mDAO proposal - New product: Validator's stake account used as collateral through Marinade

Governance
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#1

Hello everyone, here is a proposal that has been worked on internally in Marinade and that we’d like to introduce to the mDAO

What do you propose?

We’d like to propose a new product by Marinade, geared mostly at self-stake validators. Using this product, they could deposit their stake account into Marinade and mSOL, unlocking their liquidity and making their capital more efficient, while getting guarantees that Marinade would return a share of this stake back to the validator depositing the stake.

In return, users of this product will keep the received mSOL in whitelisted options that Marinade will monitor. If the user moves those mSOL elsewhere, the equivalent stake assigned to its validator would be distributed to other validators.

This product would be open to superminority validators that Marinade would otherwise exclude, given that they would never be assigned stake from the main pool - at most they would be getting back a share of the stake accounts that they own themselves, while distributing the rest of their SOL according to Marinade’s standard strategy. This makes it a win both for the validators themselves, who get to unlock their self-stake for DeFi use; and for decentralization as a whole as Marinade spreads around a share of that SOL.

The specifics are:

  • This product would not require any change to Marinade’s smart contracts, so there’s no added contract risk. It is mainly an addition to the delegation strategy.
  • This product would use mSOL and participate to Marinade TVL, but the TVL brought by this product would be distinct and displayed separately.
  • Marinade would accept up to 30% of its total TVL to be returned to validators using this product. As the TVL of this product goes above 30% of the total, validators would start getting back less stake from Marinade. (governable parameter)
  • The stake accounts deposited to Marinade must contain at least 100k SOL.
  • The whitelisted options in the first iteration would contain:
    • Deposit mSOL as collateral on Solend
    • Keep mSOL in your wallet
  • Access to this product is whitelisted. We will require validators to get in touch with Marinade beforehand, so that we can configure things before they deposit their stake account. Marinade would create an onboarding process.
  • Any validator can apply to participate as long as they have:
    • a self-stake account > to 100k SOL
    • a commission on their validator of 10% or lower
    • an average APY of at least 5%.

What is the expected positive impact of this change?

  • Under the current status quo, there is no scenario in which a large validator’s self-sake would ever get deposited in Marinade and distributed to other validators, as they would have no incentive for doing it. This product gives them a reason to accept the trade-offs coming from smart contract risk, in exchange for unlocking their stake and helping stake decentralization overall.
  • Everything above 30% of the total TVL coming from this product would be redistributed via the delegation strategy, raising the amount of stake to be distributed by Marinade, even to smaller validators. Solana’s Nakamoto coefficient could skyrocket if Marinade attracts a lot of stake this way.
  • The unlocked capital would arrive in DeFi and benefit Solana’s DeFi ecosystem as a whole.
  • Marinade TVL could grow by multiple millions of SOL very quickly, both increasing MNDE’s power (as it controls the gauges) and helping secure the project’s future.
  • Validators would receive between 30%-100% of their self-stake back (depending on the TVL of this product compared to the total TVL). There is no situation where a superminority or big validator would receive more than they have deposited - in the extreme case, they merely get to liquify their own stake.

What is the rationale behind the proposal?

Liquid staking still represents less than 5% of the overall staked SOL. Only considering the superminority, 135M SOL is currently locked to validators and not participating in DeFi. We can estimate that at least 1/3 of it comes from validators themselves self-staking. If we expand to all validators, the potential SOL unlocked by this product is even higher.

This product is a way to open the door to validators needing to keep enough stake to operate, but that would rather use liquid staking solutions and commit this capital in DeFi.

We anticipate that by unlocking this possibility, Marinade TVL could grow tremendously.

Additionally, considering mSOL and Solend’s APY, using this product would be financially interesting for validators even as they receive back 50% or 30% of their self-stake. This means that those validators could end up distributing half or more of their previously self-stake, without harming their revenue. This would help decentralize Solana even more and this stake would overflow from this product and end up distributed through the delegation strategy.

We expect users of this product to keep their mSOL on whitelisted options for a simple reason: we want to avoid any user gaming the system. For example, a user could theoretically deposit their stake account into this product, move the mSOL to a different wallet, then unstake the mSOL. Under that scenario they could socialize the unstake, while still keeping the percentage they have assigned. Requiring them to keep the mSOL under whitelisted options allows Marinade to ensure that, once they unstake, that stake gets removed specifically from their validator and not pool validators as a whole.

Any other considerations?

  • Other whitelisted destinations for the received mSOL can be added in the future if requested by users of this product.
  • Solend currently has a cap on mSOL deposit. Improving mSOL liquidity and increasing this cap will be a necessity if the product is widely used. Other whitelisted options can reduce the impact of this.
  • Even if Marinade accepts superminority validators participating in this product, it is important to understand that this stake would not move otherwise. By using this product, they accept that a part of their self-stake will eventually be distributed, helping decentralize Solana, as Marinade offers them a financially viable alternative.
  • Ideally, a future version would have a smart contract that controls the liquidity from this product and which limits what the user can do with the mSOL. A contract controlling the liquidity could also provide advantages for validators in jurisdictions where getting mSOL could be considered a taxable event. We may implement this once we see what sort of adoption the product gets.
  • The team may add new whitelisted destinations for mSOL once we evaluate the product’s adoption. These would not require a new governance vote, as they would not change the product’s core.

Let us know what you think guys!

