Author: Severin & Ian, MT Capital
TL;DR
Jito is the first liquidity staking protocol on Solana that combines MEV income and staking income. In the past 30 days, TVL has increased by nearly 70%, and it is expected to reshape the Solana staking market landscape.
Jito is about to launch the governance token JTO. In the early stage, there are few JTOs circulating in the market, and the main selling pressure comes from airdrop users. The use scenarios of JTO are relatively limited, and the value capture ability is poor. Jito needs new incentives and ecological expansion to stimulate the continued 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.
Backed by Solana's new assets, the influx of new users, the increase in trading volume, and Solana's extremely low liquidity pledge ratio, LSD protocols represented by Jito are expected to capture higher pledge TVL. Solana's potential huge MEV value gives Jito a higher imagination space.
Compared with Marinade, Jito's gap in ecological combination, degree of decentralization, and single staking model will continue to narrow as Jito develops. Jito's core competitive advantage in capturing and distributing MEV value will continue to expand with the prosperity of the Solana network. Therefore, we have very optimistic future expectations for Jito. Jito is expected to replace Maridane and become the largest LSD protocol in the Solana ecosystem.
The steady improvement of Jito's fundamentals will also drive up the price of JTO's secondary tokens. Referring to the price trend of LSD protocol tokens in the past month, we believe that JTO will also have a stronger secondary market performance.
Jito: Solana’s first liquidity staking protocol with MEV benefits
Jito Labs is deeply involved in Solana MEV
Jito Network was launched by the Jito Labs team. The Jito Labs team worked on the infrastructure of Solana MEV in the early days. In July 2022, Jito Labs launched the Solana MEV DashBoard, which conducted a MEV classification analysis of more than 36 billion transactions on Solana since January 2022. Subsequently, in August 2022, Jito Labs announced the completion of a $10 million Series A financing round led by Multicoin Capital and Framework Ventures. The funds raised will continue to be used to build infrastructure to optimize MEV.
Soon after, Jito Labs launched the Jito-Solana validator client and Jito Block Engine, which optimize MEV extraction and distribution, and became 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 transaction orders from the relayer and forwards them to the searcher.
The searcher then submits a deal bundle containing a bid.
Finally, Jito Block Engine simulates each transaction combination and finds the best transaction combination bundle and forwards it to the validator for processing.
According to the Validator Health Report: October 2023 released by the Solana Foundation, currently about 31.45% of Solana validation nodes choose to use the Jito-Solana validator client launched by Jito Labs, which also indirectly demonstrates Jito Labs' technical level in the MEV field.
As the Jito-Solana validator client continues to be adopted, the MEV rewards captured based on Jito-Solana are increasing, which also lays a solid foundation for Jito to launch the LSD module with MEV rewards.
The first Solana LSD with MEV benefits
Born at the wrong time, JitoSOL has been difficult to improve in the long run: In November 2022, on the eve of FTX's collapse, looking at the development of the popular LSD protocol, Jito Labs also officially announced the launch of Jito staking services. Similar to the liquidity staking logic of other LSD protocols, users will receive JitoSOL as a liquidity certificate after entrusting SOL to the verification node. The price of JitoSOL will continue to rise to reflect the node verification rewards obtained. Thanks to Jito Labs' early layout in the Solana MEV field, Jito is also able to distribute MEV income to pledgers, further increasing users' staking income. Unfortunately, just 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, was not immune and experienced a huge loss of liquidity. Therefore, after Jito launched the staking module, due to the lack of sufficient market confidence and liquidity demand, Jito's TVL has been lukewarm.
The points incentive plan 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 promote the large-scale adoption of JitoSOL. Users can get 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. The launch of the points incentive plan has made the growth curve of Jito TVL significantly steeper.
Lido withdrew, and Jito took over Lido Solana's market share: At the same time, in October this year, Lido DAO decided to no longer support new SOL staking after a community vote, and node operators will gradually withdraw from the SOL staking market starting in November. Lido's withdrawal has forced stSOL, which is worth nearly 6M, to find a new staking location. Jito, which has both staking and MEV rewards and point incentives, took over a large amount of stSOL, causing Jito's TVL to soar further, and it has become the top two LSD protocols on Solana.
A more decentralized Jito - StarkNet
In order to make the underlying validation node pool and the process of managing the changes in the staking pool amount more decentralized, Jito proposed the future development plan of Jito StarkNet. Jito StarkNet is a self-sustaining, transparent, decentralized validation node pool intelligent management protocol. Jito StarkNet mainly consists of three modules: Keepers, Validator History Program, and Steward Program.
The Validator History Program will store historical data records of each verification node for the past 3 years, including the participation and correctness data of the verification node in the consensus process, commission collection ratio, MEV extraction value, total staked value and staked ranking.
The Steward Program will calculate the score and appropriate staking delegation amount for each verification node based on the on-chain historical data records of each verification node.
Keepers Network will distribute the pledged amount based on the calculation results of the Steward Program.
In the Jito StarkNet network, the historical behavior of the verification nodes will be used as the only reference standard for allocating the staking delegation amount, thereby encouraging healthy competition among the underlying verification nodes to bring users a better staking experience. At the same time, the management of the staking delegation funds no longer relies on the centralized management of the protocol, but is automatically executed by the Steward Program and Keepers Network to change the delegation amount, making the operation process more decentralized.
