Staking in Jito
Key Takeaways:
- Staking represents one of the safest options in DeFi to generate yield.
- Jito is considered a secure and trustable staking service.
- The yield (APY) is derived from staking SOL tokens – contributing to the Proof-of-Stake consensus mechanism of the Solana blockchain.
- Jito is the fastest growing liquid staking derivative protocol on Solana. Staking SOL in Jito enables more efficient MEV extraction and better rewards for stakers (continuity risk).
- SOL liquid staking represents a liquidity yield-generating investment.No lockup is present but a 5-day cooldown is required to fully unstake the asset (liquidity risk of staking).
- Risk Checklist. In our view the predominant risks for this strategy are as follows: - Tech risk - Project continuity risk - Liquidity risk of staking
1. Strategy Explained
The strategy involves liquid staking SOL tokens in Jito. In addition to the staking rewards, the strategy seeks to receive also MEV (Maximum Extractable Value, i.e. the value that can be extracted on blockchains by validators and network participants by re-ordering, inserting, or censoring transactions) rewards.The following steps are undertaken:
- SOL are deposited into the pool and JitoSOL are received
- The Jito Stake Pool delegates your SOL to MEV-enabled validators
- Those validators auction off blockspace and receive MEV rewards
- These MEV rewards are redistributed to the stake pool as extra APY
- Your JitoSOL accrues MEV rewards in addition to staking rewards
Lockup period: none Cooldown: 5 days
2. Risks
Trust Score
Jito is a SOL liquid staking platform. SOL holders can deposit SOL, other LSDs, and staked SOL in exchange for JitoSOL, the fastest growing liquid staking derivative on Solana.
The staked SOL is only deposited to the top validators running Jito-Solana, which allows more efficient extraction of MEV. Jito also helps minimise the negative externalities of MEV (e.g. network delays).
The staking pool is noncustodial, which means the Jito Foundation can’t steal your SOL, and you continue to earn staking yield while being able to participate in Solana DeFi and NFTs.
SwissBorg has performed its own due diligence on the protocol and considers it trustable with a tech score of 90%.
Protocol Risks
Project Continuity Risk
Project continuity risk is low.
Jito, the company behind the Jito protocol, was founded in 2021 and is based in the United Stated.
With a TVL of around $55.8m Jito is the second largest SOL liquid staking protocol, after Marinade ($101m) and Lido ($54m) being third.
In August 2022 the company raised $10 million in a Series A funding round from a group of investors that included Solana Ventures and Anatoly Yakovenko (Solana founder) himself.
‘Staking-as-a-service’ products make it easy for custodians, exchanges, wallets and treasury managers to commit their digital assets to the blockchain.
Jito’s validator client is a fork of Solana Labs code that Jito has built and can be run independently. Jito Labs is the first MEV infrastructure company to build high-performance systems to scale Solana and maximise validator rewards. The Jito-Solana Client was created to capture MEV and optimise their distribution to network validators and stakers, combating spam and improving network efficiency.
While 66,66% of stakers rely on the Solana Labs client, already 33,34% use the Jito Labs’ software client.
The project is relatively new and not battle tested but given the growth of the staking practise the continuity risk should be contained.
Jito continuity risk is set to 3/10.
Counterparty Risk
Counterparty risk is deemed low.
Counterparty risk exists whenever an asset is handed over to an external provider. Any credit events involving the staking provider could affect the assets that have been entrusted to them.
That said, staking via a 3rd party is fundamentally different from depositing funds into a lending protocol that later becomes insolvent.
In a Proof-of-Stake protocol, tokens are locked up in a validator to secure the underlying network and receive staking rewards in return.
Those validators, with the assets and rewards they hold, are fully transparent and always verifiable "on-chain". This is contrary to centralised company reserves which can be opaque and under-collateralized, as it has been seen in the case of some famous crypto exchange, now bankrupt.
With staking, there is no counterparty but the network itself. Validators are rewarded by operations automatically through preset ‘block reward’ rules, as well as through a share of transaction fees. There is no risk of default or bank runs.
Counterparty risk is 1/10.
Liquidity Risk
Liquidity risk is deemed low.
Funds held by the staking provider are redeemable after the required (if any) lockup and cooldown periods. In no circumstances would one expect instances of illiquidity during the redemption process.
Liquidity risk is 1/10.
Strategy Risks
Complexity
Complexity of the strategy is low.
The strategy involves depositing SOL on Jito to perform staking. One chain (SOL), 1 token and one staking service is employed with no leverage.
The complexity risk of the strategy is 1/10.
Scalability
The scalability risk is low.
Staking is a highly scalable practice. Indeed, the more stakers are participating, the higher the safety of the blockchain.
The scalability risk of the strategy is 1/10.
Sustainability
The sustainability risk is low.
The yield obtained from this strategy is fully sustainable as it comes from participating in the validation of SOL transactions, the Proof-of-Stake mechanism.
Proof-of-Stake is quite energy efficient when compared to Proof-of-Work chains like Bitcoin and has therefore practically no negative impact on the environment.
The sustainability risk of the strategy is 1/10.
Yield Risk
Yield risk of strategy is medium to low.
Staking provides a constant stream of income with low variability.
In addition to pure yield risk, the strategy also seeks to receive MEV awards (additional APY).
While in principle a minimum APY is guaranteed (staking APY) some volatility on the final strategy APY us to be expected.
Where therefore conservatively set the yield risk to medium to low.
The yield risk of the strategy is 3/10.
Slashing Risk
The slashing risk of the strategy is low.
The Proof of Stake consensus mechanism requires participants to behave responsibly for the overall good of the ecosystem. For this reason, blockchains penalise validators if they step out of line by slashing the value of their stake. The two most common offences are double-signing or going offline when the validator should be available to confirm a new block.
Automatic Slashing is not currently enabled on Solana with the Solana team instead implementing manual safety checks.
Penalties currently include 100% slashing when the node is acting maliciously with examples including those just mentioned as well as signing illegal transactions, and voting for illegal forks.
When a safety violation occurs, the entire chain is brought to a halt, requiring the team to manually search for the node(s) that caused the violation and propose that the stake be reduced after the network is restarted. The stake of the bad node would then be reduced to zero, or the validators could try to vote to remove the offending node. When a node is slashed, all delegated stake from that node are removed.
At the time of writing there are 38 validators and 12,263 number of stakers in the pool, for a total of nearly 2 millions SOL staked.
Jito’s globally distributed system is designed with reliability as a top priority, recognizing downtime's critical role in validator and network security. Multiple redundancies have been implemented across the relayer and core client, guaranteeing that validators operate effectively without interruptions.
The slashing risk of the strategy is 1/10.
Liquidity Risk of Staking
Liquidity Risk on staking SOL is low.
Staking SOL on this vault requires no lockup but a cooldown period of 5 days is present.
The liquidity risk is set to 2/10.
3. Conclusions
SOL staking comes with some risk.
Staking per se is generally considered a very safe investment.
Jito, the chosen liquid staking service provider, has been reviewed and approved by the SwissBorg tech team.
This SOL staking vault comes with no lockup and a 5-day cooldown period.
The SwissBorg Risk Team ranks SOL staking as a Core investment, one for an investor with good understanding of DeFi and yielding, who is willing to take little risk in exchange for a potential very nice reward on SOL.
