# Sanctum - The Earnest Shall Build Our New World
*This post serves as an explainer to Sanctum, the team championing Liquid Staking and spearheading validator LSTs on Solana*


### TL;DR:
- Liquid Staking unlocks greater onchain capital efficiency for users but causes liquidity fragmentation
- Sanctum is solving the issue of liquidity fragmentation and building a more liquid and useful future for Liquid Staking

   

## Why is there a need for Liquid Staking?

Staking is a key feature of any PoS blockchain, where the network benefits from the additional security, and the user is rewarded for providing this through token emission (e.g. for a staking APY of 7%, users can stake 100 unit and receive 107 units after a year).

In order to earn staking rewards in a traditional way (native staking), users would have to decide on which validator to delegate their native tokens to. After making this decision and sending how much they would like to stake, they would have to wait for a period of time known as the warm-up period before they start to receive staking rewards. When the user then decides to remove their stake, they would have to go through another period of time before they receive their staked tokens and rewards, also known as the cooling-down period.

Not only is this process incredibly inefficient both time and capital wise, it is extremely unforgiving to users with little to no experience, leading to confusion and pushing them away. Clearly a solution is needed here (Spoiler: It is liquid staking).

Introducing Liquid Staking. Now when a user liquid stakes, they exchange their native token for a liquid and redeemable token called Liquid Staked Tokens **(LSTs)** (Note this is not at a 1:1 ratio). These LSTs can be used in DeFi, such as borrow lending to earn yield or providing liquidity to a liquidity pool, on top of the yield they are already earning from staking. As and when the user decides to unstake and get back their tokens and yield, they can choose to either redeem it or swap out of it.
 
What happens under the hood that the user does not see is that their stake is sent to a stake pool who will then delegate this stake out to a group of validators. Validators benefit from this as an increase in stake means higher overall commissions earned for validating the network and stake being scattered to more validators help with network decentralization.

*Credits to https://blog.polkastarter.com/liquidity-staking-derivatives-the-shanghai-upgrade-aftermath/*

*Credits to [James Hansley](https://x.com/JamesleyHanley) in this [Thread](https://x.com/JamesleyHanley/status/1787875006439207060)*

 
This process solves 3 important bottlenecks that users faced in the traditional staking process:
1. Removed the need for the user to choose which validator to delegate to
2. Removed the need for user to go through the warm-up or cooling-down process
3. User now has access to their liquidity in the form of LSTs, allowing them to make greater use of their capital

As such, it is no wonder that liquid staking is a really popular choice - the #1 DeFi protocol on Ethereum and Solana are Liquid Staking Protocols.
 
*Lido Finance on Ethereum*

*Jito on Solana*

However, this is not without some tradeoffs. And one key tradeoff of liquid staking is liquidity fragmentation. Each LST provider is responsible for allowing users to convert their LSTs to native tokens and vice versa. As such, liquidity is fragmented across various LSTs - but how is this an issue?

 
If a user (malicious or benevolent) chooses to offload a sizeable portion of LSTs on the open market with low liquidity (caused by liquidity fragmentation), it can cause the LST to depeg from the native base token. This is not science fiction - it has happened [before](https://solanafloor.com/news/marinade-finances-m-sol-token-depeg-triggers-major-debate-and-liquidations-in-de-fi-world)!

In a quick summary, one of the top LST providers on Solana, Marinade Finance, suffered a 20% depeg of its LST (mSOL) from its actual value. This was caused by a single seller offloading $8mm of mSOL on the open market. If you are familiar with DeFi, you can see how this has major downstream implications.

i) Users lending their mSOL and borrowing other assets, might get their collaterals liquidated if their collateralization health falls below a certain range.
ii) Users leverage looping their mSOL might get liquidated if it falls below a certain liquidation ratio.

 
## Introducing Sanctum
Leveraging their experience from building Socean Finance (Solana LST) and Unstake It (Enabling unstaking of any LSTs without cooling down), the Sanctum team is attempting to make Liquid Staking the norm on Solana, by making it safer, more accessible, and enabling novel use cases.

The first step is to make the whole LST scene more liquid as a whole using their reserves of 200K $SOL which serves as a backstop of liquidity. How will they make the whole ecosystem more liquid? Sanctum accepts ALL LSTs, including single stake pools with a single pool of SOL.