Token Economy
On November 28, the Jito Foundation announced the launch of the governance token JTO. The launch of JTO is an important part of Jito's development. JTO will be used as an airdrop reward for early contributors and give users governance capabilities over the protocol.
Token distribution: The total supply of JTO is 1 billion, of which
10% will be used for airdrops to early users;
24.3% is controlled by DAO governance and used for community growth;
24.5% and 16.2% of the tokens belong to the Jito team and early investors respectively. These tokens will have a one-year lock-up period and a three-year unlocking 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:
Set fees for the JitoSOL staking pool;
Adjust the key parameters of Jito StarkNet to adjust the pledge fund delegation strategy;
Manage the JTO tokens held by the DAO and the fees captured by JitoSOL;
Token airdrop incentive: Jito's early adopters will have the opportunity to receive JTO token airdrops.
80% of the tokens will be airdropped to JitoSOL holders and users;
15% of tokens will be airdropped to validators running the Jito-Solana client;
5% of tokens will be airdropped to Jito MEV searchers;
Judging from the distribution of JTO tokens, there were few JTOs circulating in the market in the early stage, and the main selling pressure came from airdrop users. From the perspective of token empowerment, JTO's usage scenarios are relatively limited and its value capture ability is poor. Jito needs new incentives and ecological expansion to stimulate the continued growth of Jito TVL, thereby alleviating the selling pressure of airdrop users to a certain extent and maintaining the stability of JTO's value.
Future prospects of Jito
Solana’s explosive growth
After the bankruptcy of FTX, the long-dormant Solana finally ushered in a recovery. Since September, the TVL on Solana has begun to grow in volume and is now close to 700M. 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 in Solana TVL is as high as 85%, far exceeding other public chains. From the asset side, the influx of assets is expected to drive the increase in SOL staking demand.
In addition to the sharp increase in TVL, the number of daily transactions on Solana has also reached a peak of 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 reactivated users of Solana continues to pick up, further broadening the audience of LSD protocols represented by Jito.
Solana LSD still has huge room for development
Although the current staking rate of SOL has reached 70.07%, the proportion of liquidity staking is only 3%-4%, and there is still a lot of room for development in liquidity staking. Compared with other staking methods, liquidity staking can give users liquidity token certificates, allowing users to participate in other DeFi activities while enjoying staking benefits, and using funds more efficiently. As shown in the figure below, with the gradual recovery of the Solana ecosystem, liquidity staking has also ushered in explosive growth. We expect that liquidity staking on Solana will replace the larger general staking market due to its higher capital efficiency in DeFi activities.
Solana MEV has huge value potential
Since Jito will distribute MEV rewards to JitoSOL holders, the higher the MEV value in Solana, the more staking rewards will be distributed to JitoSOL. The increase in APR will further enhance JitoSOL's attractiveness to users. In the past year, Solana MEV Profit has reached 14M, and there is a huge space for MEV value to be optimized.
As the Solana network prospers, the MEV value captured by Jito is also increasing. 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 with Marinade, Jito has a unique competitive advantage
Marinade is the earliest LSD protocol in the Solana ecosystem. It has subverted TVL to 1.7B and is also one of Jito's biggest competitors. Compared with Marinade, Jito's main competitive disadvantages are as follows:
The ecological network of the Marinade LST will be richer than that of the Jito LST;
Marinade has more validating nodes and is more decentralized than Jito;
Marinade is also able to offer other staking options besides LSD;
As for competitive disadvantage 1, as shown in the figure below, JitoSOL is constantly expanding its ecological use cases and has been integrated by more than 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 more easily expand more ecological partners in the future.
Regarding competitive disadvantage 2, Marinade currently has about twice the number of nodes as Jito, and the degree of decentralization is significantly better than Jito, which is difficult for Jito to surpass in the short term. But Jito itself is also transitioning to Jito-StarkNet, and the decentralization of the protocol is expected to be further improved in the future.
In addition to its competitive disadvantages, Jito also has the following competitive advantages compared to Marinade:
JitoSOL is able to capture additional MEV rewards, and the staking rewards are slightly higher than Marinade;
With the same incentive plan, Jito will be able to capture more active users in this wave of Solana 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 MEV value will be, and the more obvious Jito's competitive advantage will be. 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.
In summary, compared with Marinade, Jito's gap in ecological combination and degree of 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 with the prosperity of the Solana network. Therefore, we have very optimistic future expectations for Jito. Jito is expected to replace Maridane and become the largest LSD protocol in the Solana ecosystem.
The steady improvement of Jito's fundamentals will also drive up the price of JTO's secondary tokens. Referring to the price trend of LSD protocol tokens in the past month, we believe that JTO will also have a stronger secondary market performance.
Reference
https://www.jito.network/docs/jitosol/overview/
https://www.jito.network/blog/
https://solana.com/news/validator-health-report-october-2023
https://foresightnews.pro/article/detail/48090
https://www.techflowpost.com/article/detail_14335.html
MT Capital
Headquartered in Silicon Valley, MT Capital is a crypto-native fund focused on Web3 and related technologies. We have a global team with diverse cultural backgrounds and perspectives that give us a deep understanding of the global market and the ability to seize investment opportunities in different regions. MT Capital's vision is to become a leading global blockchain investment company, focusing on supporting early-stage technology companies that can generate huge value. Since 2016, our investment portfolio has covered various fields such as Infra, L1/L2, DeFi, NFT, GameFi, etc. We are not just investors, but also the driving force behind the founding team.
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