Key Takeaways:

Marinade is the leading Solana liquid-staking solution with over 6.6 million SOL staked, more than all major competitors’ combined ~5 million SOL
Marinade’s decentralization strategy and composability deserve a premium when compared to multichain competitor Lido
Future reductions in inflation rewards pose profitability risks as liquid staking fees compress over time
FY2022 guidance of 30 million Staked SOL could present significant upside for MNDE

Marinade Finance is a liquid staking solution for Solana’s native SOL taken was born out of two Hackathon contestants. After placing third in the February 2021 Solana DeFi Hackathon, the original Marinade team decided to combine their efforts with fellow liquid staking contestants Lucio Tato and Marco Broeken from Smart Pool, and together the core team set out to refine and launch Solana’s first liquid staking platform.

On August 2, 2021 Marinade launched with no outside funding or paid marketing efforts and a goal of delegating 100,000 SOL. Marinade reached its security cap goal in less than 36 hours and after increasing the safety limit two weeks later, hit $23 million TVL with over 300,000 SOL delegated to more than 145 validators. As of May 11, 2022, Marinade has grown to a TVL of ~$367 million delegating 6.7 million SOL across 475 non-security group validators.

Liquid Staking

Proof-of-stake (PoS) blockchains generally require staking or delegating the native token to secure the network's sovereignty by reducing its risk of a hostile network takeover. Running a validator can be a complex and relatively expensive process for the average crypto user, and delegating tokens limits liquidity, increasing the opportunity cost of staking.

Liquid staking, which was first introduced by Lido on Ethereum, created a new asset class of liquid staking derivative tokens (LSDs). These LSDs allow users to deposit into a protocol who in turn delegates the tokens to an approved validator. In the case of Marinade, mSOL remains a liquid composable token that can be used in DeFi even as they are locked into the PoS network. mSOL can be staked on other protocols, lent (or borrowed) or simply sold for instant liquidity.

Solana Liquid Staking

With 86.7% of total liquid staked SOL, Marinade and Lido overwhelmingly control liquid staking on Solana. While impressive, the most eye-catching metric is that currently only ~3% of total staked SOL is held on a liquid staking platform. Whereas ETH staking is only a small amount of total issuance as the chain still uses a proof-of-work PoW consensus layer until the Merge, staking on Solana and other PoS chains typically have a greater percentage staked as the revenue generated by validators is directly linked to the stake size. It would appear that the growth potential, especially for the market leader(s), is huge, with 97% of staking up for grabs.

The majority of Solana validators, defined as those keeping 100% of the commission, are self-staking. According to Solana Beach, at least 50% of cumulative staked SOL is staked by 100% commission validators for roughly 197.5 million SOL. Additionally, there are significant self stakes at commission based third party validators that are unavailable for liquid staking protocols. Even if the liquid staking TAM on Solana is only 1/3rd of total, liquid staking TVL has the potential to 10x or more.

Marinade and mSOL

Marinade has two core goals: to increase the decentralization of Solana and to integrate mSOL across the ecosystem. The decentralization component mirrors the Solana Foundation’s goal of increasing the chain’s decentralization and censorship resistance. Marinade does this by encouraging new high performance yet low commission validators to join the platform. Marinade ensures validator diversification by capping delegation to 1.5% of the total pool, though this rate could be adjusted in the future through a governance vote.

The integration of mSOL across Solana DeFi incentivizes more staking, which of course in turn leads to more fees for Marinade and more rewards for mSOL holders, but more staking also should lead to more validators, further increasing decentralization and therefore chain security.

Marinade has been extremely successful on both fronts over the past 9 months, delegating to more than 450 validators and integrating mSOL across most of the Solana DeFi ecosystem. mSOL is currently the leading LSD on Solana by volume with a 30-day average trading volume of $10.1 million, almost double stSOL’s (Lido) $5.9 million. The chart below highlights mSOL’s dominance over the past 30 days. It is important to note that trading volume across all LSDs was elevated between May 8th and 11th as a result of market-wide turmoil following the crash of LUNA/UST.