**This directly addresses the issue of liquidity fragmentation that has plagued the ecosystem.**

 

However the vision is much bigger than that. Sanctum is building the **infinite-LST future** with the introduction of permissionless single validator stake pools and single-validator LSTs.
What does this mean for me and you? Simply put, anyone and everyone with (at least one) validator will be able to spin up a validator LST that is *infinitely* much better user experience than native staking.

In succession, Sanctum launched another great product: **Infinity** - a multi-LST liquidity pool which supports all validator LSTs whitelisted. By converting the LST into a stake account and calculating its fair price based on the SOL contained in its stake account, this allows swaps between all LSTs without relying on constant product or stableswap functions.

 
## Wonderland and Earnestness?

In the lead-up to their Token Generation Event for $CLOUD, 2 key events stick out: Their points program named Wonderland, and their decision to reward based on a metric they termed 'Earnestness'.

**Wonderland**
In a period of time where point programs are heavily overdone and dragged out, Sanctum added their own twist to make liquid staking fun again.

1. Sanctum Pets: By holding various validator LSTs, you can get experience points to level up the respective pets.

2. Community Quests: Most point programs are seen as individualistic, but Sanctum turns this on its head by introducing community quests. The community works together to solve quests created by the Sanctum team, and the reward for doing so is an XP boost to certain pets on the weekends that benefits everyone.

 
How Effective have these efforts been? Sanctum's TVL has increased rapidly from the launch of wonderland and within a short 2.5 months, reached the elusive $1B TVL and has mostly maintained that ever since, even after the end of wonderland season 1. This is simply a testament that their product has attained PMF and users still choose to liquid stake under Sanctum even without reward programs.
*Credits to https://defillama.com/solana/sanctum*

 
**Earnestness**
In a very candid [post](https://x.com/soleconomist/status/1776687181521617078) by one of the co-founders of Sanctum, [FP](https://x.com/soleconomist), he summarizes the issue with past airdrops. In essence, teams have attempted different ways of rewarding their users for their participation, such as linear and non-linear airdrops. However, each have their own shortcomings, either incentivizing sybils or rewarding richer users. In order to work around this, Sanctum introduced the concept of Earnestness - where users are rewarded based on their contributions that show that they have conviction on Sanctum's vision and mission, through real social contributions.

*Crypto in a nutshell*

 
## Unlocking The True Potential of LSTs
Currently, the use cases, value creation, and overall impact of LSTs are very limited due to it being onchain. However, Sanctum is going to change that with 2 initiatives: **Cloud Card** and **Creator Coins**.

 

**Cloud Card**

Partnering with BasedApp, the team building non-custodial crypto debit card, the Cloud Card will be the first LST-powered debit card. What does that mean and how does that work? Simple - Just by holding the CardSOL LST, the staking yield will be converted to USDC and sent to your debit card that you can actually use. This means that you can spend your staking rewards without ever touching your LSTs ever again!

Sign up for the Cloud Card Waitlist [here](https://c2ro6h22m3b.typeform.com/sanctum-card?typeform-source=qrcode-button)!


 

**Creator Coins**

Imagine a world where you can support your favourite artists and creators financially, without giving them a single cent. This world has now been made possible by Sanctum and LSTs through Creator Coins by simply swapping your SOL to your favourite creators' coin.

This is great for creators as you are financially incentivized to put out better content to get more coin holders (i.e. fans), and you are now able to view (and possibly reward) your earliest fans and supporters, based on how early and how long have they held your coins.

This is also aligned with supporters as well, as they are not required to put out a single cent, and they are able to pull out of supporting their favourite creators whenever they want to, instead of the common monthly/yearly subscription models.


 
## Conclusion
Sanctum is here to redefine what it means to liquid stake on Solana and while they have made some unorthodox plays so far, the traction they have gained is undeniable and they are certainly going to take liquid staking to the next level.

With that said, are you ready to be a cloudman today?
 
### Resources
X (formerly Twitter): https://x.com/sanctumso
Blog: https://learn.sanctum.so/blog
Docs: https://learn.sanctum.so/docs

 
 
**The Earnest Shall Build Our New World**