solana’s extremely low liquid staking ratio, the LSD protocol represented by Jito is expected to capture higher staking TVL. Solana’s potentially huge MEV value gives Jito a higher imagination.
• Compared with Marinade, the gap between Jito in terms of ecological portfolio, decentralization, and single staking model will continue to narrow with the development of Jito. Jito’s core competitive advantage in capturing and distributing MEV value will continue to expand as the Solana network prospers. As a result, we have very optimistic expectations for Jito’s future. Jito is expected to replace Maridane as the No. 1 LSD protocol in the Solana ecosystem.
• The steady and positive fundamentals of Jito will also lead to an increase in the price of JTO Tier 2 tokens. Referring to the price trend of the LSD Protocol token over the past month, we believe that JTO will also have a stronger secondary market performance.

Jito: The first liquid staking protocol on Solana with MEV yields

Jito Labs in Solana MEV

Jito Network is launched by the Jito Labs team. The Jito Labs team has been working in the infrastructure space of Solana MEV since its early days. In July 2022, Jito Labs launched Solana MEV DashBoard, a MEV classification analysis of more than 36 billion transactions on Solana since January 2022. Then, in August 2022, Jito Labs announced the closing of a $10 million Series A funding round led by Multicoin Capital and Framework Ventures, which will continue to be used to build MEV-optimized infrastructure.

Subsequently, Jito Labs successively launched Jito-Solana authenticator client and Jito Block Engine to optimize MEV extraction and distribution, becoming another important infrastructure service provider in the Solana MEV field. Jito Block Engine solves the MEV problem by linking relayers, searchers, and validators in the network through off-chain auctions.

• First, Jito Block Engine receives trade orders from the repeater and forwards them to searchers.
• The searcher then submits a trade bundle that includes an auction.
• Finally, Jito Block Engine simulates each transaction combination and finds the best trading combination bundle and forwards it to the validator for processing.

According to the Validator Health Report: October 2023 launched by the Solana Foundation, about 31.45% of Solana validator nodes currently choose to use the Jito-Solana validator client launched by Jito Labs, which also shows Jito Labs’ technical level in the MEV field.

With the continuous adoption of the Jito-Solana validator client, there are more and more MEV rewards based on Jito-Solana capture, which also lays a solid foundation for Jito to launch LSD modules with MEV rewards.

The first Solana LSD with MEV revenue

JitoSOL has been difficult to improve for a long time: In November 2022, on the eve of the FTX crash, Jito Labs also officially announced the launch of the Jito staking service in the wake of the development of the LSD protocol. Similar to the liquidity staking logic of other LSD protocols, users who delegate SOL to validators will receive JitoSOL as liquidity credentials. The price of JitoSOL keeps rising to reflect the node validation rewards that have been earned. Thanks to Jito Labs’ early deployment in the Solana MEV field, Jito is also able to distribute MEV rewards to stakers to further increase users’ staking rewards. Unfortunately, as soon as Jito announced the launch of the LSD staking service, FTX collapsed due to misappropriation of customer funds. Solana, which has a close relationship with FTX, has not been spared and has experienced a huge amount of liquidity loss. Therefore, after Jito launched the staking module, Jito’s TVL has been in a tepid state due to the lack of sufficient market confidence and liquidity demand.

Points Incentive Program Boosts Jito’s Recovery: With the recovery of the Solana ecosystem in the second half of this year, Jito’s TVL has also begun to grow gradually. At the same time, in August of this year, Jito also launched its own points incentive campaign to drive mass adoption of JitoSOL. Users can earn points by participating in Jito staking, holding JitoSOL, participating in DeFi activities with JitoSOL, and inviting friends. Points represent the user’s contribution to the Jito community and are also regarded as an important criterion for future airdrops. With the introduction of the points incentive program, Jito TVL’s growth curve has become significantly steeper.

Lido withdraws, Jito takes over Lido Solana’s market share: At the same time, in October this year, Lido DAO decided not to support new SOL staking after a community vote, and node operators will also withdraw from the SOL staking market starting in November. Lido’s exit has made stSOL, which is worth nearly 6M, need to find a new staking venue. Jito, which has both staking and MEV rewards, as well as points incentives, has taken on a large number of stSOLs, which has further soared Jito’s TVL and become the top two LSD protocols on Solana.

More Decentralized Jito - StarkNet

In order to make the underlying validator pool and the process of managing the change of the staking pool amount more decentralized, Jito proposed the future development plan of Jito StarkNet. Jito StarkNet is a self-sustaining, transparent, and decentralized protocol for the intelligent management of validator pools. Jito StarkNet is mainly composed of three modules: Keepers, Validator History Program, and Steward Program.

• The Validator History Program stores the historical data records of each validator in the past 3 years, including the validator’s participation and correctness data in the consensus process, commission collection ratio, MEV extraction value, total staking value, and staking rank.
• The Steward Program calculates each validator’s score and appropriate staking delegation amount based on each validator’s on-chain historical data records.
• Keepers Network will allocate the staking delegation amount based on the calculation results of the Steward Program.

In the Jito StarkNet network, the historical behavior of validators will be used as the only reference standard for allocating the staking delegation amount, so as to encourage healthy competition among the underlying validators to bring users a better staking experience. At the same time, the management of pledged entrusted funds no longer relies on the centralized management of the protocol, but is automatically implemented by the Steward Program and Keepers Network, and the operation process is more decentralized.

Token Economy

On November 28, the Jito Foundation announced the launch of its governance token, JTO. The launch of JTO is an important part of the development of Jito, which will be used as an airdrop reward for early contributors and give users the ability to govern the protocol.