With any staking derivatives markets, there are likely significant winner-take-most effects for the protocols that can grow the fastest. The most useful LSD in DeFi will be more in demand, yet it takes a critical mass of volume before DeFi will find the most profitable uses, and so on.

TVL growth will depend on LSD composability, as the draw of liquid staking is utility added in DeFi while earning staking rewards. To further increase mSOL’s adoption, Marinade announced plans for a token swap program where MNDE held in the treasury, as part of the 350 million allocation for strategic partnerships, could be exchanged with ecosystem participants, deepening ties with native platforms and further integrating mSOL and MNDE into the Solana ecosystem.

Additionally, NFT projects minting on Metaplex’s Candy Machine have the option of using mSOL instead of SOL. Given Solana’s rich NFT culture, positioning mSOL as the de facto currency for Solana NFTs would likely secure its position as the leading liquid staking platform. The team’s recent NFT launch and appointment of an NFT community manager highlight their interest in integrating mSOL deeper into the NFT ecosystem.

Business Model and Current Financials

Currently, Marinade generates revenue from three sources: management fees, unstaking fees, and NFT royalties. Management fees, which are currently set at 2% of the gross staking rewards, make up the vast majority of the protocol's total revenue.

Unstaking fees, which are generated by the instant unwrapping of mSOL, are split between mSOL-SOL LPs (75%), which provide the liquidity for instant unstaking, and the treasury (25%). Unstaking fees, while beneficial to an extent, should be viewed differently than management fees. An increase in unstaking fees is likely caused by either a deteriorating Solana/macro-environment or a lack of mSOL demand. Additionally, large increases in unstaking fees could put pressure on the mSOL-SOL Liquidity Pool, threatening mSOL’s liquidity. This second risk is relatively low given mSOL’s ability to be traded on various exchanges across multiple trading pairs.

Marinade’s mDAO governance NFTs introduced a new revenue source for the protocol in the form of secondary market royalties. Marinade’s NFTs act as a locking mechanism required for MNDE holders to participate in mDAO governance. The minimum amount of MNDE required to mint an NFT is currently 1,000 MNDE, or ~$128 at current prices, with the tokens being redeemable through a 30-day burn mechanism. For holders seeking faster liquidity, the NFTs can be sold on secondary markets like Magic Eden.

Given their specific use case and redeemability, NFT royalties should remain an immaterial income source unless significant arbitrage opportunities present themselves, with NFTs trading lower than the underlying MNDE. This type of activity could also be viewed negatively, however, as holders would then be seeking to liquidate their governance powers below cost.

Given that management fees paid in SOL on percentage of staking income will be the main source of revenue, MNDE income will be dependent on mSOL supply, the market price of SOL, and changes in the Solana inflation rate. The table below outlines the previous three months of operations as reported in Marinade’s monthly “Kitchen Stories.”

Due to the natural reduction in Solana inflation rewards over time, Marinade, as well as their competitors, will need to capture a significant portion of total staked SOL in order to remain profitable. According to Solana Beach, the nominal staking APY currently fluctuates between 6% and 7%. Over time this rate will decline to a constant 1.5%. This represents almost an 80% decline in total potential revenue for Marinade, should the 2% management fee remain constant. At the long-term rate of 1.5%, Marinade would need approximately $100 million TVL to generate the same revenue as it would with $30 million TVL at 5% inflation.

Marinade Governance and the MNDE Token

Marinade’s governance structure is a relatively new development, having launched in April with the introduction of governance NFTs. Instead of implementing a time-locked staking mechanism like many protocols are currently pursuing, Marinade opted to create NFTs that act as a voting ticket for governance proposals. These NFTs can be minted for a specified amount of MNDE tokens. While the NFTs do have staking tiers, these only determine the size of the NFT character, not the voting power of the NFT. So a Level 1 NFT with 1,000 MNDE locked has the same voting power as a Level 5 with 250,000 MNDE locked. Users can elect to mint multiple NFTs, which increases the voting power of a specific wallet. Currently, an individual wallet can cast up to 15 votes, making the most effective strategy for gaining governance powers is minting 15 Level 1 NFTs for 1,000 MNDE each, for a total cost of around $3,750 at current prices.

