Sanctum: Protecting Solana from Financial Shocks

Sanctum

Enter Sanctum, formerly known as Socean. Sanctum aims to build a robust liquid staking ecosystem for Solana. What they want to do is “to make all SOL staked, and all staked SOL liquid.” In order to facilitate the launch, trading and swap of LSTs on Solana, Sanctum developed a few crypto products – Infinity, The Router, The Reserve, and Validator LSTs. These products are not only created to make LST experience on Solana better, they are also designed to protect Solana from financial shocks by providing instantaneous liquidity for the ecosystem. In this article we look at how each of these products works and how they are interrelated.

Infinity

Infinity is an “infinite pool of infinite LSTs”. Most liquidity pools support typically two, three, or at most 4 assets, such as sUSD pool on Curve Finance which is backed by USDT, USDC, DAI, and sUSD. In this sense, Sanctum Infinity is a truly game-changing product. Infinity not only supports all whitelisted LSTs on Solana at the moment, it can do this with the unlimited number of future LSTs. This is where the name comes. The token of Infinity, INF is itself an LST, and as such it can be purchased with SOL or USDC and used in Solana DeFi.

Why Infinity matters? Because as Solana ecosystem grows, we’ll likely see many protocols issuing their LSTs. With the current pools supporting only two LSTs, there may not be enough liquidity to swap any two LSTs in a capital-efficient way.

Suppose, you want to buy ZAR, the South African rand. You only have EUR; so, basically you wish to swap EUR to ZAR. But there is no EURZAR “pool” out there for direct foreign exchange. Fortunately, you notice that there are both EURUSD and USDZAR pools. What you can do now is to swap EUR to USD and then with USD buy ZAR. Though it resolves your problem, it does this in a capital-inefficient way because you’ll likely pay commissions (fees) in two trades instead of one. Suppose there’s a multi-asset pool where there are all three of them – EUR, ZAR, USD, and many other currencies for that matter. That is what Infinity is in essence where the assets are not currencies but Solana LSTs.

Validator LSTs

Liquid staking tokens (LST) on Solana represent the staked SOL. The first generation of LSTs, i.e., prior to Sanctum, worked as follows. Once you deposited SOL into a non-custodial stake pool, it’s distributed to a group of validators. Let’s say, you want to stake 100 SOL into a stake pool backed by Marinade Finance’s mSOL and Jito’s jitoSOL. In this case, if stake amount delegated equally to each stake operator, you’ll get 100 vlSOL (validator SOL, it’s a conditional name for explaining the concept), while both Marinade and Jito will receive 50 SOL.

Validator LSTs powered by Sanctum work like the ordinary stake pools with one difference. Your staked funds are not distributed among a group of validators; instead, they are delegated to a single validator. For example, there is bonkSOL which delegates to Bonk validator, dSOL and LaineSOL delegate Drift Protocol and Laine, a leading validator on Solana. Validator LST is backed by your staked SOL and gives you an immediate liquidity on your stake.

The benefit of validator LSTs for the Solana blockchain network is that it reduces the computational burden. There are too many stake accounts on Solana. To calculate their staking rewards each epoch takes a lot of time. Validator LSTs make Solana faster by decreasing the number of staking accounts.

The Reserve

The Reserve, aka Sanctum Reserve Pool, is another Sanctum product. It’s a deep liquid pool of idle SOL. Let’s look at how the Reserve works and why it matters for Solana DeFi ecosystem. If you want to redeem your LST and get your SOL back, you can do one of the following.:

- Interact with LST-SOL on a DEX, say, Jupiter. You sell LST and buy SOL back.

- Directly going to the protocol that issued the LST you’re holding. If you have jitoSOL, you can go to Jito, deactivate your stake account and get your SOL back after the cooldown period which lasts about 2-4 days.

The first option is obviously preferable because it provides immediate liquidity to a user. By swapping your LST with SOL you redeem LST and get your original investment back. But since most LST issuers on Solana are small, there may not be and is not sufficient liquidity for their tokens. If the liquidity pool for an LST is not deep enough, you will have difficulty to trade it to get your SOL back; even if you are able to do it, you’ll likely do it a worse price.

What if there would be a deep reserve pool of SOL where you can take SOL from? Actually, there is, and its name is Sanctum Reserve Pool. We already know that LSTs are just wrappers of stake accounts. The locked SOL tokens are kept in these accounts until a user decides to unlock (aka unstake) them. What the Reserve does is that it allows you to exchange your stake account with it, and get your SOL back. After that, the Reserve will deactivate your stake account and receive SOL when the cooldown period is over.

At the time of this writing, the Reserve contains more than 200,000 SOL which is worth over $30 million. Recall that first a user is paid her SOL, and only after the cooldown period ends the Reserve pool is recouped with SOL. This means that for a short while – during 2-4 days of cooldown – Sanctum Reserve Pool experience a shortage of SOL which is eventually compensated once cooldown period ends.

For providing you instant liquidity, Sanctum Reserve Pool charges a dynamic fee based on the amount of SOL contained in the reserve pool. The more SOL tokens there are, the lower fees are. As the chart shows, the number of SOL tokens contained in the Reserve was stable in a tight range of 200,000 – 215,000. This ensures low fees most of time, and capital-efficient way of SOL usage when demand for liquidity in SOL ecosystem increases.

The Router

The Reserve and single validator LSTs would be ineffective if there isn’t sufficient liquidity for these tokens. If liquidity for bonkSOL is low on a Solana DEX, e.g., Orca or Raydium, why even to hold this LST? You can swap your xSOL to ySOL but what if there is no direct route to do this? That’s why Sanctum in collaboration with Jupiter built Router. Users can buy and sell any whitelisted LST with low slippage via the Router.

Think of the Router as a deep and unified liquidity layer for Solana LSTs. With this solution, you don’t have to liquid stake your SOL with a particular validator if you want to get that validator’s LST. You can buy it with SOL or USDC or simply swap with an LST that you’re holding. These two products, the Reserve and the Router have created opportunities for small LSTs. They don’t have to depend on large liquidity pools anymore to attract users. The Reserve is a deep liquidity pool from which stakers can get their SOL tokens back immediately for a small fee, while the Router allows users to swap any Solana LST, even the most illiquid ones, with any other LST without any hassles.

Conclusion

Sanctum is one of the fastest growing crypto protocols on Solana. It has built several products to meet increasing liquidity demands for LSTs. Sanctum Reserve Pool is a deep liquid pool of SOL tokens which allows users to get their LSTs back in return for a low dynamic fee. If you need an instant liquidity, you can interact with the Reserve. They pay your SOL immediately, and get your SOL from the LST issuer after the cooldown period. Infinity is a liquidity pool supporting an unlimited number of LSTs, hence its name.