10 Likes
#2

imo a good idea, but:

  • there should be a compensation for the add’tl risk that mDAO is taking on
  • using the mSOL as solend collateral clearly exposes it to smart contract risk & the risk of liquidation or socialized losses. how are these cases handled?
2 Likes
#3

If an account using this product ends up either having the collateral liquidated or involved in socialized losses, the net result would be the total amount they hold at the whitelisted options would be lower than it should. This would be, for all intents and purposes, the same as if they had withdrawn it and transferred it elsewhere.

It would then trigger this clause:

If the user moves those mSOL elsewhere, the equivalent stake assigned to its validator would be distributed to other validators.

The added smart contract risk would be on the stake account holder choosing to use the product - it is one of the trade-offs for being able to unlock their stake. If Solend were to be hacked and the vault drained, then it would be the same case as above, since the mSOL would be moving away.

#4

I think it’s great to work towards capturing more TVL for marinade and allow a way for the whales to participate but explicitly excluding smaller players from self staking seems unfortunate.

I would propose 10k to be the starting limit or at least be able to take it on a case by case basis.

5 Likes
#5

I think this is a good idea. Market conditions have presented a unique opportunity, and you should strike while the iron is hot. Large validators who have been around since the beginning are probably sitting on sizable capital gains, and making a move like this @ $30 SOL is a lot easier than doing it @ $200 SOL.

That said, I also agree with @Cogent_Crypto on setting a lower limit or at least considering relatively smaller amounts on a case by case basis, maybe taking strategic importance / relevance into account.

2 Likes
#6

There is definitely additional risk of depositing mSOL into Solend as collateral. I am just not sure whether this risk is borne by mDAO. Both the smart contract risks and socialized losses risk is borne by the validator undergoing this program.

If the reserve gets drained, validator loses his mSOL (and also the SOL staked on his validator). If socialized losses occur in the mSOL pool, validator also takes a haircut of his mSOL staked.

In both situation, mDAO can move the validator’s SOL but does not suffer any direct losses (other than possibly TVL losses).

3 Likes
#7

LGTM. 10K is an acceptable limit giving the overhead

#8

Hello everyone,

As there seems to be no blockers in order to move forward with this proposal, apart from the high cap to enter, I’d like to summarize the proposal in a final state and include a change to lower the minimum amount to 10k SOL.

If this proposal is accepted by the mDAO, Marinade would:

  • Open this product to all validators wishing to deposit their self-stake, with a lower limit at 10k SOL.

  • As long as the TVL of this product represents less than 30% of Marinade TVL, validators would get back their stake in full. If the TVL of this product goes above 30%, all participating validators would see this percentage lower.

  • The minimal percentage of stake returned to validators using this product is 30%, and would only be achieved if the TVL of this product represents more than 90% of the total TVL.

  • The whitelisted options in this first iteration will include: Using mSOL as collateral on Solend, keeping the mSOL in your wallet. Marinade team will have the right to add more options as they are requested.

  • If the validator using this product sells or moves the mSOL from the whitelisted options, Marinade would reallocate the corresponding stake to other validators (via gauges and delegation strategy).

  • Marinade would create an onboarding process to allow self-stakers to register and participate.

  • The requirements of 10% commission or lower and a minimum of 5% average APY over the last 10 epochs still apply.

  • Marinade would not modify its main smart contract to make this product available.

I’ll also include this TL;DR:

In exchange of Marinade’s management fees and accepting the smart contract risk(s), self-staking validators would be able to unlock their liquidity with more flexibility and use it in DeFi to look for additional yield.

This product, if successful, would also allow a part of their (currently locked in big validators) stake to overflow towards the algorithmic delegation strategy and the gauges, decentralizing Solana even more without harming their revenues.

5 Likes
#9

Currently there is close to 2m mSOL deposited in Solend, with less than 15k borrowed.

It therefore seems that there is no need for more mSOL in Solend, in fact Solend is awash excess mSOL. I think the proposal is really good, but better use cases for mSOL should be found.

#10

mSOL utilization is low yeah, because it is purely negative EV to borrow mSOL over SOL.

Unless you are betting on marinade collasping, which is a bad idea as well (marinade doing so well!).

The way I think we should look at it, is look at how many users borrow against mSOL as collateral, thus unlocking liquidity for mSOL.

Some statistics pulled on 22/8, Solend will be releasing a detailed dashboard for this soon.

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We can see the borrows here outstanding against mSOL. Simply put, mSOL collateral is used to collateralize loans of 6.95M USD worth of non-SOL borrows (USDC, BTC, ETH), while used to collateralize 476K~ worth of SOL borrows.

Why is this important?

Because mSOL that is used as collateral, is mSOL that is sticky TVL. It cant be moved, cant be withdrawn.

The idea behind this validator stake account is to provide a unique selling point to these validators:

The ability to use their self-stake as collateral, which they can’t do now, while adding to mSOL’s TVL and fees generated.

1 Like
#11

Hey Maradona,

As @Soju has pointed out, mSOL on Solend is used mostly as collateral, not to get APY when others borrow. A common approach I’ve heard is deposit mSOL -> borrow SOL -> loop or use elsewhere while still getting APY.

While I don’t expect those using this product would go full degen, we have heard from potential users about borrowing USDC. Say, you deposit a large amount of mSOL, borrow 1/10th in USDC to keep a safe margin, then use that USDC as they will.

I agree that this is not the only use case and we can find others, but Solend collateral is only the first integration during this pilot program, and only an incidental part of the proposal since it doesn’t impact the protocol. As long as there are no protocol changes, and MNDE or mSOL holders couldn’t be negatively affected, there would be no need for an integration to go to governance.

The parts that can impact how the protocol acts are effectively every other bullet point on the proposal. :slight_smile: