Marinade Q1 2024 Brief

Key Insights

• Marinade’s total TVL grew by 76% QoQ to almost $2 billion. Growth was driven by SOL price appreciation as TVL denominated in SOL decreased by 8% QoQ.
• Proposals were passed to implement Protected Staking Rewards and a delegation strategy update. With these proposals, Marinade can expand the number of validators it delegates to without sacrificing performance by covering staking reward losses.
• With the increase in Solana network usage, mSOL APY increased by 6% QoQ to 7.1%. By the end of the quarter, the rolling 14-day mSOL APY reached 7.6%.
• Marinade Earn Season 2 rewarded Marinade stakers and delegation governors with MNDE. After quarter end, Season 3 was proposed, which will specifically incentivize mSOL/SOL liquidity.

Primer

Marinade (MNDE) is an automated staking protocol on Solana that provides liquid and native staking solutions. Marinade was founded during the March 2021 Solana x Serum Hackathon and launched on mainnet on August 2, 2021. A few months later, Marinade’s governance token MNDE was released, with a retroactive airdrop for holders of Marinade SOL (mSOL). Marinade has not raised any venture capital funding or conducted any public token sales. Instead, Marinade’s native token MNDE has mainly been distributed via various campaigns to reward users and contributors. Beyond incentives, MNDE is used for governance on Realms. Marinade delegates staked SOL to validators based on its algorithmic delegation strategy (60%) and MNDE and mSOL directed stake (20% each), where tokenholders can vote for specific validators or the algorithmic set. For both the algorithmic strategy and directed stake, validators need to meet certain criteria for eligibility, notably a maximum 7% commission. In February 2024, Marinade began the launch of Protected Staking Rewards (PSR), which also requires validators to put up a SOL bond to be eligible for Marinade stake. PSR enforces an onchain service-level agreement protecting stakers from reduced rewards.

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Key Metrics

Analysis

TVL

Marinade’s total TVL decreased by 8% QoQ to 10.2 million SOL. Marinade Liquid’s TVL fell by 9% QoQ to 6.3 million SOL. Its TVL was relatively flat YoY, up 1%. Marinade Native’s TVL decreased by 5% QoQ to 3.9 million SOL. However, with SOL’s price appreciation, Marinade’s total TVL denominated in USD grew by 76% QoQ and 1,445% YoY to almost $2 billion.

Market Cap and Fees

Following 889% QoQ growth in Q4, MNDE’s market cap dipped back down by 8% QoQ to $77 million. MNDE outperformed in Q4, with its market cap rank growing from 775 to 396, but underperformed in Q1, dropping to 555. MNDE currently has a fixed supply of 1 billion tokens, of which around 68% are controlled by the Marinade DAO and are yet to be allocated.

Total fees paid increased by 8% QoQ to 6.7 SOL ($825,000). Fees collected by Marinade primarily come from a 6% fee on Marinade Liquid rewards (which translates to around a 0.42% fee on staked SOL assuming a 7% APY). Thus, fee growth remained relatively flat in line with Marinade Liquid’s TVL growth. Beyond growing Marinade Liquid TVL, Marinade DAO may look to increase fees by monetizing Marinade Native.

Validators and APY

Marinade delegates SOL to 264 validators, a 16% QoQ increase. The distribution figures of Marinade’s delegated stake are as follows:

• 13 validators make up the top 33.3% of Marinade delegated stake.
• 37 validators make up the top 50% of Marinade delegated stake.
• 150 validators make up the top 90% of Marinade delegated stake.

With the uptick in Solana network activity, mSOL APY increased by 6% QoQ to 7.1%. By the end of the quarter, the rolling 14-day mSOL APY reached 7.6%. For reference, SOL’s annualized inflation rate is at 5.2%. The mSOL APY figure is calculated based on mSOL’s “true price,” i.e., SOL in Marinade staking pool / mSOL minted.

Protected Staking Rewards and upcoming delegation strategy upgrades aim to expand the number of validators Marinade delegates without sacrificing APY.

In mid-February 2024, Marinade began the launch of Protected Staking Rewards (PSR). PSR enforces an onchain service-level agreement protecting stakers from reduced rewards for reasons such as validator performance issues or commission rugs. PSR requires validators to put up a bond to be eligible for Marinade stake. The required bond amount will equal 1 SOL for every 10,000 SOL received from Marinade delegation. The Marinade DAO will also commit 4 SOL for every 10,000 SOL delegated. Validator bonds will cover initial losses, with Marinade’s bond covering extended losses. As such, PSR allows Marinade to stake to more validators without sacrificing APY to stakers.

Following a successful governance proposal, validators needed to set up their bond to be eligible for stake by mid-February, although the bond did not yet need to be funded. Over 400 validators have set up their bond so far. Following the end of the quarter, Neodyme completed its audit for the validator bonds contract. Validators will need to fund bonds by Epoch 608 (around the end of April).

