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Binance Coin had a face-ripper of a week and just passed Solana in market capitalization. We are one dip away from turning this into a Ripple newsletter.

Today, we’ve got early returns and value flows for SIMD-0096.

Solana yield is now flowing to liquid stakers

A long-awaited Solana update has gone live. All optional priority fees paid by users will be sent to the validators running the blockchain.

Solana’s median priority fee dropped 40% from the time period right before the new feature was activated, according to Solana Compass. However, it’s too early to tell whether that trend will hold. A more immediate consequence is that liquid staking tokens — which allow validators to pass along priority fee rewards, whereas regular Solana staking does not — just became the highest-yield show in town.

Solana users can pay a priority fee on top of the network’s base fee to increase a transaction’s chances of making it to the blockchain. Under Solana’s initial architecture, half of these priority fees went to the validators who run Solana’s software, and half were burned, or effectively removed from circulation. 

In May 2024, validators voted to begin sending 100% of priority fees to validators.The justification was that the 50% burn was causing some validators to cut mutually beneficial side deals with traders. As SIMD-0096’s activation date approached, some developers began pointing out that Solana lacks an in-protocol way for validators to share priority fee rewards with stakers. This means that validators would get relatively richer at the expense of the stakers who delegate stake to them.

A future proposal, SIMD-0123, could allow in-protocol priority fee sharing, but it won’t be activated for some time. Until then, one of the most effective ways for validators to share the extra yield with stakers is via liquid staking tokens, which are tokenized claims on a share of the yield generated by a pool of staked SOL. If validators transfer the extra SOL that they’re earning into stake pools, then the LST holders receive more yield.

Solana LST provider Sanctum announced this morning it would be creating an LST for every validator on the network. That would bring Solana’s total number of LSTs to over 1,000 — a more than tenfold increase. 

Solana LSTs mostly saw their yields go up across the board today. Jupiter’s is 11.96%, up from 10.69% in the period prior, and most LSTs followed suit.

LSTs may not be a perfect solution, though. For one, converting native stake into an LST could create a taxable event for SOL holders. Another critique stems from the fact that LST holders must trust that validators are passing the full yield along.

“I absolutely hate ‘trust me bro’ situations,” Sol Strategies head of staking Max Kaplan wrote on X. “I believe the LST method is confusing, a bad UX, and opens the door for potential [rug pulls].”

Jito (which operates the largest Solana LST) recently debuted TipRouter, which automatically doles out priority fees and can be verified onchain.

— Jack Kubinec

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Here’s a visualization of how SIMD-0096 works:

This chart from Blockworks Research’s Dan Smith shows how the tips and fees generated by Solana move around under the new paradigm.

Notably, the priority fee burn used to be a boost to stakers and nonstakers because their holdings were less diluted by priority fee payments. That’s no longer the case.

— Jack Kubinec