[Proposal] Balancing Decentralization in Sanctum's Liquid Staking Ecosystem

Objective:
Solana’s native staking has demonstrated that without proper incentives, most liquidity gravitates toward the largest validators, undermining decentralization. This same issue is beginning to surface with Liquid Staking Tokens (LSTs) in Sanctum, where the majority of SOL is concentrated in the largest LSTs like INF and jupSOL.

Background:
The goal of this proposal is to introduce a dynamic rebalancing mechanism within Sanctum that incentivizes users to diversify their LST holdings. The approach will leverage $CLOUD tokens as a reward, but with safeguards to avoid diluting $CLOUD’s value and maintain decentralization as the key focus.

Solution: Dynamic $CLOUD-Based Rebalancing Incentives

1. Dynamic Incentive Multiplier for Underrepresented LSTs
Each LST will have a dynamic reward multiplier based on its representation in the Sanctum ecosystem. The more underrepresented an LST is (determined by a combination of liquidity and user participation), the higher the multiplier for $CLOUD rewards when users hold or stake that LST.

For example:

  • If INF and jupSOL represent 60% of total LST liquidity, their $CLOUD multiplier might be set to 0.5x.
  • On the other hand, smaller LSTs that are only 2-3% of total liquidity could have a $CLOUD multiplier of 2-3x.

This system will encourage users to spread liquidity across lesser-represented LSTs in pursuit of higher $CLOUD rewards without touching their native APY.

2. Tiered $CLOUD Distribution Model

$CLOUD rewards should be structured in tiers to avoid oversaturating the market with tokens. The distribution can start with a daily cap on total $CLOUD allocated to the rebalancing pool, spread out based on each user’s contribution to decentralization.

For example:

  • A user holding 20% INF and 80% in smaller LSTs might earn a higher proportion of the capped rewards compared to someone holding only INF and jupSOL.
  • As more users diversify, the distribution tightens, ensuring that only those who meaningfully contribute to decentralization receive rewards.

3. Safeguards to Avoid Over-Incentivization

While incentives are necessary, it’s crucial not to over-reward users in a way that diminishes the value of $CLOUD. The following safeguards can be introduced:

  • Decay Mechanism: $CLOUD rewards for underrepresented LSTs could gradually decrease if liquidity becomes too concentrated in those LSTs, ensuring constant rebalancing efforts.
  • Capped Rewards: A daily or weekly cap on total $CLOUD distributed ensures that rewards remain sustainable and tied to long-term value.

**4. Post-CLOUD Sustainability Plan **

Once $CLOUD supply is exhausted, Sanctum could shift from token-based incentives to long-term, sustainable rewards through platform fee reduction mechanisms, governance power enhancements.

Time-weighted Governance multipliers that reward users who hold underrepresented LSTs for extended periods. For example, the longer a user holds a smaller LST (without swapping it), the more their multiplier grows based on the size

  • Fee reductions or future rewards (in a similar mechanism to yield farming boosts but based on decentralization support).

  • Users gain more voting power for protocol decisions based on LST holdings.

Gamification & Points System Instead of $CLOUD, users could earn “decentralization points” for holding and supporting underrepresented LSTs. These points can be exchanged for platform perks like exclusive access to new features, boosts in governance power, or discounted services. The points can also be used to unlock tiered benefits based on their LST holdings and rebalancing efforts.

This approach creates a reason for users to stick with underrepresented LSTs even after $CLOUD is depleted, as they will continue to receive tangible benefits tied to holding the tokens.

6 Likes

I really like this idea, but we should keep a few things in mind. For one, it’s important to set some basic criteria for LSTs to join the program. LST operators should take the lead in attracting users to stake with them. If we don’t, we might end up being unfair to operators who are already doing a great job. Plus, LSTs with less value or utility might end up getting more rewards than expected which would be underdeserved.

5 Likes

Thank you for the proposal pwnage

TL, DR: Even though I like a lot where this is going (decentralisation of LSTs), I do not feel it addresses the key reasons for LST centralisation. For me the first reason for LST centralisation is deep liquidity of big LST pairs reducing slippage, and second the ability to borrow USDC on Kamino and MarginFi against big LST pairs. To achieve LST decentralisation, we need to deepen liquidity of LST pairs AND increase borrowing capacity.

Longer text:

Setting the scene aka “why LST centralisation”. Before talking about decentralization, let’s ask why the majority of SOL goes to the biggest stakers. In my opinion this is due to 1) higher liquidation LTV on Kamino = making it possible to borrow against and 2) deeper liquidity = for funds it’s way easier to hold “big pairs” as it’s possible to trade $1m in and out without crazy slippage. Unless those things are resolved, I struggle to see how funds/whales allocate to smaller LSTs. I am not seeing those points being addressed in this post tbh.

Comments on the proposed solution.

Comments on point 1: I like the multiplier solution a lot (Kamino does it similar to their point system and has a lot of success there). However, as long as there is not enough liquidity (aka high slippage), whales will always go for the deeper liquid pools.

However, When a fund loses 1-3% slippage at a notional of $1m (when interacting with a smaller LST), they will simply not interact with randomLST - independent of getting $CLOUD rewards.

Comments on point 2: I like it as well, however I am not sure how easy this is to implement. I assume it would look like Wonderland Season 1 points, where some LSTs got booster points. Rather than giving out $CLOUD, I would give points during the Wonderland Season 2 campaign.

Comments on point 3: Perfect - no comments.

Comments on point 4: Imo - it might be better to start out with points during WS2 rather than handing out tokens immediately

1 Like