Marinade has recently launched on mainnet, simplifying the process of staking SOL and creating a token, mSOL, representing proportional ownership of Marinade’s stake pool. This means that staking positions no longer have to be tied to the address that staked it; the positions have been tokenized, enabling them to be transferred and traded. Other staking projects on Solana such as Socean, Chorus One, and Steaking will also be launching in the near future and creating their own stake pool tokens (henceforth referred to as SPTs).
Starting with mSOL, Parrot is enabling the use of SPTs as collateral to mint pSOL on our platform, granting liquidity to users’ value locked in these tokens. Further, trading pairs for pSOL-SOL and pSOL-PAI will be established to provide pSOL with utility.
Why is it a good idea to mint pSOL by using SPTs as collateral? Why don’t we just use a staking token like mSOL directly in DeFi? If pSOL didn’t exist, SPTs would have to build their own networks of liquidity and each DeFi protocol would need to adopt them separately, leading to fragmentation in the DeFi ecosystem. As a result, users would have to pay higher fees, trade with greater slippage, and borrow with higher interest rates compared to if there were just one SPT.
Let’s consider an actual example. Suppose Marinade (mSOL), Socean (SOCN), and Steaking (stSOL) are each able to gather 100k of staked SOL. If Parrot did not exist, then each project would have to source liquidity for their token. Assuming that each project is able to find users willing to provide 100k of SOL liquidity, each project’s pool will have a total of 100k of their SPT and 100k of SOL:
What happens when Parrot enters the picture? All these different SPTs would be deposited into Parrot to mint pSOL. Supposing again that the three protocols each have 100K of SPTs and are able to gather 100k of SOL liquidity, in aggregate there will be close to 300k worth of pSOL and 300k of SOL that will be deposited into a single pool:
With triple the amount of liquidity compared to a project’s pool when it is siloed, there will be a significant reduction in slippage. Indeed, there will likely be dozens of projects releasing SPTs, making the advantage of aggregating SPTs into pSOL even more pronounced.
What are the use cases for pSOL?
Currently, using SOL in DeFi is an uphill battle, because any viable use case for SOL would require a yield higher than 7%, the APR for staking SOL. For example, the SOL vault for minting PAI is capital inefficient, because SOL must be staked at a 150% collateral ratio, and the minter is giving up the staking yield on the deposited SOL. This means the PAI minted from the Parrot SOL vault would require a 10.5% APR to make economic sense.
pSOL is a game changer; the SOL used to borrow it is already generating staking yield, and whatever extra yield for pSOL is just gravy on top.
Here are a number of ways that pSOL can be used in DeFi:
- Use as collateral in lending protocols to borrow others assets and gain access to leverage or additional yield opportunities
- Earn fees by providing liquidity to traders on margin trading protocols
- Earn fees by providing liquidity to pSOL-SOL and pSOL-PAI trading pairs
How is minting pSOL from SPTs different from minting PAI?
The value of SPTs always increase relative to SOL (except if slashing occurs), thus debt positions in pSOL always remain overcollateralized and become more collateralized as time passes. This eliminates the possibility of liquidation. In this way, minting pSOL from SPTs is very similar to how you can deposit USDC to borrow PAI.
On the other hand, if SPTs were instead used to mint PAI, the value of the collateral in SPTs could fall below the debt value if the price of SOL decreases, triggering liquidations. Thus, borrowing in pSOL saves users from the burden of having to manage their debt positions to prevent being liquidated.
Does pSOL accrue value over time as the underlying SPTs increase in value?
No pSOL is designed to stay pegged to one SOL. Other SPTs (i.e. mSOL, stake pool tokens, stSOL) would increase in value over time relative to SOL, because rewards earned by the validators are added to the pool, which makes it possible to redeem more SOL per staked SOL.
pSOL is an over-collateralized synthetic. As the underlying staked SOL accrues value, the collateral ratio of your pSOL vault would increase, which allows you to take out more pSOL as debt. This helps pSOL to maintain the peg with SOL, whereas stake pool tokens would gradually become off peg.
For example, if you deposit 100 stSOL to borrow ~100 pSOL. In a year, the stSOL would be worth about 106 SOL. Because your collateral is now worth more, you would be able to borrow about 6 additional pSOL.
This new addition to Parrot’s functionality will ensure that people have a way to access the value locked in their SPTs and make them more willing to stake their SOL, increasing the security of Solana.
Now that users can receive a token when they stake their SOL, there is little reason to not stake; the only reason not to would be if you could get higher APY through some use of SOL other than through staking rewards + yield farming using pSOL.
Therefore, the baseline expectation is that everyone will stake SOL to avoid dilution. Yet users will desire to use the liquidity of their SPTs, and as a result we expect that pSOL will largely replace SOL in many DeFi use-cases as a pristine form of collateral.