A successful governance proposal to update Marinade’s delegation strategy was implemented after quarter end. Notable changes include:

• In addition to the hosting data center, decentralization scores will include overall stake distribution, hosting country, and hosting city. Accounting for overall stake distribution will improve Solana’s Nakamoto coefficient by delegating more stake to smaller validators.
• The algorithmic delegation strategy previously delegated SOL to only the top 100 validators based on its scoring criteria. Under the upgrade, the number of validators receiving stake via the algorithmic delegation strategy can increase above 100. Growth of the validator set will be tied to Marinade’s TVL growth.
• Currently, 40% of Marinade stake is delegated to validators in proportion to votes by MNDE and mSOL holders. Previously, MNDE and mSOL holders could only allocate votes to specific validators. With the upgrade, they can now allocate votes toward the algorithmic stake set.
• The maximum commission for eligible validators will be reduced from 10% to 7%.

mSOL in DeFi

mSOL deposited in DeFi protocols decreased by 15% QoQ to 1.7 million. Solend previously featured the majority share of mSOL in DeFi, but it was surpassed in Q1 by Kamino, whose mSOL TVL grew by 307% QoQ to 650,000. Kamino’s growth was largely a reflection of global Solana lending dynamics, with Kamino’s total Q1 TVL growth leading top Solana protocols at 811% QoQ. After the quarter ended, a Solend DAO proposal was passed to list MNDE as an isolated asset in the main pool, which could help revert the downward trend of MNDE on Solend.

To incentivize growth, Marinade conducted Season 2 of Marinade Earn in Q1. Season 2 distributed 1 MNDE per 2 SOL staked in Marinade Liquid (i.e., mSOL tokenholders) or Marinade Native from January 1, 2024, to March 31, 2024. Rewards were pro-rated if a user did not hold mSOL for the entirety of the program. Users would also receive rewards if their mSOL was deposited in select DeFi protocols. There were additional bonuses for MNDE holders that locked tokens to direct stake and for validators based on their algorithmic stake score. In total, 9.8 million MNDE is eligible to be claimed by Season 2 participants.

Unlike previous incentive campaigns, Marinade Earn Seasons 1 and 2 did not directly incentivize mSOL DeFi liquidity, as mSOL holders received the same rewards whether tokens were held in a wallet or DeFi protocol.

A proposal for Marinade Earn Season 3 after quarter end aimed to change this by directly incentivizing mSOL in DeFi protocols. It will specifically target the growth of mSOL/SOL trading pairs to boost liquidity over a five-month period. Under the proposal, up to 25 million MNDE will be allocated to the Meteora mSOL/SOL liquidity pool on Solend. Another 25 million MNDE will be allocated to certain Kamino vaults paired with mSOL. However, based on feedback from the community, the proposal will likely not pass under its current form and will need modifications.

Competitive Landscape

Solana’s liquid staking rate (the percent of staked SOL that is liquid-staked) continued to increase in Q1, up 27% QoQ to 5.5%. Marinade Liquid’s market share fell by 23% QoQ to 32%, with Jito’s approaching 50%. Including Marinade Native, Marinade’s market share was at 44%, just above Jito at 40%.

Unlike Ethereum, Solana’s liquid staking market structure may not have the same winner-take-all/most dynamics due to Sanctum Infinity. Launched in Q1, the Sanctum Infinity Pool is a multi-LST liquidity pool containing 22 LSTs. It prices LSTs by their “floor price” relative to SOL, allowing any LST in the pool to tap into any other’s liquidity. For example, if a user wants to sell xSOL for USDC, but no xSOL/USDC pool exists, xSOL could be swapped to ySOL and sold to USDC using the ySOL/USDC pool. The Infinity Pool ended Q1 with 227,000 TVL denominated in SOL.

Sanctum Infinity supports Solana’s top LSTs and a number of single-validator LSTs, many of which Sanctum has helped launch. Single-validator LSTs have offered unique rewards to attract stake, such as Bonk’s bonkSOL LST, which rewards stakers with BONK. Other single-validator LSTs, such as laineSOL and jucySOL, have been airdropping a portion of base and priority fees to stakers. Validators typically do not distribute these fees to stakers. In the past, this has not mattered much as fees made up around 1% of total rewards when combined with inflationary staking rewards. However, with the increase in Solana network activity, these fees have risen notably. During Epoch 590, from March 16-18, these fees made up over 13% of total rewards.

While Sanctum benefits Marinade by increasing liquidity for mSOL, it may also disadvantage Marinade as one of the market leaders. As MetaDAO notes in its Marinade report, Marinade’s PSR feature could provide a defensible moat against new entrants: a validator would be less likely to provide a bond for a liquid staking protocol that is not yet delegating a meaningful amount of SOL.

Closing Summary

While Marinade’s total TVL grew by 76% QoQ in USD terms, reaching almost $2 billion, its total TVL denominated in SOL decreased by 8% QoQ. The Solana liquid staking market has become more competitive in recent quarters, with newer protocols such as Jito, BlazeStake, and MarginFi eating into mSOL’s market share. Its landscape is also shifting with the launch of Sanctum Infinity, which may prevent winner-take-all/most dynamics by enabling any supported LST to tap into another’s liquidity.

Two notable proposals were passed in Q1 to implement updates that will further differentiate Marinade in a competitive environment: Protected Staking Rewards (PSR) and a new delegation strategy. With these proposals, Marinade can expand the number of validators it delegates to without sacrificing performance by covering staking reward losses. PSR could also provide a defensible moat against new entrants. To further spur growth, Marinade DAO will likely look to iterate on its Marinade Earn incentive program, specifically targeting mSOL/SOL liquidity.

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