Token distribution: The total supply of JTO is 1 billion, of which:

• 10% will be used for airdrops to early adopters;
• 24.3% is controlled by DAO governance for community growth;
• 24.5% and 16.2% of the tokens are attributed to the Jito team and early investors, respectively. This part of the token will have a one-year lock-up period and a three-year vesting period;
• 25% of the tokens will be used for the development of the ecosystem;

Token Utility: JTO holders can make decisions on important parameters and governance initiatives of the protocol, including but not limited to:

• Fees for setting JitoSOL staking pools;
• Adjust the key parameters of Jito StarkNet to allocate the pledge fund delegation strategy;
• Manage the JTO tokens held by the DAO as well as the fees captured by JitoSOL;

Token Airdrop Incentive: Early adopters of Jito will have a chance to receive JTO token airdrops. Where,

• 80% of the tokens will be airdropped to JitoSOL holders and users;
• 15% of the tokens will be airdropped to validators running the Jito-Solana client;
• 5% of tokens will be airdropped to Jito MEV searchers;

Judging from the token distribution of JTO, there were fewer JTOs circulating in the market in the early days, and the main selling pressure came from airdrop users. From the perspective of token empowerment, the use scenarios of JTO are relatively limited, and the value capture ability is poor. **Jito needs new incentives and ecosystem expansion to stimulate the continuous growth of Jito TVL, so as to alleviate the selling pressure of airdrop users to a certain extent and maintain the stability of JTO value. **

Jito’s future expectations

Exploding Solana

After the bankruptcy of FTX, Solana, which had been dormant for a long time, finally ushered in a recovery. Since September, TVL on Solana has started to grow in volume, and it is now close to 700M. And in this round of rising cycle, the monthly increase in TVL of the top ten public chains is only 14.8%, while the monthly increase of Solana TVL is as high as 85%, far exceeding that of other public chains. From the asset side, the influx of assets is expected to drive the rise in SOL staking demand.

In addition to the significant increase in TVL, the number of daily transactions on Solana also peaked at nearly 400M. The increase in the number of transactions will not only drive the growth of Solana network fees, but also promote the increase of MEV fees, which will drive the demand for staking represented by Jito.

In addition, the number of new and reactive users of Solana continues to recover, further broadening the audience of the LSD protocol represented by Jito.

Solana LSD still has a lot of room to grow

Although the current pledge rate of SOL has reached 70.07%, the proportion of liquid pledge is only 3%-4%, and there is still a lot of room for development of liquid pledge. Compared with other staking methods, liquidity staking can allow users to participate in other DeFi activities while enjoying staking rewards by giving users liquidity token certificates, and the use of funds is more efficient. As shown in the figure below, with the gradual recovery of the Solana ecosystem, liquid staking has also ushered in explosive growth. We expect liquid staking on Solana to replace the larger general staking market due to its greater capital efficiency in DeFi activities.

The value of Solana MEV is huge

Since Jito will distribute MEV rewards to JitoSOL holders, the higher the value of MEV in Solana, the more JitoSOL staking rewards will be distributed. The increase in APR will further enhance the attractiveness of JitoSOL to users. In the past year, Solana’s MEV Profit has been as high as 14M, and the value of MEV that can be optimized is huge.

As the Solana network prospered, so did the value of the MEV that Jito cumulatively captured. We expect this trend to continue, with Jito accumulating more MEV value from Solana’s surging network activity and distributing it to JitoSOL holders.

Compared to Marinade, Jito has a unique competitive advantage

Marinade is the earliest LSD protocol in the Solana ecosystem, subverting TVL by 1.7B, and is one of Jito’s biggest competitors. Compared to Marinade, Jito’s main competitive disadvantages are as follows:

1. Marinade LST’s ecosystem will be richer than Jito LST’s.
2. Marinade has a larger number of validators and a better degree of decentralization than Jito;
3. Marinade is also able to offer other staking options in addition to LSD;

For competitive disadvantage 1, as shown in the figure below, JitoSOL is constantly expanding its ecological use cases and has been integrated with 10+ mainstream DeFi protocols. In addition, Jito has the support of Multicoin, which is deeply involved in the Solana ecosystem, and will be able to expand more ecosystem partners more easily in the future.

For competitive disadvantage 2, Marinade currently has about twice as many nodes as Jito, and the degree of decentralization is significantly better than Jito, which Jito will be difficult to surpass in the short term. But Jito itself is also transitioning to Jito-StarkNet, and the protocol’s decentralization is expected to be further improved in the future.

In addition to the competitive disadvantages, Jito also has the following competitive advantages over Marinade:

1. JitoSOL is able to capture additional MEV rewards, and the staking rewards are slightly higher than Marinade;
2. With the same incentive plan, Jito was able to capture more active users in this wave of Solana’s recovery;

Jito’s capture and distribution of MEV value is Jito’s core competitiveness in the long-term competition. The more active the Solana network is, the greater the value of MEV, and the more obvious this competitive advantage will be for Jito. Jito’s ability to capture more active users also shows that Marinade has not yet formed a monopoly on the LSD market, and LSD protocols like Jito still have a lot of room for development.

To sum up, compared with Marinade, the gap between Jito in terms of ecological portfolio and decentralization will continue to narrow with the development of Jito. Jito’s core competitive advantage in capturing and distributing MEV value will continue to expand as the Solana network prospers. As a result, we have very optimistic expectations for Jito’s future. Jito is expected to replace Maridane as the No. 1 LSD protocol in the Solana ecosystem.

The steady improvement of Jito’s fundamentals will also lead to an increase in the price of JTO Tier 2 tokens. Referring to the price trend of the LSD Protocol token over the past month, we believe that JTO will also have a stronger secondary market performance.

Reference

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