NFTs can always be burned to redeem the underlying tokens with a 30-day post-burn cooldown period. For those seeking faster liquidity, NFTs can be sold on secondary markets such as Magic Eden. Other than those traded based on their specific characteristics, NFTs sold on secondary markets should trade at or below their underlying token balance, creating an arbitrage opportunity for investors who buy and/or burn with the belief that MNDE will be worth more in the next 30 days, or who want to acquire additional voting power below the current market cost.

While rarity does not add to the utility of an NFT, the first 3,333 NFTs minted will be that of the Marinade Octopus mascot. After this initial amount is minted, new characters will have an unlimited supply. So far only 1,400 NFTs have been minted, leaving a significant number of limited-edition characters still up for grabs.

While the locking periods are not as long as many vote-escrowed models, which can last up to 4 years in some cases, the structure does prove a sink for MNDE supply. Currently over 30% of the circulating MNDE supply, 27.5 million tokens, is locked in governance NFTs. As membership in the mDAO offers increased utility, demand for Marinade NFTs should increase, resulting in an even tighter supply of liquid MNDE.

While governance has only recently been implemented, the mDAO forums have been very active. Notable developments that could create greater demand for MNDE include the introduction of gauges (similar to Curve) for both validator allocations and liquidity mining programs.

As of May 3, there is one live vote on Tribeca proposing that around 3 months of management fees should be paid into the mSOL pool in order to compensate for a technical issue that resulted in a portion of SOL rewards failing to be deposited into the mSOL pool. The vote, if successful, would redirect rewards until 2,646 SOL has been deposited into the mSOL coffers. With roughly 75% of votes in support of the proposal, mDAO’s revenue will significantly drop over the coming months as only unlocking fees and royalties will be retained for operational costs.

2022 Guidance and Final Thoughts

In traditional equity research, a major resource for analysts aiming to estimate the future performance of a company is management-provided guidance for a specified period. In crypto today, guidance such as this is rare for multiple reasons, including market volatility, the stability of protocols, and the lack of regulations controlling what can and cannot be claimed as guidance. As part of the team’s focus on transparency, Marinade has provided both 2022 guidance and longer term goals through 2025.

For the calendar year (CY) 2022, Marinade outlined their main goals in a Medium post on February 11. The core goal for 2022 is to grow TVL from ~7 million SOL today to 30 million SOL by year-end. At this level of TVL, and in conjunction with network efficiencies related to validator costs, Marinade aims to potentially support up to 6,000 validators, up 300% from the current 1,500. Marinade plans to achieve this TVL growth by making mSOL the de facto DeFi token on Solana, through further integrations of mSOL across various platforms.

At these TVL levels, a consistent $100 SOL price, and assuming a relatively stable inflation rate for Solana through the end of 2022, Marinade would likely be producing upwards of $4.5 million in annual revenue. Additionally, at this level of TVL, Marinade would be capturing ~8% of total staked SOL, up from 1.7% today. Marinade’s long-term goals for 2025 are outlined in their protocol documents with the aim of growing TVL to 50 million SOL over the next 3 years. While lofty, these goals are achievable given the minimal penetration of staked SOL today and Marinade’s lead on competitors, both Solana-native and multi-chain.

Beyond the general macro climate, Marinade is exposed to Solana adoption risks as well as competitive pressures in SOL staking. Should Lido be able to take more market share within the Solana DeFi ecosystem and become the primary staked SOL token across other blockchains. Marinade, however, stands a real chance of retaining its position as the leading staked SOL provider by offering greater community control of the protocol and by retaining an emphasis on the decentralization of the Solana validator network. Additionally, Marinade’s lower cost structure gives the team ample leverage to further embed mSOL into the fabric of Solana DeFi over the coming years. Should Solana resolve the current network issues experienced over the past few months, increasing the stability of DeFi applications, Marinade’s goal of 30 million staked SOL by year-end seems achievable as users, seeking to maximize returns while supporting the network’s decentralization, flock to the native platform with the greatest composability.

Marinade Finance: The Base-Layer for Solana DeFi

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